O—Long-Term Care
Planning for long-term care is an integral part of retirement and financial planning. Long-term care consists of a continuum of services including nursing home care, assisted living, home health and adult day care. The need can arise from an accident, illness, or advanced age.
THE RISK. Statistics make a very good case for long-term care planning. For example, a 65-year-old woman can expect to live another 20.1 years, and a 65-year-old man can expect to live another 16.8 years. According to the U.S. Administration on Aging, 70 percent of people attaining age 65 will need some form of long-term care during their lifetimes. During these years it is estimated that the risk of entering a nursing home is approximately 50 percent.
THE COST. Nursing care is expensive. Although there is a large variation from one region to another, the average nursing home cost was over $100,000 per year in 2024.
MANAGING THE RISK. For an individual with substantial retirement income and assets self-insurance may be a realistic option. However, for those who cannot self-insure reliance upon government programs may be ill advised. For example, after a minimum three-day hospital stay Medicare will only pay for the first 20 days of skilled nursing care. From days 21 through 100 the patient must pay in 2024 the first $204 per day, and all costs after 100 days. Medicare does not pay for custodial care. Although Medicaid will pay for custodial care, the patient must first “spend down” assets in order to qualify. Simply put, “spend down” means liquidating assets to pay for long-term care until a level of financial indigence is reached and it is possible to qualify for Medicaid. When does such a “financial meltdown” become significant? The answer depends upon marital status. In most states a single individual cannot have more than $2,000 in
countable assets. But the “indigent spouse rules” provide better treatment to a married couple with an at-home spouse.
If an individual needs 24-hour-a-day custodial care, under Medicaid there is little or no provision for “community based care” (i.e., home care, assisted living or adult day care). It is understood that, on average, Medicaid pays about two-thirds as much as the private pay patient. Although a nursing home cannot, by law, treat patients differently depending on who is paying the bills, quality of care remains an issue. The Medicaid patients do not get private rooms. If the quality of care deteriorates, the family of a private pay patient can move him to a different facility.
Private insurance is often considered by those desiring independence and choice of care and benefits. It also provides asset protection from the Medicaid spend down requirements.
PRIVATE INSURANCE provides flexibility by allowing individuals to obtain care in various settings and at different levels. Contracts do not require prior hospitalization, are guaranteed renewable and offer level premiums. Premiums can be raised on a class basis. These features are offered either within the base contract or by contract rider. Long-term care insurance is also available on a group basis or as permanent life insurance that advances the death benefit. Daily benefits run from $50 to $400 or more. The benefit periods are typically 2, 3, 4, or 5 years, or lifetime. Benefits are paid when the insured has a cognitive impairment or is unable to perform certain activities called “benefit triggers.” Typically, benefit payments are triggered by the loss of two or more activities of daily living (ADLs). These activities include eating, toileting, transferring, bathing, dressing and continence. There has been considerable debate over
the quality of benefits under tax qualified versus nontax qualified products (e.g., the nontax qualified products will pay a benefit using the more liberal “medical necessity” standard).
A deductible, in the form of an elimination period, will generally last from 0 to 180 days. Of particular importance is waiver of premiums to limit premium costs and inflation protection to ensure an adequate daily benefit in the future. For younger insureds inflation protection is particularly important (e.g., a 50-year-old will not likely need coverage as soon as a 70-year-old, thus with inflation his care will cost more). Assuming 5 percent inflation per year, care that costs $3,750 a month today will cost $6,108 in 10 years and $9,948 in 20 years.
In addition to these basic components, other benefits are often available. These features include spousal discounts, respite care, hospice care, caregiver training, bed reservation, medical equipment, cognitive reinstatement, non-forfeiture benefits, case management and referral services. Individual taxpayers are allowed to deduct the cost of their policy (and that of a spouse).
Legislation passed in 2021 (H.R. 133) permanently set the medical expense deduction floor at 7.5 percent for all taxpayers. In addition, long-term care benefits are reimbursable through a taxpayer’s HSA account with a 2025 contribution limit of $ 4,300 for individuals and $ 8,550 for families.
Business owners can offer LTC benefits to employees as a benefit. Benefit limitations are $450 for age 40 and under; $850 for ages 41 to 50; $1,690 for ages 51 to 60; $4,520 for ages 61 to 70; and $5,640 for over age 70. Tax-qualified LTC benefits are generally income tax-free subject to a $400 per day maximum, or the actual cost of care, whichever is higher.
LONG-TERM CARE/CHRONIC ILLNESS HYBRID PRODUCTS are becoming increasingly popular. In recent years, the cost of new and existing (in force) private long-term care insurance has increased at a rate far exceeding inflation. As a result of price increases and few companies offering stand-alone long-term care insurance, there has been tremendous growth in “hybrid products.” These products combine long-term care or chronic illness riders with a life insurance or annuity contract. The cost of adding a long-term care rider or chronic illness rider on a life insurance product will often increase the cost of the life product by 10 percent or less making hybrid products an increasingly popular alternative to stand-alone long-term care products.