Long Term Care Insurance

The real threat to financial security in retirement is two-fold.  Both health-related and investment related events can wipe out our estate drastically.  We all know what the markets can do to our investments but what could retirees do to protect themselves from health-related tragedies?

Long term care insurance.

You do not want the largest part of your estate going to the children of the owners of a nursing home.  Instead, you should develop a plan that will help protect your assets and not be a burden to your loved ones.  A good long term care plan will do this.

Lady in Retirement

First let's see what long term care is.

There are two types of care[5]: acute care and support care. Acute care involves those hospital stays where you get surgery and a few days later go home. 

Support care is a little different.  It is part of the normal aging process involving the loss of independence in one form or another.  If we live long enough and don’t die suddenly all of us will face dependency like this as we get older.  This is where a good long term care insurance plan could help.

Let's look at three growing crisis in America today.  The first is that people are living longer.  If you live to age 65 chances are you will live into your mid-eighties and living into your mid-eighties should get you into your nineties.  People don’t realize that age 100 is the largest growing segment of our population in this country.  New technology and healthy living has helped to bring this trend about.

The second crisis is that family support isn’t what it used to be.  We are living in a transient society and our kids are not staying in the communities they grew up in.  I am a perfect example of this because I live in Colorado and my mother lives in Minnesota.  How much help could I really be other than an occasional visit and some phone calls.  Our kid's love and want to help but won't be there to change mom’s diaper.  They will be managing the care you will receive and could be where the long term care plan helps.  As retiring parents it’s important to make sure our children won’t have to pay for the care.  I have seen many client's assets in jeopardy because they have to pay for mom and dad's care.

A third crisis is that Medicare and Medicaid are cutting back on paying for care and pushing the burden to the public.  This is a real problem for those not aware of what is happening with these programs.  The government does not want to pay for your long term care stay.

The biggest misconception I hear these days is that Medicare will help me with these needs.

Is that really the case? 

Let's see how much Medicare covers?

In order for Medicare[3] to pay for your long term care stay the below requirements need to be met:

  • You need to have had a prior hospital stay of at least 3 days
  • Admitted to a Medicare-certified nursing facility withing 30 days of your hospital stay
  • The care requires skilled services

If those are met then Medicare will pay the below amounts:

Benefit You Pay Medicare Pays
First 20 Days Nothing 100%
Next 80 Days $152 Balance
After 100 Days All Costs Nothing

After that 100 day period in a facility you are required to pick up the tab.  A common response is that Medicaid will now cover my costs. 

Well let’s see what Medicaid will pay for?

Medicaid will pay for long term care services only after you financially qualify for the aid.

How do you qualify for Medicaid?

If you look at the requirements below you will see that it isn’t so easy. First you have to spend down all of your assets until there is only $2,000 left in your bank account.

What Medicaid does is put a dollar value to all of your countable assets. Then you will have to spend those down until you have no more than $2,000 in your bank account before you can qualify for Medicaid. Below is a list of your countable assets.

Countable Assets:

•    Cash, Bank Accounts and CDs
•    IRA, Keough Plans, 401K and Securities
•    Income or Vacation Properties
•    Revocable Living Trusts
•    Boats and Motor Homes

Medicaid[1][2] does let you keep some assets that are exempt from the spend down requirements. Below is a list of those assets that are considered exempt.

Exempt Assets:
•    Primary Residence or Home
•    One motor vehicle
•    Household goods and personal effects
•    Prepaid funeral plans and a small amount of life insurance
•    Assets that are considered "inaccessible" for one reason or another

There are some caveats to the exempt assets.  Take you primary residence for example, for most people their largest asset.  Due to the Medicaid Recovery Act and their paying for your Long Term Care, Medicaid will keep a running tally on what you spend and upon your passing and your spouses passing will put a lien on your home to recoup the dollars you spent.

Medicaid[1] is going broke in every state and this is a way to recoup dollars spent for long term care.

So how can we protect ourselves from losing our assets due to a catastrophic event that lands us in a facility?

Traditional long term insurance gives you the opportunity to have control of the quality of care, where you get the care, and how you get care.  It is underutilized because people often don’t think of the consequences of not having this type of insurance.  Therefore, only thin of it after the event occurs.

One of the biggest responses I hear when mentioning long term care insurance is that it is too expensive and I can’t qualify for it.  What people don’t realize is they can get a plan that will fit their needs and more importantly, budget.

Let’s look at some ways to build this plan.

When you meet with an agent for long term care insurance look at how much care you will need. We know that the average cost for a long term care stay for a private room in a nursing home is [6]$229 a day or $6,995 a month.  Do we need a plan to cover the whole amount?  No!  You will have Social Security coming in, a pension, or money from a 401K that may help.  Lets say you only need half of that so the plan may only need to cover $3,500 a month.


Next figure out how many years you need the plan to pay.  The national average for a long term care stay is 3 years so that is the minimum you should choose.  Plans could have 2, 3, 4, 6, or lifetime payment plans.  Obviously the more years the more expensive your premium will be.

Now choose an elimination period.  This is the period before the plan starts paying.  The average is 90 days and the minimum I recommend but I’ve seen as high as 180 days.  The longer you go the less expensive the premium will be.  Most people could at least weather 90 days in a facility before having the plan start paying but it is up to you.  You could also get what’s known as a cash first benefit to cover costs before the plan starts paying but this is separate and has extra costs.

There should be an inflation rider attached to the plan so the benefit will keep up with inflation. Cost of care 20 years from now will be more expensive than today so an inflation rider is a good idea.  I recommend a minimum of a 3% inflation rider.  Most plans offer either a 3% or 5% inflation rider.

The last part is where the care is to be given.  Most people would like to live their remaining years at home and this is the direction care is moving so make sure your long term care plan has 100% home health care.  Out of all the traditional long term care plans paying claims today 51%[6] of them are paid to home health care.  These plans will also pay for assisted living, adult day care and a nursing home stay.  The most important thing is that you understand where the care is allowed and if it will pay for the care you want and will need.

Some things to think about:

  • These plans get more expensive the longer you wait
  • The cost of premium will go up over the years
  • There is a health qualification
  • Think of all pros and cons for  your situation before purchasing

A good long term care plan will help to prevent a catastrophic event wiping out your estate.  The number one mistake I see from clients is that they do not take this seriously until an event brings them to my office where, in most cases, it's too late.[4]

Retirement Income: An Owner's Manual
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