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Thursday, October 22, 2020

Many Americans will eventually need long-term care. Here’s how to pay for it

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Chances are, you aren’t seriously thinking about how to pay for long-term care when you are older.

Most people only think about it at two points in their lives: when their parents need it or when they start to get much older and realize they need to have a plan, said Carolyn McClanahan, a physician and certified financial planner at Life Planning Partners in Jacksonville, Florida.

Yet someone turning 65 years old today has almost a 70% chance of needing some type of long-term care services in their remaining years, according to the U.S.Department of Health and Human Services. Women need 3.7 years of care, while men need 2.2 years.

The average lifetime cost of formal long-term care is $172,000, according to PWC.

“The big thing that you at least need to think about is your aging, periodically, and how you are going to plan for it,” said McClanahan, a member of the CNBC Financial Advisor Council.

“Not just the cost, but the whole logistics for how you’re doing to thrive as you get older.”

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That means before you go down the road of how to pay for it, think about the optimal situation for your older years. Will you want to stay at home no matter what or are you willing to move into a facility that will care for you? Do you have family members willing to help out to keep costs down? Do you live in an area where it is cost-effective or do you need to move? What is your health like?

“If you have significant health issues you are not going to have longevity,” McClanahan said. That means you have to have a conversation with your family about what your desires are about medical intervention or moving into hospice care.

You have to spend down to a very low level of assets in order to qualify for Medicaid.

Aaron Ball

New York Life

Then, think about how to pay for your plan. You can save for it yourself, known as self-insuring, or buying some type of long-term care insurance policy. Government benefits, such as Medicaid and Medicare, have specific qualifications.

Government programs

Medicare will only pay for long-term care if you need skilled services or rehabilitative care for up to 100 days in a nursing home or a short period of time with skilled home health or other skilled in-home services.

Medicaid is reserved for those who qualify under their state’s program. Financial eligibility is based on your modified adjusted gross income and is tied to the federal poverty level.

“You, in effect, have to be impoverished,” said Aaron Ball, head of insurance solutions, service and marketing at insurance company New York Life.

“You have to spend down to a very low level of assets in order to qualify for Medicaid.”

The government looks back five years into your finances and would determine if any assets transferred during that time make you ineligible to receive benefits.

Check your state’s Medicaid website to see if you qualify, which you can access through Medicaid.gov. You can also go to MedicalPlanningAssistance.org to check eligibility.

Self-insurance

The big issue with putting aside money for the possibility of long-term care is that you need to have enough money to be able to do it.

Elder care isn’t cheap. The annual national median cost for a private room in a nursing home was $102,200 in 2019, according to Genworth Financial.

For an assisted living facility, it costs a median yearly $48,612. The median national annual cost of a home health aide was $52,624, the insurance provider found. The cost varies by state, so research the state you plan live in during retirement

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You should have at least two years worth of care covered, McClanahan advised. If you are really healthy, though, it means you may live longer and have a higher risk of dementia, she said. In that case, plan on having enough money saved to cover five years of care.

“The problem is now you have segregated this money you are not using for your life, so you have to understand the risk and benefit of that,” she said.

Also, if you are going to need care, make sure to actually use the money.

“Some people, when they actually get there, they are so afraid of spending the money, they don’t get the care they need, or the family doesn’t want you to spend the money because of their inheritance,” McClanahan said.

When calculating how much to put aside, don’t forget about other streams of income you’ll be receiving, like Social Security, pension or an annuity.

Long-term care insurance

About 7.5 million Americans have some form of long-term care insurance, according to the American Association for Long-Term Care Insurance.

The average annual premium for a 55-year old couple is $3,050, according to the association’s 2020 price index. For a single man, age 55, the average cost is $1,700, while a 55-year-old single female is looking at an average annual premium of $2,650. The initial pool of benefits is $164,000 each and reaches $386,500 by age 85.

However, costs vary depending on your age, health and the policy, among other factors.

Typically, people start to think about buying insurance between the ages of 45 and 55, New York Life’s Ball said.

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It’s especially a good option if you haven’t started putting money aside in your younger years, said Tom Henske, CFP and partner at New York-based Lenox Advisors. It will be hard to accumulate the money you need if you only start saving at age 60, he said.

“A long-term care event would devastate your financial plan,” Henske warned.

There are different types of long-term care insurance products available.

Traditional long-term care insurance is strictly for paying for long-term care. Costs have risen over the years, in part as insurers realized they initially underpriced their products.

“The problem is it is expensive and you don’t know whether you are going to end up needing it,” McClanahan said.

Hybrid plans include both life insurance and long-term care insurance. If you die without using it, at least the family receives a death benefit. The downside is it doesn’t pay as nice of a benefit as traditional insurance does, McClanahan said. She suggests buying the policy in a lump sum. The younger you are, the less you’ll have to pay.

A new product is also making its way into the marketplace, aimed at those who don’t have enough saved for long-term care but don’t want to lay out large premiums, said New York Life’s Ball.

It has coinsurance and deductibles more akin to health insurance, which helps reduce the premiums, he said. In the case of New York Life’s product, the average premium is $1,600 a year.

Making the decision

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