Millions of older adults and younger individuals with disabilities require assistance with daily activities that many take for granted.
According to LongTermCare.gov:
- About seven out of 10 people turning 65 today can expect to need some form of long-term care services in their remaining years.
- Women need care longer (3.7 years) than men (2.2 years).
- 20 percent will need long-term care for more than five years.
Confusion often surrounds the cost of long-term care and who is ultimately responsible for paying for it.
According to a survey published late last year by KFF (entitled The Affordability for Long-Term Care and Support Services), a leading health policy organization in the U.S., nearly one in four adults mistakenly believe that Medicare will cover the cost of nursing home care for themselves or a loved one with a long-term illness or disability.
Almost half, or 45%, of adults who are 65 years or older believe Medicare will pay these costs.
Let’s be clear. Medicare and most health insurance, including Medicare Supplement Insurance (Medigap), do not pay custodial care, such as helping with activities of daily living (ADLs), if that is the only care you need.
Medicaid pays for over 60% of long-term care residents, according to KFF.
Before we continue, let’s define the two terms.
HHS.gov defines Medicaid as a “joint federal and state program that helps cover medical costs for some people with limited income and resources.”
Medicare is a “federal health insurance for people 65 or older, and some that are under 65 with certain disabilities or conditions.”
And here lies the problem that will affect many in retirement. Medicare is not responsible for covering long-term care costs. Medicare will only cover a limited stay in a nursing home following a qualifying hospitalization. Even then, out-of-pocket costs can add up.
Medicaid is the primary source of funds that pay for long-term care, but Medicaid places strict limits on income and assets, depending on the state and specific program. Moreover, Medicaid has a “look-back” period regarding your assets.
In most states, generally speaking, the look back is 60 months, per the American Council on Aging. California is 30 months, but that is expected to be completely phased out by July 2026. New York has no look back for Community Medicaid.
For most states, all financial transactions over the last 60 months are subject to review.
In practical terms, penalties could result if an audit finds a cash gift to your grandson for a high school trip, gifting property or cash to relatives, or selling assets below market value.
So, if Medicaid may not be an option for you, let’s review some alternatives.
1- Consider a health savings account (HSA). Those with high-deductible healthcare plans may be able to contribute to an HSA and withdraw funds to pay for eligible medical expenses. Contributions to an HSA reduce taxable income, appreciate tax-free, and withdrawals for qualifying medical expenses are not taxed.
You may also access funds in your HSA to pay the premiums for most long-term-care insurance policies. The annual withdrawal depends on your age, ranging from $480 per year if you are 40 or younger to $5,960 if you are 71 or older (IRS through 2023).
2- That leads us to long-term care insurance (LTCI). LTCI isn’t cheap, and you won’t qualify if you have a pre-existing debilitating condition, but a policy can provide support when you most need it. Many seek coverage in their 50s or 60s, and coverage will vary considerably.
Most policies are triggered when you are unable to perform two or more “activities of daily living” (ADLs) on your own or if you suffer from dementia or a cognitive impairment.
ADLs include bathing independently, using the bathroom without assistance, dressing oneself, getting in and out of bed without help, eating without assistance, and maintaining continence.
However, LTCI has faced significant criticism due to high costs and rising premiums. If you reach a point where you can no longer afford the premium, you risk losing your coverage or having to reduce it, even if you have been paying into the policy for years.
3- As the name suggests, LTCI is insurance. It’s something you hope you never need. If it’s unused, the cost provides peace of mind but not much else.
Enter the long-term care annuity. How does this work? You pay a lump sum or regular premium that provides a benefit that can be used for long-term care expenses. If the LTCI benefit is not needed, you or your heirs have access.
But this is a complex product. It has benefits and drawbacks. Underwriters may be more willing to accept someone with pre-existing conditions. But you may not have full coverage immediately. Space limitations prevent a deep dive, but it’s an option we want you to be aware of.
4- Can you self-finance? You can dip into savings to pay for long-term care if you have adequate resources. But it is costly.
According to a Genworth survey, assisted living facility rates increased by 1.4% to an annual national median of $64,200 per year in 2023.
The national annual median cost of a semi-private room in a skilled nursing facility rose to $104,000, an increase of 4.4%, while the cost of a private room in a nursing home increased 4.9% to $116,800.
Further complicating this approach is the indefinite time period that one may require care. If your assets are depleted, Medicaid may become your best option.
5- Consider a Roth IRA. There are many benefits to a Roth IRA when compared to a traditional IRA. For example, a Roth is not subject to required minimum distributions. If possible, you may decide to keep funds in your Roth until needed for long-term care or LTCI premiums.
You must be 59 ½ and have held the Roth for at least five years to avoid taxes or penalties. There are no restrictions on how you can use the funds withdrawn from a Roth IRA.
6- Using your home equity. You may also tap equity by taking out a home equity line of credit (HELOC).
Final thoughts
How you might approach long-term care will depend on your circumstances. We have offered a basic outline of various options.
If you have any questions or wish to discuss other matters, please don’t hesitate to contact me or any team member.
As always, thank you for choosing us as your financial advisor. We are honored and humbled by your trust.
