How to pay for long-term care expenses?
A few years ago, when I wrote my book, The Money Talk, Retirement and Estate Planning for Indian Americans, I did a small survey with my clients and friends just to understand where they were at with their finances. And one of the questions asked in the survey was, “What are your two biggest worries when it comes to your retirement?” And the answers that kept repeating themselves were healthcare expenses and the fear of outliving their savings, which also makes perfect sense because that is also the same results other surveys have gotten.
By the way, The Money Talk is available on Amazon in print, audio and e-book, but you’re also welcome to download it for free on our website.
What I also discovered was that less than 10 percent of our clients and friends had done any form of long-term care planning, which in some ways was not surprising. You see, in many countries like India, when parents get older, they usually stay with their children, and their kids take care of their parents in their old age, which in some ways is probably the best form of long-term care planning there is, wouldn’t you agree?
Now even if that is your plan, it doesn’t hurt to have a contingency plan to pay for some of these expenses, because as we all know, healthcare in America is very expensive and without a good plan, you can bankrupt yourself. It is estimated that the average cost of long-term care services in the United States for things like home healthcare, assisted living nursing homes is estimated around $60,000 to $70,000 per year, depending on where you live and the type of services that are necessary.
Now if you’re in your 50s, and most probably will not need those services until your 80s, what do you think those costs will be 30 years from now? I don’t know for sure, but I am pretty sure it’s going to be much, much higher than what it is today due to medical inflation. So let’s go over these five most common ways to pay for the long-term care right now.
Cash
The first and most obvious way to pay for anything is cash. Cash is still king in most situations! And if you have the money, you can just pay for the services that you need. And if you’re on the wealthy side, this may not be a bad option for you.
Here’s a question for you?
If you had to pay out of your pocket $70,000 to $100,000 a year in retirement, where would it come from? Your savings, IRA, investments? Or would you possibly have to sell some properties or other assets?
The reason I ask this question is because it’s something that most people had never thought about, and it’s a very important question to consider. There are also many people who have money, but also have a difficult time spending their money, even if it is for their own well-being. So what if I can show you ways to pay for some of these expenses in a more painless sort of way?
So if you believe it would hurt your finances to dish out 70,000 to 100,000 a year, stay tuned. I will show you some alternatives which are also worth considering, even for the wealthy, because at the end of the day, peace of mind is our number one goal.
Medicaid
The second most common way people pay for long-term care is through Medicaid. Medicaid is a joint federal and state program, and it is operated by each state for people who do not have enough income or assets. And if you do not have enough income or assets, you might be eligible for Medicaid in your state, and Medicaid will take care of your long-term health care needs, which I think it is awesome in this country. Now Medicaid rules can vary from state to state, so get educated on the Medicaid requirements for your state.
But be warned, being on Medicaid may also mean that you might have to spend down your assets in order to qualify for some of these benefits.
Many people who start out paying for their long-term care needs with cash eventually find themselves impoverished because they had to spend down their savings. And it is usually the husband who needs the care first. And if they have to spend down what they have for him, it’s the wife who is left impoverished with very little for the rest of her life.
Plus being on Medicaid may also mean that you might have lesser choices on where you can get the care because Medicaid usually does not pay as much to the providers for the services. So many nursing homes or assisted living facilities limit the number of beds they make available for their Medicaid patients, because obviously they want to keep more room for their high paying customers.
Now, I don’t mean to scare you with all this. My intention is just to provide you with the necessary information so that you can plan your future needs. But if you believe that you might have to go on Medicaid, you really should get educated on how Medicaid rules work in your state. And it also may not be a bad idea to meet with a financial planner or elder law attorney who can guide you through this process.
Long Term Care Insurance
Moving on to number three is traditional long-term care insurance. Unfortunately, there are pros and cons with all of these solutions, and one of the challenges with long-term care insurance is that because it is a form of health insurance, the rates may not be guaranteed and you might have to plan on rate increases for the rest of your lives.
Now this can be sometimes problematic because it is another payment you have to plan for in your retirement years. And nowadays there are only a handful of companies providing traditional long-term care insurance. So if you’re considering this option, be sure to shop around and make sure that the company that you choose is financially strong enough to pay these benefits.
Asset Based Long Term Care Insurance
And this brings us to the two newest and most popular ways to take care of your long-term care needs. These have most certainly become the most popular and soon you will see why. Number four is what is known as asset-based long-term care insurance. Many times as I’m talking to some of our clients, they will say something like, “I have put aside about $200,000 for me and my wife, just in case if we ever need any long-term care in the future,” which is really not a bad idea.
But what if you could reposition that same 200,000 in a way that could provide you with more benefits, cover both spouses if you ever needed the care. And if you never needed the benefits, the policy would pay out as life insurance death benefit after the death of the second spouse, which will be 100 percent tax-free to your family. Not bad, huh?
There are also other optional riders with policies like this. You can add a continuation of benefits rider. So if you were to use up the full benefits purchased, you could even provide additional unlimited lifetime benefits for you and your spouse, which I think is a pretty important thing to consider because as we are all living much longer and certain ailments like Alzheimer’s and dementia can last for many, many years. Remember President Ronald Reagan? He was diagnosed with Alzheimer’s around 1994 and lived another 20 plus years afterwards.
So asset-based long-term care is a great option if you have the financial resources to make either a single premium or a series of premiums. What I also like about this strategy is that there’s also an option to add a return of premium rider, where if you ever change your mind and want to cancel your policy, you can get all of your premium back. Just like in the example before, if you invested 200,000 in your policy and you change your mind, you can have your full 200,000 back without any interest, of course.
Life Insurance with Long Term Care Riders
Our fifth and final way to pay for your long-term care needs, which is life insurance with long-term care benefits built in. Now this landscape has changed so much over the last few years. Now you have an option to include long-term care benefits with your life insurance, which I think is an excellent way to take care of multiple needs at the same time.
And this is why I have been recommending the two-policy approach for most of my clients. Buy a large term policy with 20 or 30 year rate guarantee, but supplement it with a smaller permanent policy, which can include the long-term care benefits, so that if you ever need long-term care in the future, this could be another bucket that you can dip into to pay for it. And if you don’t need it—which is once again what we’re always praying for, because who wants to be on long-term care?—the benefit will be 100 percent tax-free to your beneficiaries as a life insurance death benefit. Either way, we know that sometime, somewhere, someone will get paid, and you can enjoy the peace of mind knowing that you have taken care of one of the biggest risks in your retirement years.
Moneywise is hosted by Rajesh Jyotishi with Shalin Financial Services, Inc. Rajesh Jyotishi is a registered representative of Dempsey Lord Smith, LLC, which is a registered broker-dealer and a member of FINRA/SIPC. Advisory Services are offered through Dempsey Lord Smith, LLC. Rajesh has been a resident of Atlanta since 1975 and in the financial services industry since 1991. For questions, he can be reached at 770-884-8175 or at RJ@shalinfinancial.com. |
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