Long term care insurance, hybrid life insurance and long term care riders – these funding vehicles are, arguably, among the best ways to pay for long term care. And, while they might be a tough sell in the near term, they offer unparalleled security and lasting peace of mind in the long run.
That said, relatively few seniors are buying them. A Genworth survey found that 45 percent of adults don’t plan on purchasing long-term care insurance, and the National Bureau of Economic Research reports that only 10 percent of seniors actually have the coverage. Hopefully these statistics will change as more boomers retire – and as more members of the sandwich generation see what their aging parents are enduring.
In the meantime, however, advisors are faced with the challenge of helping retirees with sudden, unplanned-for long term care needs. From slips and falls to rapidly progressing dementia, all manner of mishaps can leave previously healthy seniors in need of around-the-clock care. Fortunately, there are still a few strategies for making the most of their assets.
“It’s a growing strategy to exchange life insurance for other options,” says Chris Orestis, CEO of Life Care Funding. Even without prior long term care planning, life insurance can be surrendered for cash or converted into an annuity – both of which provide flexible funding. This money can be used to pay not just long term care providers, but family members, friends and other caregivers who may have given up their own working hours.
For many seniors, an even better option is to convert a life policy into a long-term care benefit plan – an option open to anyone with an immediate need for care. The policy is transferred from the holder to a benefits administrator, which pays qualified long term care providers directly. Unlike a cash-out, this option allows the client to receive their benefits in full. And because those funds are applied directly to care, they don’t count as income when determining Medicaid eligibility.
“If you’re a veteran and you served in a time of war, there’s the Aid and Attendance benefit for you and your spouse,” says Richard Reyes, CFP of The Financial Quarterback.
Often referred to as the VA assisted living benefit or “improved pension,” this provides qualifying veterans and their spouses up to $2,120 per month for assisted living and home care services. The benefit also raises pension income limits, which means retired military clients could also be eligible for additional income.
Most retirees want to age in place. And while in-home care isn’t as affordable as one might assume, a reverse mortgage can be a viable way to fund it. The amount a client can borrow against their equity is determined by their principal limit factor, which is, in turn, influenced by age, mortgage insurance premiums, mortgage rates and a financial assessment conducted by the lender. The PLF is multiplied by the home’s value to determine the payout. That means clients with paid-off homes and great borrowing histories can often receive sizeable sums.
Like life insurance, a reverse mortgage can also provide flexible funding for professionals or family caregivers. What’s more, the proceeds are considered loan advances rather than earned income, so they’re not taxed, nor do they affect Social Security or Medicare benefits.
“Medicaid may actually be a good idea, but you need to plan for it in advance by strategically giving away your assets,” says Steven Schwartz, vice president of HUB International Northeast’s Executive Benefits Division.
While Medicare only covers 100 days of skilled nursing care after a qualifying event, Medicaid may pay the whole bill for clients who become eligible by spending down or giving away their assets.
There are a couple of caveats, however, that should make any last-minute planner pause. The first is the five-year look-back period. As of 2006, assets transferred within 60 months of a Medicaid application are penalized according to the amounts transferred and the average monthly costs of nursing care in the client’s state. If a client transfers $50,000, for instance, in a state where the average cost of care is $5,000 per month, they would be ineligible for Medicaid for 10 months. During that time, they would have to allocate the assets they didn’t transfer to care falling in that gap.
Not all nursing facilities accept Medicaid, either, and those recipients tend to fall at the back of the line for room choice.
“Going into a nursing home as a private pay patient opens up many more doors,” says Phil Reames of Reames Financial. “Once someone is already living in a nursing home, however, they’re usually good to stay there.”
Ideally, even clients of modest means will pay privately for the first few months of care to ensure they have more say over where they stay.
Medicaid planning and asset protection involve a variety of tough-to-navigate laws that vary from state to state. Legal counsel, then, is a must.
“First and foremost, for late starters, the best tactic is to see an elder care attorney,” says Schwartz.
While last-minute long term care planning is far from ideal, an experienced attorney can protect your clients’ rights and ensure their assets end up in the right hands. A lawyer will also be essential in drawing up wills and designating durable powers of attorney – matters that many late starters also neglect until they need care.