Helping clients manage longevity risk is a much better strategy than tackling the ballooning costs of long-term care.
By Mallon FitzPatrick, As published in Rethinking65
October 12, 2021 – Covering the costs of health and personal care needs in the final years of life is an inevitable financial burden for most people. Despite the ballooning price tag on long-term-care (LTC) services, many fail to plan ahead for this phase, often leaving them with fewer options and higher bills. As advisors, we can help clients reduce this financial burden by educating them and determining the best way for them to fund their final years.
LTC is generally defined as the care needed to help people to live independently when they can no longer perform two or more daily living activities, such as bathing, dressing, eating, continence or getting in and out of bed.
According to LongTermCare.Gov, 70% of people who reach the age of 65 will require LTC in their lifetime and 20% of them will need it for at least five years. LTC services, not generally considered medical care, are not typically covered under most medical insurances.
LTC Costs are High — and Getting Higher
Clients often begin planning for LTC needs too late or not at all. Once they do begin to confront the realities of this phase, some are left reeling from sticker shock, particularly as COVID has dramatically accelerated cost increases with the need for new industry-wide protections. They are also left with fewer funding options.
Medicare will cover up to 100 days in a skilled nursing facility, but will not cover LTC or any kind of custodial care after that time. While costs vary widely from state to state, the median price for a private nursing home room is currently $105,000 a year — with occupancy averaging three years.
Private rooms in Missouri are $69,000 and $168,000 in Connecticut. Click here to estimate LTC costs in each state.
That figure becomes more daunting factoring in that we expect a 5.5% annual hike in LTC costs — what some might say is a low estimate.
According to U.S. Department of Labor, Bureau of Labor Statistics data compiled by Genworth, facility and in-home care services costs have risen on average from 1.88% to 3.80% per year between 2004 and 2020. This translates into an annual increase of $797 for home care and up to $2,542 annually for a private nursing home room. That means some costs are outpacing the 1.8% U.S. inflation rate.
Understanding LTC and How to Fund It
In the final years of life, one or more of the three main types of LTC may be needed:
- Home care — skilled nursing services that help people stay at home and live as independently as possible.
- Assisted living — communities that offer medication, housekeeping, laundry and other personal care services, and are best suited for aging residents without serious medical conditions as they lack 24/7 nursing care.
- Skilled nursing — facilities that provide inpatient medical services for those who need 24/7 care or supervision.
It is important to plan for LTC early on to protect savings and maximize options. Beyond income and gifts, there are four primary ways to help fund LTC, including personal savings and assets, LTC insurance and hybrid insurance, synthetic LTC policies, and government programs reserved for qualifying individuals.
Funding LTC with Personal Savings
Clients may choose to bear these costs with existing assets. In these cases, they should ensure they have enough funds to cover at least three years of LTC, using the conservative estimate of $105,000 a year for a private nursing home room. Here are some examples of funding LTC with assets:
Health Savings Account (HSA). Workers who have qualified high-deductible health insurance plans can open an HSA. Contributions are tax deductible and grow tax-deferred, and distributions used to pay for qualified medical expenses are designated as tax-free. The annual contribution limits for 2021 are $3,600 for individuals and $7,200 for families.
Properties. Individuals moving into an assisted living community or skilled nursing facility may sell their home to cover the costs. People who want to remain in their home while receiving care may use a reverse mortgage to borrow against the value of their home without selling it. The loan is not due until the borrower passes or moves from the home. Typically, the home is then sold and the proceeds go to repay the loan amount plus interest.
Retirement and Investment Accounts. Tax-advantaged retirement accounts such as 401(k)s, IRAs and Roths may help fund LTC. Individuals may use assets in taxable investment accounts to pay for LTC. Before liquidating assets, they should consider the tax implications. Individuals may take an itemized deduction on medical expenses that exceeds 7.5% of AGI. LTC expenses must be medically necessary to qualify for a deduction.
Funding Through Traditional LTC Insurance
Individual LTC insurance is purchased from an insurer to help cover LTC costs. Some policies are designed to pay the full cost of care while others can be used to supplement funding. Employers may offer coverage under a group policy.
Premiums are based on age, health, gender, marital status, insurance company and amount of coverage. The younger an individual is when purchasing LTC insurance, the lower the premium will be. It is uncommon to later switch insurance as it becomes significantly more expensive with age. The optimal time to buy insurance is between the ages 55 and 60. Policies typically range from $1,500 to $5,000 annually. Spouses may obtain a 10% to 30% discount on premiums when they apply together. Generally, LTC insurance premiums are less expensive for males than females.
LTC insurance offers daily or monthly maximum benefits for a specified period of time, usually one to five years. Costs may vary day-to-day and monthly limits offer more flexibility to manage expenses.
With medical costs expected to rise 5.5% each year, inflation protection on LTC policies can offer equivalent value in the future. A $105,000 cost today is equal to $306,365 20 years from now. An inflation protection rider will grow the benefit and help align with future costs.
Group policies may be available through an employer and are typically offered at a lower cost than private insurance. The policy is portable, meaning employees can retain the plan when they leave the company. Medical underwriting is more lenient for group policies than individual policies and employees with health conditions are more likely to qualify for coverage.
Payments from an LTC insurance plan are not considered taxable income. LTC insurance premiums in excess of 7.5% AGI qualify as itemized deductions for federal taxes. Premiums can only be deducted up to a maximum amount based on age at the end of the year. Some states allow a LTC insurance premium tax deduction or credit.
States are beginning to require individuals to have LTC policies. Washington, for instance, is imposing a 0.58% payroll tax on W-2 wage earners starting Jan. 1, 2022. It is designed to create a state-run LTC trust fund. Individuals can request exemption from the tax if they have LTC insurance that provides at least the same benefits as the state program ($100/day with a $36,500 lifetime maximum).
Funding Through Hybrid Policies
A hybrid policy combines life insurance and LTC insurance. There are two kinds of hybrid policies: life insurance with an LTC rider and a linked benefit policy — both of which provide lower LTC and death benefits than standalone policies. They offer individuals a guarantee of some kind of benefit whether or not they need LTC.
Life insurance with an LTC rider. LTC riders allow an individual to receive a portion of the life insurance death benefit to pay for LTC while still alive. LTC riders are generally only available through forms of permanent life insurance. The benefit of the policy is reduced by the amount used to pay for LTC.
Linked benefit policy. A linked benefit policy provides a pool of money for LTC that’s equal to several times the premium payment. When LTC costs have exhausted the benefit, the policy will continue to provide LTC coverage. If the policy holder does not require LTC benefits, the policy pays a death benefit to the beneficiaries.
LTC riders tend to provide larger death benefits while linked benefit policies offer more LTC coverage. Premiums for both types of hybrid policies are more expensive than traditional LTC insurance. Hybrid policy premiums are guaranteed and will not increase; LTC policy premiums may increase.
In most cases, hybrid policy premiums may not be claimed as a medical expense deduction. Generally, claims paid out for the LTC portion of the policy may be received tax-free. A policy may be eligible for a partial deduction if it meets criteria to be considered qualified LTC insurance, as defined by the Internal Revenue Code.
Funding Through Synthetic LTC Policies
Individuals who are ineligible for LTC insurance or do not wish to purchase LTC insurance can mimic the structure of a policy using investment accounts and a low-cost annuity wrapper.
Traditional variable annuities are contracts with an insurance company that serve as investment accounts allowing for tax-deferred growth. The owner has the ability to turn the account into a guaranteed stream of periodic payments that may be used to cover LTC.
Investment only variable annuities (IOVAs) are a less expensive alternative to traditional annuities because there is no income guarantee. Investments grow tax-deferred and most have no surrender penalties after age 59½, meaning an individual may access the funds at any time. If the funds are not used, the IOVA will pass to heirs to use without restriction. Beneficiaries may withdraw the funds over their lifetime if they desire, as there is no 10-year rule similar to that for IRAs.
IOVAs benefit individuals who have underlying health issues and cannot qualify for an insurance policy. They allow investment and estate planning flexibility while eliminating risk of spending money on an insurance policy that may not be used.
Funding Through Government Programs
Former government employees and people with low income who are unable to fund LTC might be eligible for LTC assistance from the federal government.
Medicaid. Medicaid, designed for low-income individuals, is the only federal program that will pay for nursing home care. Benefits and eligibility vary based on state. Choices will be limited to providers that accept payment from government programs.
To find each state’s Medicaid eligibility requirements, click here.
Programs for All-Inclusive Care of the Elderly (PACE). PACE is a Medicare and Medicaid program that supports a person aging at home. PACE includes all Medicare- and Medicaid-covered care, transportation and home care. Medicaid-eligible individuals do not pay a premium for PACE. The average premium for a non-Medicaid PACE enrollee is $4,000-$5,000 per month.
To a find PACE plan by area, click here.
Federal Long Term Care Insurance Program (FLTCIP). U.S. Postal Service and uniformed service members are eligible for the FLTCIP. Its pricing schedule is based on age. Certain medical conditions will prevent people from being approved. FLTCIP often presents a good value to women who tend to have higher LTC insurance premiums.
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Mallon FitzPatrick is a principal and managing director at Robertson Stephens and heads the firm’s financial planning center. The center works with advisor teams to help clients achieve desirable outcomes by creating and implementing a cohesive wealth management plan integrating investment strategies, tax planning, charitable giving strategies, risk management and estate planning. Advisory services are offered through Robertson Stephens Wealth Management LLC. Opinions presented are those of the author and not necessarily Robertson Stephens.