A plan to pay for long-term care is absent from most people’s retirement plans. Why? People assume they’ll rely on family for caregiving without understanding the emotional and financial burden they could place on their loved ones. Or they underestimate how likely they are to need long-term care, think Medicare will pay for it or don’t realize how expensive it is. What you don’t know about adding long-term care insurance to your retirement planning, though, can really hurt you and your family.
Why Long-Term Care Insurance?
The truth is, asking your daughter to quit her job so she can feed you and keep you clean when you’re 85 or 90 won’t be good for your relationship—or for her own ability to save for retirement. Medicare only pays for short-term care and only under certain conditions. Most people do need some amount of long-term care when an illness or injury leaves them unable to manage activities of daily living on their own for months or even years. And that care is so expensive that it will rapidly deplete your retirement savings. Long-term care insurance can solve these problems.
Long-Term Care Insurance Helps Preserve Retirement Savings—and Relationships
Doesn’t Medicare cover any type of health care you could need after age 65? No. In the case of long-term care, Medicare’s coverage is limited. (First, you must meet three conditions to have skilled nursing facility, hospice or home healthcare covered by Medicare:
- Have a recent hospital stay of at least three days (and you must be under admitted status for three midnights, not merely under observation status)
- Be admitted to a Medicare-certified nursing facility within 30 days of that hospital stay
- Require skilled nursing services, physical therapy or another type of skilled care
If you meet all three conditions, Medicare will pay 100 percent of your costs for the first 20 days, costs exceeding $140 for days 21 through 100—and then you’re on your own.
What kind of costs could you end up paying on your own? According to Genworth’s 2017 Cost of Care Survey, they’re steep. The national median this year is $85,755 per year for a semi-private room in a nursing home and $97,445 for a private room, which breaks down to about $7,100 to $8,100 per month. Costs can be considerably higher—or lower—depending on where you receive care. In Texas, for example, a semi-private room was about $54,750 per year in 2017, while in Florida, it went for about $94,500. For most people, the amount they can afford to withdraw from their retirement savings each year is nowhere near these levels.
Why not rely on a relative? You might have to move to be near someone who can take care of you. If it’s a long-term move, you might have little control over what happens to your home and possessions in your incapacitated state. If you have to move in with a relative, your presence and your need for care could end up straining their marriage or their relationship with their children.
Your relative probably can’t afford to work part-time or leave the workforce to care for you. He or (most likely) she might do so anyway if devoted enough. But if you want the best for your family members, you don’t want to interrupt and possibly derail their careers or their own chances at a financially comfortable retirement. And they might not have the physical capacity to care for you—could your daughter lift you out of bed and place you in a wheelchair?
Then there’s the emotional aspect. For a relative who loves you, it’s going to be incredibly difficult to see you incapacitated. If you’re in pain or losing your mental sharpness, you might not have the most pleasant disposition, leading to fights and resentment. And if you are still sharp, you might feel more comfortable having a stranger’s help with intimate tasks like bathing, using the toilet and getting dressed.
Relying on Medicaid for Long-Term Care Is a Bad Idea
Medicaid does cover long-term care beyond the 100 days of coverage that Medicare provides. However, the program is a last resort for the poor. To qualify for Medicaid to pay for nursing home, assisted living or home health care, your state determines the income and asset thresholds. In most states, your income must be 300 percent or less of the Supplemental Security Income limit of $735 per month in 2017. That means your income must be less than $2,205 per month. The income limit may be lower if you’re seeking in-home care.
As for assets, your home equity is not included up to $560,000–$840,000 depending on your state, but you otherwise can’t have more than $2,000 in most states ($3,000 if both you and your spouse need care). You must spend your own assets on your care before Medicaid will cover it. (An irrevocable trust can help you protect more assets, while still qualifying for Medicaid.)
The good news is that if you have a spouse who doesn’t need long-term care, the asset threshold is about $24,000–$120,000, depending on your state, to prevent your spouse from becoming impoverished. You’ll also be required to put most of your monthly income toward your care. Further, not all facilities accept Medicaid, and some only have so many beds for Medicaid patients, which means your options for where to receive care may be limited.
Even if you go broke paying for care and qualify for Medicaid, you’re not off the hook financially. After you die, federal Medicaid estate recovery laws will kick in, and any assets you have, such as your home, can be sold to recoup what the government has spent on your care. If you have a surviving spouse who continues to live in your home after you pass away, estate recovery won’t apply until your spouse passes away, too.
Tax Benefits Can Make Long-Term Care Insurance More Affordable
Long-term care insurance isn’t cheap. According to the American Association for Long-Term Care Insurance 2016 price index, which includes “good,” “better” and “best” coverage options, yearly premiums range from $960 to $2,535 for a single person, age 55, and from $1,920 to $3,560 for a couple age 60. The older you are when you take out a policy, the higher the premium will be.
There is some tax relief, however. If you itemize your healthcare expenses on Schedule A of your federal tax return, you can include your LTC insurance premiums in those expenses, making them tax deductible. You can’t deduct all of your unreimbursed medical (and dental) expenses, only the part that exceeds 10 percent of your adjusted gross income. If you were born before January 2, 1952, that threshold decreases to 7.5 percent. The most you can deduct for LTC premiums depends on your age: $1,460 if you’re 51–60, $3,900 if you’re 61–70, and $4,870 if you’re 71 or older.
If you don’t itemize your medical expenses, you can pay for your premiums from your health savings account (HSA). ( An HSA is funded with pretax dollars, and there’s no tax on distributions used to pay for qualified medical expenses.) Finally, if you need to use your LTC insurance, the proceeds will usually be tax-free.
The Bottom Line
Because of the high cost of long-term care, the extreme burden it could place on your loved ones and the lack of a social safety net until you’re broke, the best way to pay for long-term care is through LTC insurance. To get started, get quotes from at least three long-term care insurance providers, then work with an agent to tweak the benefits until you find the best combination of coverage and affordability.