F E A T U R E
Paying for
Long-Term
Care
by Jon Caswell
any stroke families don’t
know how to care for a
family member who can’t
handle a few activities of daily living
(ADLs) but isn’t so compromised that
they require a nursing home. Does
another family member sacrifice their
life so that the survivor can live at
home, or do they arrange for home
healthcare assistance? Whatever you
decide, you have to figure out how to
pay for it. At that point, you really are
on the horns of a dilemma.
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November/December 2005
Families in this situation quickly
discover that there is a big hole in the
safety net of Medicare, Medicaid and
private health insurance. Medicare or
private insurance only covers longterm care if it is “skilled care” (see
“Skilled vs. Unskilled”). “Even then,
Medicare only pays for 100 days,”
said long-term care expert Phyllis
Shelton. “And the average number
of days paid by Medicare is less than
25 days, because most people don’t
Phyllis Shelton
meet the skilled-care qualification
longer. Medicare doesn’t pay for assisted living. It doesn’t pay
for nursing home care for people with chronic conditions, like
Alzheimer’s disease.”
Shelton is the author of Long-Term Care: Your Financial
Planning Guide. Long-term care is generally defined as needing
assistance with two or more activities of daily living for at least
90 days.
The Medicaid Option
Medicaid does pay for nursing home care, but it’s only part of
the answer. “Medicaid is the federal and state welfare program
for the poor,” Shelton said. “It currently pays for about half of
all nursing home care in the United States, but it is fast being
overspent. And many states are exercising asset recovery, so in
those cases it is not much more than a loan program.”
There are significant problems with relying on Medicaid. First,
most Medicaid programs don’t pay for extended home health care,
such as 8- to 10-hour shifts. Second, many nursing home facilities
don’t accept Medicaid patients because they represent a financial
loss for the facility. Third, Medicaid patients are at the mercy of
the system. They must go wherever there’s a bed for them, and a
private room is usually not an option.
“In my book, I relate the story of an Ohio family who spent
all their assets paying for two years of nursing home care for the
aging father,” Shelton said. “Then the mother had to go into a
nursing home, at which time the family home was sold to pay for
her care for 18 months. Both parents ended up on Medicaid, but
because there are so few Medicaid beds in Ohio, the mother is in
Cleveland, and the father is two hours away in Toledo, and the
children live in Canton. So visiting is difficult.”
Since Medicaid is a program for people with limited resources,
most states require that most assets be depleted before patients
can qualify. “About a quarter of nursing home patients currently
paid by Medicaid did not enter the nursing home on Medicaid,”
Shelton said. “In other words, they had to ‘spend down’ or
exhaust their resources before they became Medicaid patients.”
(See “Transferring Assets to Qualify for Medicaid,” p. 23.)
Generally, if keeping independence and staying in control is
important to a family, Medicaid appears to be a solution of last
resort because choices for care are so limited.
Skilled vs. Unskilled
“It’s the skilled/unskilled aspect that the
average person has no idea about,” said Phyllis
Shelton, author of Long-Term Care: Your
Financial Planning Guide. “Skilled care is paid
for by Medicare or health insurance, but neither
one pays for unskilled care, and long-term care
is considered unskilled.”
Skilled care
Skilled care has nothing to do with how sick
a person is. It is determined by the services the
patient receives, and those services have to be
getting the patient better.
Examples of “skilled care” services include:
• Speech and physical therapy, which is
paid for by Medicare or private insurance
until the patient stops showing progress
(or until the payment cap is met).
• Care for a bedsore is covered only until
it is under control, not until it’s healed.
• Extended IVs or tube feeding.
Unskilled care
Unskilled care has nothing to do with how
sick a person is but with what services they
receive. Once progress stops, the care is
considered “chronic” or “maintenance” and
traditional insurance payment stops.
Examples of “unskilled care” services include:
• Daily cleaning of a colostomy drain
or a catheter.
• Respiratory therapy for an emphysema
patient (while this helps them stay alive,
they are not getting better).
• Help with activities of daily living such
as bathing or dressing.
November/December 2005
21
Linked Benefit Plans
Alternatives for Paying for
Long-Term Care
There are several ways to finance long-term care,
according to Shelton, and some are better than others.
Long-Term Care Insurance
It is clear that the states (through Medicaid) can no
longer afford to be the funder of last resort for care of the
chronically ill and disabled. Using tax incentives and other
legislative and policy measures, the federal government has
made it clear that it wants the private insurance market to
pay for most long-term care (LTC).
For instance, a portion of the premium for LTC insurance
counts as a medical expense. Since medical expenses
beyond 7.5 percent of your income are tax deductible, a
portion of the premium for LTC insurance helps meet that
threshold. At the other end, benefits paid are not considered
taxable income, nor are premiums paid by employers
considered taxable income for employees.
Congress has also standardized benefits to protect
consumers. For example, a qualified policy must offer
inflation and non-forfeiture benefits, and a qualified
healthcare professional (physician, registered nurse, social
worker) must certify that two or more activities of daily
living will be compromised for at least 90 days.
“The message from the government is loud and clear,”
Shelton said. “‘Take care of your long-term needs with
private insurance.’ There simply isn’t enough money to
create another entitlement program for long-term care.
According to the comptroller general of the United States,
just keeping Social Security, Medicare and Medicaid afloat
could require a doubling of taxes.”
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November/December 2005
Linked benefit plans are hybrids that combine
long-term care benefits with life insurance or an
annuity.
If a linked benefit plan is combined with life
insurance, two times the death benefit may be
available for LTC. “If you need the benefit for LTC
almost immediately,” Shelton said, “the policy could
pay as much as 2 percent a month for four years,
or 4 percent for two years. The longer you have the
policy without filing a claim, the more accumulation
and the longer the benefit period.” Payment of a
$100,000 lump-sum premium provides a monthly
benefit of about $5,000 for four years.
You can also use an annuity to fund LTC. (An
annuity is an investment that returns fixed annual
payments for a lifetime or a specified number of years.)
Using this method, your lump-sum payment is put into
two funds: an LTC fund, which grows at a higher interest
rate for five years, and a regular cash fund that grows at a
smaller rate.
“The purpose of the separate LTC account is to allow
you immediate access to the money for services from a
licensed home healthcare agency, adult day care center,
assisted living facility or nursing home care,” Shelton
said. “Otherwise, early withdrawals from an annuity mean
limitations on the amount you can withdraw, usually 10
percent, without a penalty.”
Medically Underwritten Annuity
Sometimes stroke survivors can’t qualify for LTC
insurance. A long-term care immediate annuity is available
to people who are already receiving LTC and may be a
way to maximize financial resources to pay for it. This
product involves paying a single, lump-sum premium that
is converted into a monthly payment guaranteed for the
life of the policyholder. This type of annuity is available
to people with certain diseases or conditions (“medically
underwritten”) and uses different life-expectancy tables than
regular annuities.
For example, an 82-year-old man with advanced
Parkinson’s who wanted a monthly benefit of $3,500 would
normally have to pay about $300,000 in a single premium.
However, because of the Parkinson’s, he would need only
$134,000 to gain the same $3,500 monthly lifetime benefit.
It can even be structured so that a beneficiary receives
part of the money if the policyholder dies earlier than the
insurance company expected.
Accelerated Death Benefits
An alternative to purchasing LTC insurance is to buy
life insurance that provides cash advances against the
death benefit to pay for LTC expenses of the policyholder.
Because the benefit is paid while they are still alive, it is referred
to as an “accelerated death benefit.”
A few of these policies pay for home care or assisted living.
Typically, monthly benefits equal 2 percent of the face value of
the policy for nursing home care and 1 percent for home health
care. Benefit payments are not taxable income.
Some insurance companies include an LTC benefit at no extra
charge. Check with your insurance professional to see if your life
insurance policy has this feature.
“A big pitfall to this alternative is that inflation may not be
addressed,” Shelton said, “so the benefit doesn’t increase as costs
increase as it would with LTC insurance with an inflation rider.”
Viatical Settlements
“Viatica” were the supplies needed to provide last rites to
Roman troops sent into battle. The word has come to mean any
supplies for a journey. The “viatical” insurance alternative allows
a terminally or chronically ill patient to “sell” a life insurance
policy to a third party. The idea is that the money from this sale
would provide money for a dying person’s final journey. The
third-party purchaser becomes the owner and beneficiary of
the life insurance policy. “Terminally or chronically ill” can be
anyone with a life expectancy of two to three years. Remember,
once you’ve done a viatical settlement, the life insurance policy
is gone, and any expenses you were planning to settle with that
money, such as medical bills or funeral expenses, will have to
come from somewhere else.
Life Settlements
Life settlements are much like viatical settlements. In this
case, a person with life insurance sells the policy to a third-party
investor who then becomes the beneficiary. There is no terminal
or chronic-illness requirement. Because of this the payout is at
a lower rate, no more than 50 percent of the policy’s face value,
compared to up to 80 percent in a viatical settlement.
Reverse Mortgages
“Since many older people own their homes free and clear,
they find themselves ‘house rich and cash poor’,” Shelton said.
“Reverse mortgages allow a family to tap into this wealth without
giving up their home.”
Transferring Assets to
Qualify for Medicaid
Medicaid was designed to help the poorest
citizens pay for medical expenses. It has grown
enormously since its inception in 1965­­­­­­­­­­­­­­­­. Much of
this growth has come from increased use and
cost of nursing home care for the “aged and
disabled,” which now consumes two-thirds of
Medicaid dollars.
To qualify for Medicaid, a person must have
few assets and, in some states, very limited
income. The most the healthy spouse can keep
in 2005 is about $95,000 plus a house and
car. Most people qualify for the program by
“spending down” their assets. They exhaust
their resources by paying for long-term care
out-of-pocket. Others attempt to qualify by
transferring assets to loved ones.
“This can be very tricky,” said Phyllis
Shelton, a long-term care insurance expert.
“First, because you must give up control of the
asset and become dependent. And second,
because it is not always looked on favorably by
authorities.” Here are some of the reasons for
not transferring assets:
• Divorce: If you sign over your assets to an
adult child, half your assets may go to their
spouse in a divorce settlement.
• Lawsuit: The child holding the assets is
sued. The court will consider your assets
theirs.
• College Financial Aid: Your grandchild
no longer qualifies for financial aid because
you transferred your assets to your child.
• Early Death of an Adult Child: Your
child dies before you. Now you are at the
mercy of a son- or daughter-in-law.
• Misuse of Funds: Your child makes
disastrous investments with your money.
Because of program changes that will be
required because of the aging of baby boomers,
there are no guarantees that current benefits
will continue. And states are also becoming
more aggressive about estate recovery after the
beneficiary dies. Estate recovery turns Medicaid
into a loan, not an entitlement.
Source: “10 Reasons Why It Might Be a Bad Idea to
Transfer Assets to Qualify for Medicaid” (See “LTC
Reports” at www.ltcconsultants.com for a sample
brochure.)
November/December 2005
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Reverse mortgages are also called “home equity
conversion loans.” They allow people over 62 to convert
part of their home equity into income without having to
sell the house, give up title or take on a second mortgage
payment. The income from this loan is generally paid
in monthly installments. It’s tax-free and doesn’t count
as income for Social Security eligibility purposes. The
balance due the purchaser grows as cash is paid to the
homeowner.
The homeowner still owns the home and can live in it
until they die, no matter how much time passes. If they
decide to sell in order to move, the loan is paid off from
the proceeds of the sale. The older the patient is and the
more valuable their home, the more they can borrow.
Someone in their 60s can get about 38 percent of the
home’s equity; a 75-year-old would get about 58 percent;
and someone in their 80s would get about 60 percent.
Critical Illness Insurance
Introduced in the United States in the 1990s, critical
illness insurance pays a lump sum upon diagnosis of one
of a dozen or so diseases. Among the conditions covered
are stroke, heart disease, Alzheimer’s, multiple sclerosis,
kidney failure and major organ transplants. Some policies
return any part of the premium not paid out in benefits
upon the death of the policyholder. You can purchase the
policy at any age, but benefits are typically reduced by
50 percent at age 65 if you were older than 60 when you
bought the policy.
A major benefit of such a policy is that the lump-sum
payment allows the beneficiary to use the money however
they want. When buying such a policy, if your parent had
a condition (say, Alzheimer’s) covered by the policy, you
might have to pay a higher premium.
The odds are greater than 50 percent that everyone
in the United States will need some form of long-term
care, and for stroke survivors the odds are probably even
higher. Planning ahead can head off a tragedy, but for
those who don’t have that option, investigating some of
the alternatives mentioned here may help pay for the care
your loved ones need.
Phyllis Shelton’s book, Long-Term Care: Your Financial Planning
Guide, is available at bookstores, through www.amazon.com or at
www.ltcconsultants.com.
LTC Resources
www.ahca.org
This is the Web site of
the American Health Care
Association, a consumer
advocate on long-term care
issues.
www.longtermcareliving.com
This Web site can help you
assess your needs and explore
alternatives.
www.fpanet.org/public/tools/
healthcare.cfm
The Web site of the Financial
Planning Association has helpful
information on long-term care.
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November/December 2005
www.aarp.org
At the AARP homepage,
type long-term care in
the search window. It
will take you directly to
a great deal of up-todate information on the
subject. For information
on contacting your state’s
ombudsman if you have a
problem with a care facility,
type ombudsman into the
search window.