Consider self-insuring or opening a health savings account, among other options, to cover costs.
A senior who turned 65 in 2015 could incur an average of $138,000 in long-term care costs, according to a 2015 study published by the U.S. Department of Health and Human Services. The study estimates that half of seniors will need care, and one in seven seniors will require long-term care services for five years or more.
The statistics are concerning for workers who are already struggling to save money for basic needs in retirement, let alone expensive health care services. However, experts say ignoring the problem isn’t the right response.
“You’re going to pay one way or another,” says Melanie Halstenberg, co-founder of investment advisory firm Arch Financial Services in Fayetteville, West Virginia.
Workers can prepare for long-term care expenses by buying insurance or investing money. If they don’t buy or invest early on, they’ll have to find another way to pay. While public programs like Medicaid can help, Halstenberg cautions against counting on the government to pick up the tab entirely.
Here are six ways to pay for the long-term care costs that might be in your future.
1. First, check if a long-term care insurance policy is available. Don’t assume long-term care insurance is financially out of reach. “A lot of the experts say to buy [a long-term insurance plan] at age 50 or 60, but one thing you can consider is buying it a lot younger,” says Shanna Tingom, co-founder of investment firm Heritage Financial Strategies in Gilbert, Arizona.
LifeCare Assurance Company, a firm based in Woodlawn Hills, California, that provides consulting and administrative support to long-term care insurance providers, estimates a 40-year-old couple can buy coverage for both spouses for $1,433 per year. While long-term care policies can be customized, at that price, the couple would get a plan intended to provide five years of care with an annual 3 percent inflationary increase in benefits. That same plan may have an annual premium of $1,948 if bought at age 55 or $2,202 if purchased at age 60. Though these prices are representative of market premiums, actual pricing will vary by insurer and depend on selected coverage levels and features.
“We tend to be focused on making sure that the underwriting is done right,” says Marc Glickman, an actuary and chief sales officer with LifeCare Assurance Company. He says older policies became too expensive because they used faulty assumptions about the care people would need. The policies on the market today use claims data from the older long-term care policies to create pricing that is intended to be more stable in the long run.
2. Add a rider to an existing life insurance policy. Even if you can afford long-term care insurance, you might not qualify for it. In order to stabilize prices, some companies have tightened eligibility criteria to exclude those with multiple health conditions such as diabetes, cognitive impairments or orthopedic issues.
In that case, another option is to add a rider to a life insurance policy. “There’s something called accelerated benefits where you can use a portion of your death benefits for [long-term] care,” Halstenberg says.
Depending on the rider’s language, early benefits might be accessed once someone is deemed terminally ill, diagnosed with a cognitive impairment or meet other criteria. The benefits are usually capped at a specific percentage of the death benefits and anything paid out for long-term care is deducted from the amount given to beneficiaries after the policyholder passes away. Most insurers offer this rider option to customers.
Glickman estimates a rider for accelerated benefits adds 5 to 10 percent to a life insurance policy’s premium. However, some insurers may include them as a standard provision in all policies.
3. Open a health savings account. Workers who have qualified high-deductible health insurance plans can open a health savings account, or HSA, to pay for future long-term care costs. In 2018, individuals can deposit up to $3,450 in tax deductible contributions to an HSA. Those with family insurance plans can deduct up to $6,850 in contributions. What’s more, those age 55 and older can contribute an additional $1,000 to their account.
Money in an HSA rolls over from year to year, and withdrawals are tax-free if used for qualified health care expenses, including long-term care and long-term care insurance premiums.
4. If eligible, take advantage of veteran benefits. When Halstenberg’s grandmother needed long-term care, her family turned to the U.S. Department of Veterans Affairs. Veterans who have served in qualified periods of conflict, as well as their spouses, are entitled to receive financial aid, known as the Veterans Affairs Aid and Attendance, or A&A benefit, to pay for long-term care.
“It’s a great benefit most people don’t know about,” Halstenberg says. Once you’ve been approved for a Veterans Affairs pension, apply for the benefit by writing to your Pension Management Center.
5. Use personal savings. Self-insuring is essentially saving up enough money to pay for out-of-pocket care, and it’s another way to pay for long-term care costs. Tingom says this can be done by setting aside a portion of an investment plan to pay for future care.
While no one can know for sure if they will need long-term care and how much it will cost, Tingom says people can still make educated guesses. “There are pretty specific statistics available,” she says. For instance, the 2015 study published by the U.S. Department of Health and Human Services found most people need less than two years of long-term care services and setting aside $70,000 may be enough to meet average costs.
6. Medicaid. When all other options are exhausted, the government will help pay long-term care costs, but not in the way many people expect. “A lot of people think Medicare will pay, and it doesn’t,” Halstenberg says. While Medicare will pay for some nursing home care after a hospitalization, that coverage is limited. “After 100 days, [Medicare beneficiaries] are totally on their own.”
However, Medicaid will pay for ongoing long-term care needs. The catch is that a person must deplete almost all financial resources first. Medicaid eligibility varies by state, but typically seniors can’t have more than $2,000 in liquid assets. While many states exclude one vehicle, principal residences and small life insurance policies from their Medicaid eligibility criteria, estate recovery laws allow for these assets to be seized after a senior’s death to reimburse the government for the cost of a person’s care.
Halstenberg believes one of the biggest drawbacks of using Medicaid to pay for long-term care is the fact that not every facility accepts Medicaid patients and only traditional nursing homes are covered. “The thing with Medicaid [is] you don’t get to choose [where to live], and assisted living is not an option,” she says.
Regardless of how you plan to pay for long-term care, experts urge people to write down their wishes and share them with family members. Otherwise, relationships can be irreparably damaged as children and other relatives grapple with how to take care of an ailing loved one. “I see that happen a lot with my clients,” Tingom says. “It can get really ugly, really fast.”
Long-term care costs will be a reality for many Americans, but you have options. Determine what works best for you and your family long before it’s time to make tough decisions about where and how long-term care will be provided.