Long-Term Care: Many Will Need It. Many Won’t be Able to Afford It
While most of us don’t like to think about needing care in our later years, the statistics suggest it’s something everyone needs to consider.
According to the U.S. Department of Health and Human Services,1 someone turning 65 this year has almost a 70-percent chance of needing some type of long-term care in their remaining years. Long-term care can range from non-skilled service or care in the home — such as help with bathing, dressing, eating and moving around — to full-time care in a nursing home that provides general nursing care to those who are chronically ill or unable to take care of daily living needs.
On average, men need long-term care for 2.2 years, while women need it for 3.7 years.1
With the median annual cost of a private room in a nursing home topping $102,000 a year, according to a 2019 Genworth Cost of Care survey,2 that kind of vital care will be well outside the reach of many seniors. Despite these daunting numbers, there are financial strategies to help cover those bills, ranging from obtaining your own long-term care insurance to checking for eligibility for government assistance.
Financial strategies and options to cover long-term care
Long-term care insurance: This is your own separate insurance policy designed to make sure you can afford assistance and long-term care to remain independent as long as possible. Knowing you have coverage can provide peace of mind. This insurance pays for things like help in your home with bathing, dressing or taking medications, as well as full-time support in a long-term care facility.
Long-term care insurance is the most flexible and straight-forward option for extended care and assistance without having to bear the entire cost yourself. You can choose the amount of support you want and the term of coverage, and whether you want to cover just yourself or take out a policy with a spouse.
Insurance riders: Some life insurance policies and annuities allow you to add a rider to cover long-term care or treatment for a chronic illness, including dementia. These riders pay out some percentage of the death benefit, usually up to 2 percent per month. There’s often an extra charge for a rider benefit, either in the premium or through deductions to the death benefit.
The advantages of insurance riders include the fact that you get additional benefits rolled into one policy, and the cost of a rider can be less than buying a separate long-term care policy.
Health Savings Account: If you’re enrolled in a high-deductible health insurance plan, you can contribute up to $4,550 if the plan covers just yourself, or up to $8,100 for family coverage, in a Health Savings Account (HSA), which functions much like a regular IRA. You don’t need to be working to contribute to an HSA. Contributions and earnings are untaxed, as is any cash withdrawn to pay for a wide range of medical expenses, including long-term care premiums and expenses.
Money in an HSA rolls over from year to year, and the account remains with you if you change jobs or retire. One strategy is to build up an HSA during your working years and leave it untouched until retirement. This allows you to save additional tax-free retirement money beyond the limits on an IRA or 401(k) plan.
But you can’t make contributions to an HSA unless you’re enrolled in a high-deductible insurance plan.
Reverse mortgage: This loan allows a homeowner to withdraw equity without needing to repay the loan as long as they own and reside in the home. If the homeowner sells the home or moves out — or if the homeowner dies — the loan must then be repaid. If the home is still owned by the homeowner or estate, it can be sold to pay off the loan or surrendered to the lender.
FHA-insured reverse mortgages are non-recourse loans, meaning the lender can’t demand more than the value of the loan’s collateral — the home, in this case. So the homeowner on a reverse mortgage will never owe more than the home’s value when the loan becomes due. However, the homeowner is still responsible for property taxes, homeowners insurance and upkeep of the home.
Reverse mortgage proceeds are tax-free, but the interest isn’t deductible until the loan is repaid. A reverse mortgage also allows you to preserve other savings and income for other purposes.
Reverse mortgages are not right for everyone. They charge much higher fees than conventional home loans, and if you go to long-term care, you may not qualify as residing in the house and have to forfeit the home. And you need to consider that your reverse loan balance increases over time as interest on your loan and fees accumulates, just as with a conventional mortgage.
For a detailed look at whether a reverse mortgage is right for your situation, see Five Things You Need to Know About Reverse Mortgages.
Savings: Wealthier retirees can rely on their own retirement savings, pensions and Social Security income to pay for care. But in planning for long-term care costs, it’s important to know that only 13 percent of people who are 65 will spend less than $50,000 during their retirement for long-term care, according to 2017 data from the Department of Health and Human Services.2
An advantage of using your savings is that it gives you liquid assets and income to pay for care while also allowing you to save that money or use it for other expenses. This option also preserves your money in the event that you don’t need any significant amount of care.
But a potential disadvantage is that you’re taking on all the risk if you don’t turn out to be among the minority — one out of every seven to eight people2 — who won’t need long-term care. You also could run out of money and need to rely on limited Medicaid nursing home benefits.
Government assistance: Traditional Medicare doesn’t cover long-term care expenses, other than temporary care in a rehabilitation center or hospice care. The Medicaid program for low-income residents can cover nursing home and long-term care.
This government benefit covers the cost of care and can relieve the pressure on your spouse or other family members to pay for or provide care.
However, Medicaid requires aid recipients to spend down assets, limiting them to $2,000 in cash, stocks and bonds, plus a primary residence and one or two vehicles. Spouses can protect their own additional assets, and some other property can be protected by consulting with an elder care attorney, which adds another expense. Choices for Medicaid facilities can be limited.
Veteran’s benefits: A little-known program called the Veterans Affairs Aid and Attendance provides monthly cash assistance to qualified veterans or their surviving spouses who need regular help with daily living, whether at home or in a care facility.
Veterans Affairs Aid and Attendance provides benefits from nearly $14,000 a year to more than $27,000 a year for qualifying veterans or their survivors for care at home or in a nursing facility. But the benefit is limited to veterans or their surviving spouses who receive a VA pension and meet certain care requirements. The application process is best handled through a local veterans group or county veterans services offices, and you may need to consult an elder care attorney.
Making long-term care decisions and weighing all the options and considerations can be complicated and confusing. It’s important to do your own research on the choices available to you, weigh all the factors and your financial situation, and involve family members early on so that everyone knows what to expect as you age.
Mutual of Omaha Insurance Company and its affiliates do not provide tax or legal advice. Please consult a tax advisor for specific tax advice.