Paying for Long Term Care (LTC) in retirement

Dave Kutcher

by Dave Kutcher

Did you know that Medicare is not designed to pay for Long Term Care expenses?

Other than some minor costs during the first 100 days that you might need care, Medicare does not provide coverage for custodial care.

So, what are your options?

1. Buying Individual Long Term Care Insurance

2. Paying for Long Term Care out of pocket

3. Using Hybrid Life Insurance/Long Term Care policies

4. Relying on family members for your care

Let’s start with some general information you should know.

1. Long Term Care refers to the support for your daily health and personal needs-these are custodial in nature and include things like bathing, dressing, and eating.

2. Health Insurance and LTC Insurance cover different things; health insurance pays for treatment to help you get better and LTC insurance covers the custodial care you need to help you through your daily living.

3. To receive LTC benefits you typically need to be certified by a physician as being UNABLE to perform two of six activities of daily living; bathing, dressing, toileting, transferring, continence and eating due to loss of function or you need supervision due to cognitive decline such as dementia or Alzheimer’s.

Your Options:

Individual LTC policies provide a fixed amount of benefit expressed either in daily or monthly limits and include varying benefit period maximums ranging from 2-7 years.

Premium rates are NOT guaranteed, and it is quite likely you will experience one or more rate increases meaning you will be paying far more for coverage over time than may seem evident when you start a plan.

Individual LTC policies provide benefits based upon a reimbursement methodology, where you receive reimbursement for expenses that were actually incurred up to daily or monthly maximums. Expenses must be tracked and claim forms processed to receive any eligible benefits. Optional benefits can include inflation adjusted maximums.

Securing Individual LTC coverage requires that you submit to a health history assessment and in some cases an exam to qualify for coverage. Not everyone will qualify for a policy.

Paying for LTC out of pocket may sound good but you must be realistic about your financial wherewithal to do so. You will need significant assets and/or income and you must account for the fact that your spouse will still require income from your retirement assets while you are receiving Long Term Care assistance.

Don’t assume government programs will cover your care. Unless you are destitute or qualify for some special government benefits such as might be afforded through the Veterans Administration, you are on your own to arrange plans that can mitigate this very real threat to you and your spouse’s retirement plans.

Medicaid is only available to those who have spent their assets down to poverty type levels and any care you seek out will have to accept Medicaid as a form of payment. Not all providers will accept Medicaid.

Hybrid Life and LTC policies combine a life insurance policy with “living” benefits for long term care. You might hear these plans referred to as “Asset-Based” or “Linked Benefit” policies.

There are typically two components to these plans;

1. A base life insurance policy that will pay income tax-free death benefits to your named beneficiary if you die before care is needed or care is not ever needed.

2. An agreement for LTC benefits that allows access to the death benefit while you are alive to provide a pool of money to help bear the costs of LTC. The LTC component typically includes some form of extension of benefits beyond the sum total of your basic death benefit.

The hybrid plans typically allow you to pay for your policy either in the form of one lump sum or a series of periodic payments over time. These payments are guaranteed, unlike traditional LTC policies. Your premiums will not go up and your benefits will not be reduced. Additionally, many of these plans have increasing benefits over time and may well be worth far more to you 15-20 years from now, a time more likely when you would need the coverage.

These hybrid plans may provide benefits in the form of reimbursement of actual expenses like the way traditional LTC policies work or they may provide a cash indemnity benefit that pays up to a specific amount to you if you are eligible for benefits, regardless of what expenses might have been incurred for your care.

You will need to prove good health to qualify for a hybrid policy and underwriting will likely include a health assessment and /or a physical exam.

Relying on Family Members is something most of us would like to consider for this type of care. Many of us have seen prior generations do so for our grandparents. More and more, however, people are understanding that their lives are not quite the same as our grandparents lived, family is spread out geographically and younger generations are requiring two income households, unable to have a family member give up their employment or move to properly care for a parent.

Family caregivers may not be skilled in the care that may be required or special equipment and/or modifications to a home may be needed to accommodate these arrangements.

Statistics say 1 out of 2 of us reaching retirement age will require LTC at some point beyond age 65. The average period of care for those that do require care is a little over 2 years. Average annual costs of care range from $100,000-$150,000 per year and that is in today’s dollars, resulting in a two-year cost of care approaching $300,000.

Projecting costs out over the next 15-20 years, it is easy to see how the financial risk of LTC could easily climb to $1,000,000 if both spouses need care or if one spouse requires care for an extended period, something that is more and more evident with cognitive decline. It is not unheard of for people with Dementia or Alzheimer’s to live 5 or more years in a condition requiring daily supervision.

Now is the time to start considering your strategy for the future. We are uniquely positioned to help you in this regard and often couple this type of planning along with our other retirement distribution planning work with our clients.

I am Dave Kutcher, a retired Marine Corp Captain and founder and owner of Kutcher Financial Services in Eagle River. We are on the radio every Saturday morning, “Retirement in the Last Frontier”, 8:30-9:30 on AM 650, Keni Radio. Kutcher Financial Services, 10928 Eagle River Road; Eagle River, AK 99577, (907) 795-7452.