Planning for Care in the Long Term

As the population ages, planning for long-term care is becoming increasingly important. Long-term care typically involves an individual receiving care at a nursing home, at an assisted-living facility or from home healthcare.

"Seventy percent of people over 65 will require long-term care, and half of all nursing home stays last over 2 1⁄2 years. So costs can add up," says Dean Johns, a principal at John D. Dovich and Associates.

You can, of course, cover the cost of the long-term care by paying out of pocket, but generally this is not the best option. A year-long stay at a nursing home can easily cost $65,000. If that cost goes up five percent annually, in 10 years that will be $106,000, and in 20 years it will be $175,000. Even two years in a nursing home can seriously deplete your assets.

Rather than covering the cost of long-term care, you might be able to use Medicaid. "Medicaid is a government program that will pay for long-term care if you are financially eligible," says Ed Bender, an attorney at Wood & Lamping. "The program is means tested. There is an asset test and an income test and the asset test is different if the applicant is single or married."

To pass the income test, the applicant cannot have income that exceeds what the nursing home charges.

Moreover, if the applicant is single and has fewer than $1,500 in assets, they pass the Medicaid asset test. For married couples, the state adds up the value of everything they own, including stocks, bonds, mutual funds and the cash value of life-insurance policies, but excludes some assets such as a jointly owned home, one car or prepaid irrevocable funeral arrangements and cemetery lots. Half the value of the couple’s assets cannot total more than $117,240.

"That’s where planning comes in. The healthy spouse needs to figure out how to get their assets down to $117,240," says Bender. "The trick is to plan ahead so when an event happens and a spouse requires long-term care, you’re ready."

To become eligible, the spouse must spend down their assets to the $117,240 mark. Often, they might think to give the excess assets to their children. But a five-year lookback rule means that if they gift their assets less than five years from the time they apply for Medicaid, the gifted assets are simply attributed back to the total as if they were never gifted.

"You can spend down your assets in ways that are acceptable under Medicaid rules," says Bender. "That might mean paying the mortgage on your house or paying off debt like car loans or credit cards, or buying a more expensive car or home."

Another option is to take funds in an investment account and pur- chase an annuity or convert retirement funds like a 401(k) into an annuity, which in certain circumstances Medicaid will allow. That’s because the asset will no longer be categorized as an asset once annuitized, but as a revenue stream instead. Applicants must be cautious, however, that the revenue from the annuity does not push them over the income test.

If Medicaid is not an option, which for many people it will not be, long-term care insurance policies do exist, though there are fewer companies offering them.

"Commercial insurance companies have not been able to price long-term care policies to make money due to advancing medical technology and an aging population," says John Dovich, president of John D. Dovich and Associates. "Most companies have simply dropped out of that market and no longer sell those policies, or they’ve really cut back on the provided benefits for offered policies. For example, policies with lifetime benefits are no longer being sold."

In response, insurance companies are increasingly offering life insurance products that cover long-term care while addressing an underlying drawback of existing policies.

"One of the things consumers dislike about standalone long-term care policies is that if you don’t use it, you lose it," says Dovich.

"So the insurance industry has developed new products that have life-insurance chassis and long-term care riders. Most of them are pooled policies, meaning you can put the entire amount of the policy towards long-term care during a lifetime, or you don’t have to use any of it for that purpose and upon your death, the beneficiary receives the benefit in full."

These life-insurance policies with long-term care riders have elimination periods that act like a deductible. During the elimination period of long-term care, usually for at least the first 30 days, you bear the full cost. Afterward, the insurance company pays the benefits.

However you choose to approach long-term care, whether by self-insuring or with Medicaid or an insurance policy, Dovich and Johns emphasize that early planning is imperative and expertise in the area is necessary. There are, after all, many nuanced factors to consider when planning for long-term care. This includes the pace of medical technology, the likelihood of a long-term care event, the benefit amount and coverage provided by a certain policy, and the possibility of using a health-savings plan in combination with an insurance policy to avoid taxes.

"One thing we always talk about with clients when modeling retirement plans is whether they’re hitting their number where they can live the lifestyle they want for as long as they want to," says Johns.

"At John D. Dovich and Associates, we constantly go back and stress test those models to account for long-term care events to determine whether they can sustain such an event and also have the retirement they want."  

Securities offered through NFP Advisor Services, LLC (NFPAS), member FINRA/SIPC. Investment Advisory Services offered through John D. Dovich & Associates, LLC. NFPAS does not provide legal or tax advice and is not a Certified Public Accounting firm. NFPAS is not affiliated with John D. Dovich & Associates, LLC. 

John D. Dovich & Associates is located at 625 Eden Park Drive, Suite 310, Cincinnati, OH 45202. You can reach them at 513.579.9400 or visit their website at www.jdovich.com. 

Wood & Lamping, LLP law firm is located at 600 Vine Street, Suite 2500, Cincinnati, OH 45202. You can reach Mr. Bender at 513.852.6002 or website at www.woodlamping.com. Not affiliated with John D. Dovich & Associates.