Smart Ways To Finance Long-Term Care

What is one of the major financial misconceptions among Americans? Many people incorrectly believe the government will pay for nursing home care or other long-term health care. The fact is federal and state governments pay very little of the cost of home health care, assisted living, independent living, and nursing homes. (See last month’s issue for explanations .)

Annual nursing home costs range from $38,000 to $90,000 across the country. To avoid your family’s being one of those that goes bankrupt each year because of long-term care expenses, plan your financing well before there is a need. The basic sources of long-term care financing are the government, self-insurance (including family), and private long-term care insurance.

Of the government programs, Medicare pays nursing home costs only for rehabilitation after an illness or injury, and only after a hospital stay. Medicaid pays nursing home costs, but only if you are impoverished. The government programs do not pay for assisted living or independent living, other than for specific medical care expenses. Home care also gets limited coverage.

Private insurance will cover many nursing home and home care costs. But Long Term Care Insurance premiums for a 65-year-old cost around $1,000 annually, close to $2,000 with inflation protection.

Because of the cost of private insurance, people with low incomes or relatively small estates should avoid insurance and count on Medicare and Medicaid. Most advisors put the cut off at estates of $250,000 or less.

People with large estates should self-insure. Even a long stay in a nursing home won’t do much damage to multimillion dollar estate. If you stay four years in a facility for $90,000 annually, that takes $360,000 out of the estate. The limited damage to the estate means there is little reason to buy private insurance.

The difficult decision is for those in the middle. A stay in long-term care could consume a high percentage of the estate. But insuring both spouses could take a big chunk of annual income. That leaves a choice of risking that long-term care expenses might deplete an estate, or protecting the estate with insurance premiums that could meaningfully reduce spendable income.

To decide whether or not to buy insurance, here are some guidelines from the United Seniors Health Cooperative (1331 H St., NW, Washington, D.C. 20006) that I find useful. Consider buying a policy if:

• After excluding your home and cars, your household has more than $75,000 in assets per person;
• Your household has annual income of at least $30,000 per person;
• The premiums won’t cost more than 10% of your household’s annual income; and
• The policy still would be affordable if the premiums were to rise as much as 30% over time.

For those who decide to buy a long-term care policy, next month I will show you how to choose one that is worth the premiums, and how to reduce the premiums. In the rest of this visit, I’m going to show you ways to make the premiums more affordable.

If you buy only one policy, statistics indicate the woman in the house should be insured. Women tend to live longer and are more likely to acquire the medical conditions that require long-term care.

Another strategy is to avoid buying a policy before age 65. If you buy earlier, the premiums will be lower, and you are likely to meet any medical qualifications. But few people will need the coverage before their seventies. If insurers underestimate their costs, they can raise premiums as much as they want on entire groups of policyholders, especially younger ones. Those who buy at relatively young ages could see their premiums double or triple in a few years. That’s why it probably is better to save and invest the money that would be paid in premiums and wait until you are 65 or older to buy a policy

Another way to make long-term care (or an insurance policy) more affordable is to shift the burden to your children, but help them pay. Here’s how the deal helps the entire family.

Retirees tend to be in lower tax brackets than their children. Because of a low tax bracket, you won’t get much benefit from any deductible medical expenses, including nursing home expenses. Your kids in a higher tax bracket could get big tax benefits, forcing Uncle Sam to pick up part of the cost.

Children who pay the nursing home costs of a parent usually can deduct these costs as medical expenses if the children provide more than half the support of the parent in the nursing home. If they are paying all the nursing home expenses, they are providing all of the support.

When the stay in the nursing home is to obtain medical care, the entire cost usually is deductible. In other cases, or when the individual is in an assisted living facility instead of a nursing home, then room and board or not deductible but the costs of medicines and medical care are. The facilities usually itemize their bills so you can easily determine which expenses are deductible.

Your family’s overall tax bill and after-tax cost of providing the long-term care could be lower if your children pay. You can make annual gifts to help them cover the premiums. When care is needed, the children can pay any expenses that are not covered by insurance. You can even continue to make gifts out of your assets to cover those expenses. If your children resist this strategy, point out that it is a way of preserving more of your estate for them down the road.

You need to meet with a tax or estate planning advisor to be sure this strategy works best for your family. If your children have high incomes, then many of the medical expenses won’t be deductible because of the itemized deduction limitation. And you have to be sure there won’t be gift taxes on any transfers to the children to pay the long term care costs.

Next month we’ll examine the choice between tax-qualified and nonqualified policies, and the essential provisions you want in a long-term care policy.