Financing potential long-term care expenses can be complicated and expensive. Nationally, a month in a nursing home ranges from $3,000 to $6,000, and is rising faster than general inflation. That’s why many people do no planning.
Another reason is that half of nursing home stays are for 90 days or less, and Medicare pays for most of that care. Only about nine percent of nursing home stays are the stereotypical stay of five years or more. Women make up about three quarters of those long-term nursing home residents.
My usual advice for financing nursing home care is that those with total assets of less than $250,000 should plan on Medicare or Medicaid handling the bulk of any long-term care expenses. (Remember, to qualify for Medicaid you have to spend down most of your assets.) Those with net worths of $1 million or more should primarily self-insure or use a combination of self-insurance and private insurance. Those in the middle group should consider buying private long-term care insurance, if they want to leave assets for their loved ones.
There’s flexibility in those brackets. Much depends on how your assets are invested, the rate of return, the cost of long-term care in your area, and the other sources of income.
The fact is, most people are self-insuring, whether they realize it or not. Only about 5% of those over 50 have purchased long-term care insurance. Maybe that’s because to insure two 65-year-old spouses usually costs $2,000 or more each annually. Most people don’t want to reduce their lifestyles by that amount.
To get good rates on long-term care insurance, you really need to buy it while in your fifties. If you wait not only will the premiums be higher, but you might not be able to buy. One study asserts that at age 65 about one quarter of Americans would be declined long-term care insurance for health reasons.
For those who aren’t satisfied with the private insurance options and want another choice, consider the reverse mortgage.
Suppose you own your home free and clear. You can borrow against that equity, receiving either a lump sum, monthly payment, or line of credit. No payments are due during your lifetime as long as you own the home. That’s means when one spouse enters a nursing home, the other can continue to live in the home and keep the other income and assets. They use the equity to pay for the long-term care.
After you (and your spouse) die, the loan payments are due. Your children or other heirs can convert the reverse mortgage into a regular mortgage. Or the house can be sold and the proceeds used to pay the loan. Your heirs keep whatever sale proceeds exceed the loan amount.
The amount you can borrow depends on the value of your home, your age, and current interest rates. Recently a 75-year-old with a home worth $225,000 could receive $771 monthly for as long as he lives in the home. The older you are, the more you can borrow.
The amount you end up borrowing plus the accumulated interest can exceed the value of your home. In that case, insurance purchased by the lender pays the difference. You and your heirs don’t have to.
One strategy to consider: Find both the lump sum and monthly annuity the lender would pay. Before choosing, shop for insurance annuities. See if an insurance annuity purchased with the lump sum would pay more than the home equity annuity. But compare after-tax amounts. The home equity annuity is tax-free, since you are borrowing against your equity. While part of each annuity payment will be taxable interest.
Reverse mortgages used to have a bad reputation. But now there are reverse mortgages backed by Fannie Mae and the Department of Housing and Urban Development. Greater disclosure of costs is required. HUD requires prospective borrowers to meet with counselors to review the full cost and consequences.
The federally-backed loans have ceilings. HUD loans are limited to the median home value in your geographic area. Fannie Mae loans are limited to $240,000 everywhere. There are lenders who will make reverse mortgages for highr amounts that are not federally backed.
For more information, you can contact Fannie Mae at 800-732-6643 or HUD at 888-466-3487. The National Center for Home Equity Conversion (651-222-6775 or www.reverse.org) can send you a list of reverse mortgage lenders. Don’t pay finder’s fees or fees other than those you pay directly to the lender.
A reverse mortgage is not for a younger person or couple. And it is not for someone who wants to leave the home equity to the children. The average reverse mortgage borrower is a woman in her late seventies. That’s about right for this financial tool. Consider a reverse mortgage as an option to pay for late-in-life expenses without spending down other assets or giving up income.