M Means Making Sense of Long-Term Care Costs

M Means Making Sense of Long-Term Care Costs
Personal Finance from A to Z
Eileen St. Pierre, The Everyday Financial Planner

Many people mistakenly believe that Medicare will cover long-term care costs. The truth is that Medicare will only cover skilled care for only a short period of time. Once you reach that cutoff or are no longer expected to recover – whichever comes first – you will have to pay for long-term care.

black-small-letter-character-m-icon-256-x-256The Cost of Long-Term Care

Most long-term care is provided at home by unpaid caregivers. Care provided for by family members or friends may be free, but it takes an emotional and physical toll on them. It also diminishes their earnings power in the future. According to Genworth Financial, 43% of caregivers have had to work fewer hours, 33% have missed career opportunities, and 14% have lost their jobs.

If you need to pay for care, the cost depends on three factors:

  • The general level of charges in your area of the country
  • The specific expense rate for the services you need
  • How long you need the care

According to the Genworth 2014 Cost of Care Survey,

  • The national median annual cost of a semi-private (private) nursing home room is $77,380 ($87,600).
  • The national median monthly cost of a private, one-bedroom room in an assisted living facility is $3,500. Over the past five years, this cost has risen about 4.3% a year.
  • Click on the interactive map to find the cost of care in your state.

The most obvious way to avoid paying these costs is to stay in your home as long as possible.

  • Nationally, the median hourly rate for homemaker services (cooking, cleaning, running errands) is $19. The national median rate for licensed home health aide services is $20/hr.
  • If you need to pay for help for 15 hours a week, the annual cost would be $14,820 – perhaps even lower in your area. This is far less expensive than living in assisted living or a skilled nursing facility.
  • Caregivers can also get a break by using Adult Day Health Care centers. The national median rate is $65/day. Cost and types of services vary greatly at the community level.

Paying for Long-Term Care

You will have to rely on your retirement income and personal assets to fund the majority of your long-term care. Keep these things in mind:

  • In general, Medicare will not cover long-term care expenses.
  • Medicaid may be available to cover nursing home costs but you must meet limited income and asset requirements. This means you must “spend down” your assets and be considered destitute. Medicaid has also started to cover other long-term care expenses – check with your state’s Department of Human Services to see what types of plans are offered.
  • Consider long-term care insurance.
  • Talk to a Certified Financial Planner about other options.

Choosing a Long-Term Care Insurance Policy

First, you need to determine if you should even buy insurance. If you have a high net worth, talk with your financial advisor. You may be able to pay these expenses yourself. If you have a very low net worth and believe you may qualify for Medicaid, then it does not make sense to buy insurance either. Long-term care insurance was designed for those in the middle.

There are three ways you can obtain long-term care insurance:

  • You can purchase an individual policy (not part of the Obamacare Health Insurance Exchange).
  • You can purchase a group policy if your employer offers it as part of its benefits package. You may be able to get a lower premium and be automatically enrolled without worrying about pre-existing conditions.
  • Many states offer Long-Term Care Partnership Plans in order to reduce their growing Medicaid expenses by delaying or eliminating the need for Medicaid to pay for long-term care services. These policies will allow you to keep some of your assets, while still being eligible for your state’s Medicaid program.

What is not covered? For pre-existing conditions, a waiting period applies, usually six months. Be honest on your application form. There are specific exclusions such as some mental and nervous disorders, alcoholism and drug abuse, and self-inflicted injuries. Virtually all policies now cover Alzheimer’s disease.

Ways to save money on long-term care insurance:

  • Don’t procrastinate! The younger you are, the lower your insurance premiums.
  • Buy a policy with the longest elimination period you can afford.
  • Consider buying a policy that will pay most, but not all, of the average nursing home costs in your area. The more you are willing to pay for out-of-pocket, the lower your insurance premium.
  • Some life insurance companies are starting to offer long-term care benefits as a rider on existing life insurance policies. This is an additional premium. However, by combining the two, the insurance company can generate savings that hopefully get passed on to you. Check with your life insurance company to see if it offers this.
  • If you are married and your spouse also wants long-term care insurance, consider buying a joint policy. The policy will pay when either one of you needs care and can pay for both, if necessary, up to its benefit limits.
  • Shop around! You may not collect benefits for decades to come. Look for companies that have been around for a while and are financially stable. A.M.Best, Standard & Poor’s and Moody’s Investor Service all rate insurance companies. Look for companies with A++ and A+ ratings (considered superior). Make sure the insurance company gives you an outline of coverage. This will allow you to compare costs and benefits with other companies.

My Basics of Long-Term Care Insurance Fact Sheet contains more details on policy features and additional resources. Visit my Financial Planning for Later in Life page for more information.