When most people think of advance care planning, they think of advance directives, power of attorney, will and estate planning, and other documentation to help you receive care in line with personal values and wishes, as you age – and, when you pass away. Too often, however, the cost of this care is overlooked or unknown. This gap in understanding can ultimately push individuals and families to choose care based on affordability, rather than personal wishes. By outlining financial coverage as a crucial element of advance care planning, we hope to encourage individuals to explore the costs of the care they hope to receive later in life and to plan for these costs in advance; thus, affordability is not the primary factor when you’re at your most vulnerable and in need of long-term care services and supports (LTCSS).
The cost of long-term care is steep, about $60,000 annually for in-home care and $100,000 annually for a nursing home. To put these costs in perspective for seniors living on a limited budget, the average annual income from Social Security for retirees is less than $30,000, leaving a significant gap for seniors trying to afford the necessary care.
Given the high costs of long-term care, self-insuring, or paying out-of-pocket is out of reach for most. In fact, only 22% of individuals can afford home care out-of-pocket, and just 5% can afford nursing home care.
Filling this gap is a challenge especially because these services are not covered by traditional Medicare plans. Medicaid is the largest payer for long-term care services and supports (LTCSS) in the United States; however, in order to qualify for Medicaid in most states, you must be at or below 133% of the federal poverty line. Some individuals try to ‘spend down’ to qualify for Medicaid later in life. Because qualifying for Medicaid involves a five-year lookback period, meaning your past assets may make you ineligible for coverage, spending down is not typically the best or most viable option for covering LTCSS – especially, if someone’s assistance needs are time-sensitive.
Insurance products designed to cover long-term care can be a great way to afford your care needs late in life, without the burden of paying large out-of-pocket sums at your time of need. There are both traditional long-term care policies, as well as hybrid life policies to consider when looking for insurance coverage:
Traditional Long-Term Care
Traditional Long-Term Care plans cover care administered at home, in a nursing home, assisted living facility, or adult day care center when you are suffering with a chronic condition (such as congestive heart failure) or a cognitive condition, such as Alzheimer’s. These plans offer broad and flexible coverage, which can make them a great option for some. These plans also offer optional inflation protection, so your benefit level will increase, typically 3% on a simple or compounded basis each year, to keep pace with rising costs of care.
Most traditional LTC plans, however, do not guarantee rates and insurance companies are able to increase premiums if costs of claims are higher than anticipated. Another important aspect of traditional LTC is the benefits are lost if not used in your lifetime. For example, if you hold a $100,000 policy and use only $50,000 of that benefit in your lifetime, there is no reimbursement for the remaining benefit. It’s also important to note these plans are tax advantageous, as premiums are tax deductible as medical expenses, and these deductions increase with age. Premium payments can typically be paid through Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs). These plans, however, have the most stringent underwriting, which can make qualifying difficult for those with ongoing health concerns.
Hybrid LTC plans often cover similar services as Traditional Long-Term Care plans, with options for home care, nursing homes, assisted living facilities, and adult day care centers. The primary differentiator for hybrid plans is the life insurance component. These plans guarantee payment, whether it be in the form of accelerated benefits for LTC during life, or payments to your beneficiaries upon death. Hybrid plans are also guaranteed renewable, and premiums will remain constant while you hold a policy.
These plans provide optional inflation protection, often include a guaranteed interest rate of 4% and are tax advantageous – similar to the Traditional Long-Term Care policies. These plans tend to have higher premium rates than Traditional LTC, but, if affordable, can be a great option for those looking to build an estate and create a sense of financial security for future generations, while also ensuring financing and access to care needed in life.
Short-Term Home Health Care
Short-Term plans are designed to cover temporary care, often recovery after an accident, procedure or support needed for less than one year. These policies typically go into effect immediately, unlike Hybrid and LTC plans which tend to have a 90-day elimination period before the benefit is accessible. They provide significantly less funding for care than longer term options and, as such, are less expensive and can be a good option for those who cannot afford or qualify for a Hybrid or Traditional LTC policy, but still want some coverage and support for services not covered by Medicare. In addition, these policies can be beneficial for those who have either Traditional LTC or hybrid policy in place but want some limited coverage for the 90 day Elimination Period before the policy takes full effect.
Regardless of which policy may be your best fit, insurance can serve as a valuable planning tool for your future and can protect you and your loved ones from the stress of affording the care you want when you need it most. Next time you’re updating, or as you’re creating an advance care plan, consider your finances and don’t leave affordability and coverage options out of those planning discussions.