by Brian Swerdlow
Federal Employee Advocates
If you need long term care, which type should you have, and how will you pay for it?
If you are a government employee planning for retirement, you shouldn’t overlook the possibility that you’ll need expensive long-term care at some point after leaving service. Retirement experts say that as much as 70% of Americans over the age of 65 will need this care, even if only temporarily.
Unfortunately, as you are probably aware, not only are long-term care costs on the rise, but so are premiums for the government’s FLTCIP program. As the program goes back online after a suspension that began in December of 2022, participants have been warned to expect both coverage changes and significant spikes in premiums. Some federal benefits advisors believe that premiums will increase even more in the future.
What about Medicare?
Medicare won’t help you if you need long-term care, which is why government employees usually choose to enroll in FLTCIP or private long-term care insurance.
While Medicare covers medical services in a nursing home or assisted living community, it won’t pay for your stay in those facilities. It also doesn’t cover custodial care, such as assistance with bathing, eating, dressing, or going to the bathroom.
Medicare does pay for short stays in Medicare-approved skilled nursing facilities, but only in specific situations. For example, if your primary care physician decides you need some type of specialized care or rehabilitation therapy after you’ve gotten out of the hospital. In this instance, Medicare only covers skilled nursing facility care if you are an inpatient admitted to the hospital for at least three consecutive days. Observation stays don’t count toward those three days.
What’s the difference between assisted living and a nursing home, and what’s better
Choosing between assisted living and a nursing home depends mainly on the level of care you need. While both provide support tailored care for older adults, there are significant differences in the services, environments, and costs associated with each option.
One of the main differences between an assisted living facility and a nursing home is the extent of medical care each provides. Nursing homes generally accommodate individuals with complex medical needs that a typical senior living community cannot adequately manage. Residents of nursing homes may have chronic conditions or require round-the-clock medical supervision. A nursing home has licensed healthcare professionals on staff to address those needs. Nursing homes are often more suitable for those with mobility issues, injuries, or life-threatening health challenges.
Assisted living communities, on the other hand, offer a more relaxed environment with lower levels of medical care. They provide support with the daily activities of life, such as bathing, medicine management, dressing, and eating. However, assisted living does not offer the intensive medical services that nursing homes do. Assisted living residents are usually more independent but still have access to additional support if and when they need it.
Nursing homes tend to be more like hospitals, with a more structured routine focused primarily on medical care. This medical emphasis may lead to limited autonomy for residents, who may find their daily activities restricted or interrupted by the need for medical attention.
For seniors who enjoy being independent and who don’t have overwhelming medical needs, assisted living facilities offer a more vibrant lifestyle. Residents may live in condo-style apartments or standalone homes with access to amenities such as fitness centers, recreational activities, and social events. There is generally more freedom, and residents can choose their activities. Assisted living facilities can also provide more opportunities for social engagement, while nursing homes don’t always offer the same variety of social interaction and activities.
As you can probably guess, a nursing home is nearly always more expensive than an assisted living facility. This increased cost is primarily due to the higher level of medical assistance provided. According to some long-term care insurance companies, the median price of a private room in a nursing home is $330 per day, or $10,025 per month, while a semiprivate room costs $294 per day, day or $8,929 per month.
When you add it up, the annual costs for a private room in a nursing home average a whopping $120,304! A semiprivate room is around $107,146. Costs vary significantly by state, ranging from $5,483 per month in Texas to $19,267 per month in Alaska.
While still far from cheap, assisted living is far more affordable than a nursing home. The median cost for assisted living is around $181 per day, which amounts to $5,511 per month or $66,126 per year. These estimates don’t include any additional costs for specialized care, such as memory care, which will increase the overall expenses.
Ultimately, the choice between assisted living and a nursing home will depend, above all else, on the level of medical attention you need. If you require constant medical supervision or suffer from a condition requiring particular protocols, a nursing home may be the best choice. However, if you are still relatively independent and only need help with specific daily activities, assisted living can give you a more balanced environment with greater freedom and social interaction at a lower price.
If you are a federal employee in the early planning stages of retirement, you definitely want to plan for long-term care and do some research into the pros and cons of assisted living versus nursing home care. Websites such as AARP and other senior advocacy groups provide a lot of information on this topic.
How will I ever afford this?
The cost of long-term care continues to increase, with no sign of slowing down. Many federal employees are considering how best to protect themselves financially in their later years. Long-term care (LTC) — whether at home, in assisted living, or a nursing home — can quickly drain your finances and turn your dream retirement into a stressful nightmare. If you need long-term care for an extended period and have no plan in place, your emergency savings could be gone in a matter of months.
The challenge of paying for long-term care is one that nearly all Americans will face during their lifetimes. Two options that may provide you with long-term care protection are the FLTCIP program or purchasing an annuity with a long-term care rider. You may also have some, but not a lot, of LTC coverage through your FEHB plan should you choose to keep it after you retire. But, LTC coverage is not automatically included in your health insurance plan. You must either enroll in FLTCIP once it reopens or consider purchasing private long-term care insurance if that makes more sense. Both options are getting more expensive by the day.
Another option that some federal retirees use is a long-term care annuity. A long term care annuity is a type of financial product that combines a deferred fixed annuity with a long-term care insurance “rider.”
For federal employees, this hybrid solution may be appealing. An LTC annuity offers flexibility that traditional private LTCI or FLTCIP may not. For one thing, money put into an LTC annuity isn’t “use it or lose it.” Most standalone private long-term care insurance does not provide any return on the premiums you’ve put in, even if you never need long-term care. In contrast, an LTC annuity continues to grow tax deferred over time.
The idea behind an LTC annuity is simple: you pay a lump sum or a series of premiums into an annuity. If you need long-term care later in life, the LTC rider will pay for many of those expenses. If you never need long-term care, you can set up the annuity so the remaining value goes to your heirs.
Pros and cons of having an annuity with a long-term care rider
One of the most significant advantages of a long-term care annuity is that it serves two purposes. Not only does it cover LTC expenses, but if you don’t use it for long-term care, you can pass on money left in your account to your spouse or other beneficiary. An LTC annuity is also tax-advantaged. You won’t have to pay taxes on any gains until you start making withdrawals.
In addition to LTC benefits, some annuities offer you a chance to add another guaranteed income stream to your retirement. This additional income can supplement your pension or TSP and give you more financial security in retirement, even if you never need long-term care. And, if you are hesitant to put a large lump sum of cash into your annuity, some companies now offer innovative, flexible premium payments. Having flexible payments will allow you to make additional contributions over time instead of using a single lump sum.
Long-term care expenses continue to rise, with monthly costs in the U.S. ranging from $5,148 to over $9,034. Although no one can predict the future, an annuity with a long-term care rider can help shield you from being overwhelmed by these future costs.
However, as with most other retirement vehicles, long-term care annuities have some possible downsides. For instance, an annuity can be challenging to understand. For example, your long-term care coverage could have a “vesting” requirement. Vesting means you may not have full long-term care coverage right away.
You should note that while annuities are constantly evolving and providing greater flexibility in payments, your chosen contract might still require a substantial lump-sum payment upfront. Having to come up with a lump sum could be a drag on your finances.
Some people purchasing hybrid long-term care annuities may fail to realize that the rider can potentially slow the growth of your annuity’s cash value compared to an annuity without the LTC rider.
There are also tax considerations. For example, while traditional LTC insurance premiums may be tax-deductible within specific limits, any upfront money placed in an LTC annuity is not. You and your federal benefits advisor should discuss all potential tax issues before deciding whether an LTC annuity will work in your specific situation.
Finally, it’s crucial to remember that if you do use your annuity’s long-term care benefits, the cash value of that annuity could eventually go to zero. If you intend for funds to go to a spouse or other family member, an LTC annuity may not be the best option.
Deciding between using an annuity with a long-term care rider or relying on the FLTCIP or private long-term care insurance ultimately boils down to your financial goals and anticipated nursing home or assisted living needs. Many people choose to save money by doing nothing. However, since you have a greater than 50% chance of needing this type of care, it may not be such a great strategy. The good news is that by planning now before you retire, you and your advisor can craft an LTC strategy that doesn’t break the bank and offers you at least some protection against long-term care expenses.
For many federal employees, the rising premiums of the FEHB and FLTCI may make them less effective as your only primary long-term care solution. An annuity with an LTC rider may offer a more tailored and secure way to address long-term care needs while giving your retirement savings added protection. If you are younger and healthier, you may find traditional LTC insurance more affordable. If you look around, you might even discover a few plans that offer a return of premium features. This provision gives you some of your money back if you never need long-term care.
Summing it up:
If you intend to have a retirement that is more prosperous and enjoyable, you must plan now for your future long-term care needs.
While your FEHB plan offers significant health insurance benefits, it may not fully protect against the rising costs of long-term care. Annuities with long-term care riders are one alternative solution that can fill the gap, blending LTC coverage with a tax-deferred savings vehicle.
Before making a decision, carefully weigh the advantages and disadvantages of all your choices. Consult with an advisor who understands both the annuity product and federal benefits.
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