“Most Americans know they’re likely to need some kind of long term care, but few know
exactly how they’ll pay for it.”- Jim Fish
by Jim Fish
Jane and her husband Dave were only two years into retirement when they received devastating news. Dave, who had been experiencing symptoms he jokingly referred to as “senior
moments,” was diagnosed with Dementia with Lewy bodies (DLB). A progressive condition that is the second most common form of dementia in the United States, DLB and other forms of dementia, such as Alzheimer’s affect over five million Americans. DLB is also among the most expensive medical conditions to treat.
While Medicare and their supplemental insurance covered some of the associated costs of the disease, Dave and Jane had to come up with the rest out of their savings,
spending over $350,000 in the five years before Dave passed. Unfortunately, they had no provisions for long-term care costs in their planning and had to take money out of
retirement accounts. Tapping into their accounts left Jane with much less to live on when Dave eventually passed.
With average costs for long-term care in the United States ranging from $80,000 to $175,000 per year, many seniors with dementia, cancer, strokes, or other life-altering
conditions face the possibility of depleting their retirement savings much earlier than anticipated. And although reputable financial advisors and retirement planners
unfailingly urge their clients to consider long-term care insurance (LTC), relatively few do so. The main reasons cited by seniors for not purchasing LTC insurance are the high
cost and the “use it or lose it” aspects inherent in traditional LTC policies.
But, wait! Doesn’t Medicare cover dementia and long-term care costs?
Although you’ll often hear that it does not cover most long-term care needs beyond the first 100 days, there’s no simple answer to the question of whether or not Medicare covers the
costs of dementia and other diseases requiring long-term care. While it is an essential component of most people’s retirement, Medicare isn’t designed to meet the needs of patients with dementia or other conditions requiring round-the-clock care from a home health care professional or nursing home.
And, although most Americans leave skilled nursing facilities after three months, a full 6 percent stay for a year or longer, racking up out-of-pocket costs that can destroy their retirement plans. Medicare currently pays 100% of "medically necessary" nursing home casts for the first 20 days, and 80% for an additional 80 days, for a total of 100 days of coverage. However, if a physician determines that someone with dementia needs care in a psychiatric hospital, Medicare will increase the covered days to up to 190.
Like most health insurance, Medicare doesn’t differentiate dementia care from other conditions such as cancer. Instead, Medicare has guidelines governing how much it
pays for all medically necessary treatments. Original Medicare doesn’t pay for personal (non-medical) care at home or in an assisted living facility but will cover medical care.
The same is true for home care and adult day care.
Medicare does not cover assistance with the activities of daily living, which dementia patients almost always need. However, for people who are getting hospice care at
home, Medicare pays the personal care expenses of those in the final six months of life.
For many people, having a Part C plan may be the best option for custodial or personal care coverage. Medicare supplemental insurance policies may pay 20% of nursing
home costs not covered by Medicare. Still, even with these policies, there could be coverage gaps that might affect your retirement accounts.
A long-term care annuity can help fill in the gaps.
Premiums for traditional long-term care insurance have spiked over the last decade,causing many seniors to shy away from standalone LTC policies. Although LTC-only
policies can be expensive and require medical underwriting, they usually provide more comprehensive coverage than other options. Even so, if you have adequate financial
resources and are in good health, you may want to have your financial advisor explain the pros and cons of a traditional LTC policy.
If you don’t meet the underwriting requirements for traditional LTC or don’t like the idea of paying premiums for years for coverage you might never need, alternatives are
A long-term care annuity, sometimes called a hybrid annuity, is one type of safe money product you can use to help pay long-term care costs. Funds in an LTC annuity
can pay for nursing home and assisted living stays, home health care, expenses related to chronic illnesses, and terminal illness costs.
There are several different ways hybrid annuities provide LTC coverage. Most commonly, the annuity company pays a fixed amount of tax-free money that covers
specified LTC expenses. Monthly payments from an LTC may not be enough to pay all your care expenses, but they can help make your bills more affordable and perhaps
lessen the amount of money you’ll need to withdraw from your retirement accounts. Another feature of traditional long-term care insurance alternatives is that many offer
benefits that double or even triple your initial single premium payment.
For example, say you put $100,000 into a hybrid annuity. Using your medical records, the annuity company may designate you as either “standard” or “preferred.” With a
standard designation, your $100,000 initial investment doubles to $200,000, which you can only spend on LTC facilities and services. If you are declared preferred, that
$100,000 becomes $300,000 you can use for qualified LTC expenses.
Payouts from a hybrid annuity are tax-free, but only when made via reimbursement over a specified period. Reimbursement means you will need to pay expenses out of pocket
and submit the invoices to the annuity company. The company will then repay you up to your monthly allowance. Withdrawing your money for anything other than covered LTC
expenses makes those withdrawals subject to taxes. When you pass away, your designated beneficiaries will inherit the remaining policy value in a lump sum.
Another annuity-based solution to protect your retirement against long-term care costs is to purchase an annuity customized with a long-term care rider. A rider is a provision
in an annuity contract that you add for an additional fee. There may be some limitations to these riders, so you should always consult an annuity specialist before purchasing
You could also purchase an immediate annuity, an option available even if your health is poor or you are already getting long-term care. You pay a lump sum with an
immediate annuity and, in exchange, receive a contractually guaranteed monthly income. However, in an immediate annuity, your monthly income depends on your
gender, age, and the amount of your initial premium. Monthly payments may not be enough to cover long-term care costs. And there are some potential tax issues as well.
Summing it up: The price of long-term care has risen to a point where it threatens to upend the retirements of many Americans. Medicare generally limits LTC coverage to a
maximum of 100 days, leaving you to make up the difference. That’s why many pre-retirees and retirees look for cost-effective LTC solutions.
If you are someone who feels you or your spouse are likely to need long-term care at some point, then you should plan now for how you’ll meet those expenses. A long-term
care annuity may make sense for you, especially if you don’t want the cost of a traditional LTC policy. With the right annuity, you will have a guaranteed income stream,
and if you need long-term care, you can use your rider to help offset your expenses.
There are many nuances to long-term care planning. Partnering with an LTC annuity specialist will help you navigate the potential pitfalls and create a plan that brings you
greater peace of mind. If you’d like to see how these annuities work in real life, reach out to me, and I’ll be happy to show you the ins and outs and answer all your questions.