How to Plan and Pay for Long-term Care With and/or Without Insurance
Retirement Daily Guest Contributor
By Chris Orestis
Seniors have been the most vulnerable population during the coronavirus pandemic. They have been especially hit hard by the health impact of the virus, as well as the financial turmoil that the virus has unleashed. But financial security is a concern for seniors during the best of times, too. There are a number of factors that come into play as people deal with the unique challenges of aging and declining health. Compounding these challenges is the fact that most people do not adequately plan for the financial realities of retirement and the expense of long-term care.
Most people are not well informed about the variety of financial vehicles available to them to plan for retirement. Even more so, seniors tend to be unaware of, or don’t fully understand, the variety of readily available financial instruments that are specifically designed to meet their needs and can actually become more beneficial to them as they get older or more infirm.
Financial models suggest that a person would need about 70% of their peak earning level to maintain their lifestyle. To do this you would need to have saved at least 10x your annual income. That means if you earned on average $100,000 during your work years, you would need to have saved at least $1 million in order to generate $70,000 a year to live on in retirement. But the reality is not many Americans will retire with that kind of money in the bank, so what are options to address financial needs in retirement?
Financial options most readily available to seniors can be divided into three categories: Entitlements, Insurance, and Age-Based Funding.
What you need to know about Social Security
Social Security provides a financial safety net for elderly Americans, the disabled, and the survivors of a deceased spouse/parent. Eligibility starts at age 62, but the longer you wait to collect benefits the more you will receive. For example, if you start collecting at age 62, you might only be eligible for 70% of the amount you have earned. If you wait until your “full retirement age” (which is 67 if you were born in 1960), you would receive 100% of your benefit. If you delay collecting past your full retirement age, you will actually earn credits that will increase your benefit up to 8% if you max out at age 70. The average age of people collecting Social Security is 73. But remember, Social Security is not designed to be a full replacement of your income, and will probably only replace about 40% of your peak earnings. It is important to keep generating as much income as possible to an age range of 67-70. By continuing to build up your savings, assets, and investments you can add another 30%-40% to get you closer to what was once your working income. To help you predict the Social Security benefit you could receive, use these helpful Social Security Calculators to project possible benefit amounts, ideal retirement ages, and life expectancy.
What you need to know about Medicare
Starting at age 65, Medicare provides a number of health benefits including hospital care, skilled nursing facility, hospice, lab tests, surgery, home health care, doctor care and outpatient services, prescriptions, and preventative services. It is always best to enroll in Medicare as soon as you are eligible at age 65. Open enrollment is required on an annual basis from October 15 – December 7. It’s very important to make sure you and your spouse continue to evaluate your needs and make the right selections during the annual Medicare Open Enrollment period to make changes to your coverage.
Medicare coverage is divided into four parts plus supplemental coverage:
- Part A covers hospital (inpatient, formally admitted only), skilled nursing (only after being formally admitted to a hospital for three days and not for custodial care), and hospice services.
- Part B covers outpatient services including some provider’s services while inpatient at a hospital, outpatient hospital charges, most provider office visits even if the office is "in-hospital," and most professionally administered prescription drugs.
- Part C is an alternative to traditional Medicare enrollment called Medicare Advantage. This allows patients to choose private health plans with at least the same or more service coverage as Parts A and B, usually the pharmacy benefits of Part D, and always an annual limit to out-of-pocket costs. A beneficiary must enroll in Parts A and B first before signing up for Part C.
- Part D is simply coverage for your medication needs. You pay a monthly premium to an insurance carrier for your Part D plan. In return, you use the insurance carrier's network of pharmacies to purchase prescription medications.
- Medicare Supplement Insurance (Medigap) is offered by Medicare-approved, private health insurance companies as a supplement to, but not a substitute for, Medicare coverage. It is designed to help pay what original Medicare does not, such as copays, deductibles and coinsurance.
What you need to know about Medicaid
Medicaid gives low-income persons and the disabled (and dependents) access to healthcare and long-term care support and services. Recipients must be U.S. citizens or qualified non-citizens, and may include low-income adults, their children, and people with disabilities. Medicaid provides health benefits to qualified applicants such as doctor visits, hospital expenses, nursing home care, home health care, and long-term care costs.
Medicaid is available only to people with limited income and assets. Income from work, investments, and entitlements such as Social Security all need to be reported by the applicant. Assets such as cash, stocks, bonds, trusts, annuities, real estate, vehicles, and life insurance all must be reported and calculated for eligibility. If a state determines that an individual has transferred assets for less than “fair market value” inside the mandated five year “lookback period,” they may be ruled ineligible for Medicaid coverage for a specified period of time. If a transfer of assets for less than fair market value is found, the state must withhold payment for nursing facility care (and certain other long-term care services) for a period of time referred to as the penalty period.
In addition to financial eligibility, states determine if an individual meets the functional criteria by assessing the limitations in an individual’s ability to carry out activities of daily living (ADL) and instrumental activities of daily living (IADL). Individuals who incur high medical costs may “spend down” into Medicaid eligibility because these expenses are deducted from their income. Spending down may bring their income below the state-determined income eligibility limit.
What you need to know about Senior Health Planning Accounts (SHPA) for Long Term Care
In 2020, the United States Congress introduced H.R. 5958, the “Senior Health Planning Account Act” which is a bipartisan bill that provides a tax-free way for seniors to roll over their proceeds from an LTC-Life Settlement into a senior health planning account” (SHPA), which would be dedicated to paying health care costs for themselves and their spouse. If passed, the Long-Term Care Benefit Account (LTC-HSA) will be a bank-trust account funded tax-free by an LTC-Life Settlement set up to make monthly payments towards any form of senior living and long-term care services the owner wants. Any form of medical and long-term care will be covered including home care, assisted living, skilled nursing care, memory care and hospice.
What you need to know about Life Insurance
Life insurance is a legal contract between an insurance policy owner and an insurance company, where the insurer promises to pay a designated beneficiary a sum of money (the benefit) in exchange for a premium, upon the death of an insured person (often the policy owner).
The primary forms of life insurance are:
- Term life insurance guarantees payment of a stated death benefit during a specified term. Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the policy to terminate. Term life policies accumulate no cash surrender value and as a result, term life premiums are lower than permanent life insurance premiums for whole life or universal life insurance.
- Universal life is permanent insurance with the flexibility to reduce or increase a death benefit, and pay premiums on varying schedules and amounts after the first premium payment has been made. Policies accumulate cash value which can be used to pay premiums, but a policy will lapse if premiums are not paid and the policy does not have sufficient cash value to cover the cost of insurance. Universal life insurance provides security, flexibility, and variety of investment options to change premium payments, withdraw cash-value, or increase or decrease the face value of the insurance policy.
- Whole life insurance provides death benefit protection for as long as the insured lives. Policy owners pay the same amount of premium for a specific period to receive the death benefit. Whole life policies accumulate cash surrender value. With every premium payment, cash value increases on a tax-deferred basis. The owner can borrow against the cash value or surrender the policy to take the cash value. You can also benefit from dividends in the policy on an annual basis by taking dividend payments in cash or letting them accumulate interest. Dividends can also be used to reduce a policy's premiums or buy additional coverage.
What you need to know about Long-Term Care Insurance
Long-term care insurance (LTC or LTCI) is an insurance product that helps pay for the costs associated with long term care. Long-term care insurance covers care generally not covered by health insurance, Medicare, or Medicaid. Individuals who require long-term care are unable to perform two of the six activities of daily living (ADLs) such as dressing, bathing, eating, toileting, continence, transferring (getting in and out of a bed or chair), and walking. Long-term care insurance can cover home care, assisted living, adult day care, respite care, hospice care, nursing home, Alzheimer's facilities, and home modification to accommodate disabilities.
Long-term care insurance rates are determined by a variety of factors: the person's age, the daily (or monthly) benefit, how long the benefits pay, the elimination period, inflation protection, and the health rating (preferred, standard, or sub-standard). Most policies have an elimination period or waiting period of 30 to 120 days after a long-term care incident. This period of time is similar to a deductible because the policy owner pays for care before benefits will start. A policyholder can select a maximum daily or monthly benefit which would be the maximum the insurance company will pay toward care on either a daily or monthly basis.
What you need to know about Critical Illness Insurance
Critical illness insurance provides additional coverage beyond traditional health insurance for medical emergencies like heart attack, stroke, or cancer. Because these emergencies or illnesses often incur greater than average medical costs, these policies pay out cash to help cover where traditional health insurance stops. Policies are relatively low cost, but what they will cover is generally limited to very specific illnesses or emergencies. Critical illness and accelerated death benefit riders can also be added to life insurance policies. If specific health circumstances detailed in the insurance contract are met, such as a need for long-term care, certain diagnoses or a terminal condition, the policy will pay out living benefits, may convert to a long-term care policy, or pay out a lump sum.
What you need to know about Final Expense Funeral Insurance
Final expense life insurance coverage is used to cover the actual costs of death and funeral arrangements such as burial or cremation, and items like flowers, receptions, caskets and urns. Unlike traditional life insurance policies, which require a medical exam to help set the cost of the policy, final expense policies don’t require in-depth underwriting, and applicants will often be insured after answering only a few questions. Final expense insurance is usually a relatively small face value (typically $25,000 and under), with a higher premium on a dollar-for-dollar basis compared to other forms of life insurance.
Age- or Asset-Based Funding
What you need to know about Life Settlements
A life settlement is the sale of an existing life insurance policy (typically of seniors) to a third-party owner (typically a financial institution) for a percentage of the death benefit. The value of a life settlement is based on “reverse underwriting,” and the more advanced the age and health impairments of the insured is, the higher the percentage of the life settlement lump-sum payout will be. There are over 150 million life insurance policies owned in the United States, but 9 out of 10 are in danger of being lapsed or surrendered after years of premium payments. Industry averages over the years show that Life Settlement market value can be 5x-10x greater than surrender value, and certainly a smarter option than to lapse a life insurance policy after years of premium payments. The industry average payout for a life settlement is around 25% of the face value for a policy. The range for a life settlement can be as low as 10% and can climb as high as 60% or greater of the face value. The typical age range for a life settlement is 75-92 with a remaining life expectancy under 10 years, but younger or older applicants can qualify based on the type of policy or the severity of their health-related impairments.
What you need to know about Reverse Mortgages
A reverse mortgage is an FHA-insured HECM (home equity conversion mortgage), non-recourse loan or line of credit secured by a residential property. The loans are designed for older homeowners and do not require monthly mortgage payments. Borrowers are still responsible for property taxes and homeowner's insurance. Reverse mortgages allow people above the age of 62 to access the home equity they have built up in their homes now, and defer payment of the loan until they die, sell, or move out of the home. Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. Borrowers are not responsible to repay any loan balance that exceeds the net-sales proceeds of their home, ensuring that a reverse mortgage cannot go “upside down.”
What you need to know about VA Aid & Attendance Benefits
The Veterans Aid & Attendance Pension Benefit is a monthly, tax-free monetary payment to veterans who served during a period of war. It is also available for their single surviving spouses and/or dependent children. Cash income payments in 2019 range from $756 a month to $2,230 a month depending on the type of claim and the medical rating involved. Eligibility requirements for a veterans pension (for a living veteran) require previous active duty service for at least 90 days, with at least one of those days during a period of war and an honorable discharge or a discharge classified as other than dishonorable and is “means based” with an income and an asset test.
What you need to know about Senior Living Bridge Loans
An unsecured bridge loan specifically designed to help seniors move into retirement communities can be borrowed for amounts between $5,000 and $500,000 based on co-signers from the borrower’s immediate family. Current variable interest rates range from 9.49% to 16.24%, and origination fees of 8% to 8.5% of the amount borrowed are charged. With this line of credit, interest-only payments of around $12 per month per $1,000 drawn are charged. The borrower will have between 15 and 18 months to pay off the loan from either VA benefits, a life settlement, or funds from a real estate sale. Term loans have up to 36 months before they are due, with payments on both the loan’s interest and principal required.
What You Need to Know about Structured Settlements
A structured settlement is a negotiated financial or insurance arrangement through which a claimant agrees to resolve a personal injury tort claim by receiving part or all of a settlement in the form of periodic payments on an agreed schedule, rather than as a lump sum. As part of the negotiations, a structured settlement may be offered by the defendant or requested by the plaintiff. Ultimately both parties must agree on the terms of the settlement. In addition to court-ordered structured settlements from a legal dispute, settlements of lottery winnings and annuities are also common for those seeking to get out of installment payments and receive a lump sum.
Navigating the financial challenges of life can be daunting for people of any age, but for older adults there are demands placed on them that one does not typically experience until after retirement and the impacts of aging and declining health become a reality. The better informed one is about the financial options available to help navigate these times means not just getting through challenges, but being able to maintain financial comfort and security.
About the author
Chris Orestis (www.retirementgenius.com) is President of LCX LIFE and a nationally recognized healthcare expert and senior advocate. He has 25 years experience in the insurance and long-term care industries, and is credited with pioneering the Long-Term Care Life Settlement over a decade ago. Known as a political insider, Orestis is a former Washington, D.C., lobbyist who has worked in both the White House and for the Senate Majority Leader on Capitol Hill. Orestis is author of the books Help on the Way and A Survival Guide to Aging, and has been speaking for over a decade across the country about senior finance and the secrets to aging with physical and financial health. He is a frequent columnist for Broker World, ThinkAdvisor, IRIS, and NewsMax Finance, has been a featured guest on over 50 radio programs, and has appeared in The New York Times, The Wall Street Journal, CNBC, NBC News, Fox News, USA Today, Kiplinger’s, Investor’s Business Daily, PBS, and numerous other media outlets.