Never Too Early to Review Long-Term Care Options

Imagine having to figure out a way to pay $5,000 per month for a period of five or more years -- during a time when, by definition, you will not be working. That's at least $300,000 worth of care, and it's a real issue for millions of boomers who are careening toward retirement at a growing pace.
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We face a long-term care crisis in the United States, and seniors and boomers need to start creating a strategy as soon as possible. One study suggests that about 70 percent of seniors will need some type of long-term care, and most of the costs are not covered by Medicare. We aren't talking about costs for doctors and prescriptions, but rather care like nursing home stays, home health aides and the like. Today, the average day in a nursing home costs about $239, a figure which will likely rise. The average stay typically lasts about two and a half years, so even the most financially prepared person will be challenged by $5,000 per month for expenses like these.

Baby boomers, a generation of Americans who are generally healthier than their parents' generation, will likely live longer and may have longer interactions with long-term care concerns. Imagine having to figure out a way to pay $5,000 per month for a period of five or more years -- during a time when, by definition, you will not be working. That's at least $300,000 worth of care, and it's a real issue for millions of boomers who are careening toward retirement at a growing pace.

Thankfully, a number of financial solutions can be explored.

There's Insurance For That

Long-term care insurance covers care that is generally not covered by health insurance, Medicare and Medicaid. It can be used to pay for assistance with the basic activities of everyday living such as bathing, dressing, using bathroom facilities, eating and overall mobility -- moving from bed to chair and around one's living space. It will typically pay a large portion of nursing home expenses for a set benefit period of time. The cost of long-term care insurance varies depending on the age and health of the applicant, the benefit amount, benefit period, whether the benefit will rise with inflation and other factors. A bare-bones policy for a 40-year-old may cost less than $1,000 per year while a comprehensive policy for a 70-year-old might be four times that.

Long-term care insurance may be the answer, but it can be a complicated purchase. Buying it at a relatively young age, say 45, might seem like a cost-effective hedge, but if the insurance isn't needed for 20 years, then it might make sense to invest the cost of premiums instead. One must also read the fine print of long-term care policies and make sure premiums remain level and don't escalate and also make sure there are no other hidden costs.

Lastly, the financial stability and viability of the insurance carrier is critical. Just like with life insurance companies, a purchaser must work with highly-rated companies because you want to make sure the carrier is still in business if and when you need to collect your benefits.

Reverse That Mortgage

A reverse mortgage enables a homeowner (at least 62 years of age) to draw income from the equity in their home while continuing to live there. The owner continues to be responsible for paying property taxes, homeowner's insurance and for making property repairs. When the loan period is over, the owner (or their heirs) is responsible for paying back the loan amount plus interest. For individuals with few other options, a reverse mortgage can be an excellent way to finance long-term care costs. It has a lot of appeal for anyone who wants to stay in their home as long as possible.

Like any financial transaction, there are risks. If the money you have tapped runs out and you fail to pay your property taxes and insurance, then the bank can foreclose on your property. Most banks that offer reverse mortgages would rather have you repay the loan than end up with your house; but the banks will eventually get their money. Financial advisers also agree that money from a reverse mortgage should be used strictly to pay for costs of living and not be invested in other manners. Just as you shouldn't borrow money to invest in the stock market, one shouldn't use reverse mortgage payouts for similar investments.

Life Insurance to the Rescue

Individuals over the age of 70 with life insurance can sell their policies for immediate cash, which can be used to either buy a long-term care policy or to fund the care itself. A life settlement provider continues to pay the purchased policy premiums, collecting the full amount when the policy seller passes away. The amount received for a life settlement varies depending on the life expectancy of the policyholder at the time of sale, and the ongoing premiums necessary to keep the policy in force. A life settlement will always be less than the full value of the policy but more than the amount a policyholder would receive if he or she let the policy lapse or surrendered it to the insurance company. Often, a life settlement offers seven to eight times more funds than surrendering the policy.

The downside to a life settlement is that the policyholder's beneficiaries will not be paid a death benefit when the policyholder dies, but many individuals who sell their policies to fund long-term care make this decision because they don't want to be a burden on their children before they pass away.

Drain Your Bank Account and Go On Medicaid

Medicaid serves as the payer of last resort and is most frequently associated with the indigent. If you or a loved one can't afford long-term care and have no other assets, one solution is to make yourself eligible for Medicaid, by exhausting your savings. Note that transferring assets to relatives -- in order to look indigent -- is difficult because the government penalizes you for having given money to others within the previous five years. Also, some nursing homes may not accept Medicaid patients so your care options are limited. "Going on Medicaid" isn't the best option, but may be the only choice for some.

In general, anyone past the age of 45 should develop a plan to pay for long-term care. Making creative use of existing assets offers options preferable to becoming a burden on the government or your kids.