How to Pay for Long-Term Care

If your parents or loved ones need long-term care as they age, it won’t be cheap. The average estimated cost of long-term care for someone who is 65 today is $138,000, according to a 2016 study by the Department of Health and Human Services. Those who need several years of care could end up spending hundreds of thousands of dollars.

Here’s the kicker: Medicare won’t pay for it. The federal government’s health care benefits program for adults 65 and older will cover short-term stays in nursing homes after a hospital stay. But it doesn’t pay for the type of care your loved ones would receive in an assisted living facility or even at home if, say, they were diagnosed with Alzheimer’s disease and could no longer care for themselves.

The cost of professional care is a key reason why so many people rely on family if they need help as they age. According to a survey by Nationwide Retirement Institute, 83% of help provided to older adults comes from unpaid caregivers. 

Of course, you might be more than willing to care for loved ones as they age. But being a caregiver can take a huge emotional, physical and financial toll on you. That’s why it’s important to have a plan to pay for professional care if it’s necessary. Here are the options.

Medicaid

Although Medicare doesn’t pay for long-term care, Medicaid does. This joint federal and state program will cover care in skilled nursing facilities and at home (but typically not in assisted living facilities). However, your parents must have limited income and assets to qualify for Medicaid. The income amount varies from state to state, but countable assets (which don’t include a primary residence and one car) usually must be $2,000 or less for individuals and $3,000 or less for couples. The local area agency on aging can help your parents navigate the Medicaid application process.

It’s possible for your parents to spend down their assets or transfer them to qualify for Medicaid. However, that takes planning to be done properly. They would need to work with an elder law attorney who specializes in Medicaid planning. They can find an attorney through the National Academy of Elder Law Attorney’s online directory.

Long-term care insurance

A long-term care insurance policy will help cover the cost of care at home, in an assisted living facility or in a nursing home. However, the policy must be in place before there is a diagnosis of a condition that will require long-term care. So if your parents still are healthy and in their 50s or early 60s, they could purchase long-term care insurance.

The average annual cost of a shared policy with benefits equal to $164,000 for a couple age 55 in good health is $3,050, according to the American Association of Long-Term Care Insurance. That might seem a lot until you consider that the median annual cost of an assisted living facility is $54,000, according to insurance company Genworth’s Cost of Care Survey. 

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A long-term care insurance policy will help cover the cost of care at home, in an assisted living facility or in a nursing home. However, the policy must be in place before there is a diagnosis of a condition that will require long-term care.

If your parents already have long-term care insurance, the policy will start paying once they have cognitive impairment or need assistance with two of the six activities of daily living: bathing, dressing, eating, going to the bathroom, transferring to or from a chair or a bed, and incontinence. However, you’ll need to find out how long the elimination period is on your parents’ policy. This is the period (typically 30 days or more) that a policyholder will have to pay for care out of pocket before coverage kicks in.

You’ll also need to know what the benefit amount is (how much the policy will pay out daily or monthly); the benefit period (the maximum number of years the policy will provide benefits); and the benefit maximum (the total amount the policy will pay based on the monthly benefit and benefit period). Long-term care insurance will reimburse policyholders for the cost of care, so you’ll have to file a claim and go through the process of proving that your parent needs care and how much that care costs to get a payout.

[ Read: What You Need to Know About Long-Term Care ]

Life insurance with a long-term care benefit

If your parents don’t like the idea of paying for insurance they might never use, they might want to consider a permanent life insurance policy with a long-term care insurance benefit. If they don’t need to use the long-term care benefit, the policy will pay a death benefit to their beneficiaries when they die. These hybrid policies tend to be more expensive than stand-alone long-term care coverage, but they can be easier to qualify for if the applicants are older (in their 60s or 70s) and aren’t in excellent health.

Like long-term care insurance, these policies will pay out once the policy holder has cognitive impairment or can’t perform two of the six activities of daily living. However, some hybrid policies operate on an indemnity model rather than a reimbursement model – which means they pay out a certain amount of cash each month rather than cover the actual cost of care. This allows the flexibility to pay a family caregiver (who typically can’t be paid through a traditional long-term care policy).

Other life insurance options

If your parents have an existing permanent life insurance policy and still are in relatively good health, they could convert it to a hybrid policy to add a long-term care benefit. If they already need care, they could use the cash value in a permanent life insurance policy to pay for care. They could take loans against the policy or surrender the policy entirely to get the full cash value. However, that latter option could force them to pay fees and taxes.

They also might be able to sell a permanent life insurance policy to a life settlement company if they are at least 65 years old. They won’t get the full death benefit amount but will get more than the cash surrender value. 

If your parents have a term life insurance policy that’s still in force, they might be able to use accelerated death benefits to pay for care if they have a life expectancy of 12 months or less. If their policy has an accelerated death benefit rider, they could get a lump-sum payment equal to a portion of the policy death benefit (typically 50% of the death benefit). 

Annuities

Your parents could use annuities to help pay for long-term care. Annuities are products that are issued by insurance companies. They provide a guaranteed stream of income in exchange for a lump-sum payment. If your parents already have one of these products, they could annuitize it to start getting regular payments. Just make sure they’re past the waiting period for accessing the money in the annuity. Otherwise, they’ll have to pay a surrender charge.

There are annuities that are specifically geared toward paying for long-term care. So if your parents don’t qualify for long-term care insurance and have a stash of cash to invest, they could buy an annuity with a long-term care benefit. Typically, these types of annuities will pay out two to three times the initial investment.

When buying any type of long-term care insurance or annuity product, it’s best to work with an insurance broker who works with several insurance companies and can help compare plans for you. You can find a broker through the American Association for Long-Term Care.

‍[ Read: How to Talk to Your Parents About Long-Term Care ]

‍Reverse mortgage

Your parents might be able to use the equity from their home to pay for long-term care. If they are 62 or older and own their home outright or have paid off most of their mortgage, they can apply for a reverse mortgage (also known as a Home Equity Conversion Mortgage) to access the equity that has built up in their home. The money from a reverse mortgage can be received as a lump sum, in monthly payments, or as a line of credit. 

To be clear, a reverse mortgage is a loan. So interest will accrue, and the balance will grow over time. And the loan must be paid back when the house is sold or the homeowner moves out or dies. Borrowers don’t have to pay back more than the home is worth. But there might not be any equity left in the home by the time it’s sold if the reverse loan balance is as much as the value of the house – which means there will be no profits from the home sale.
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To be clear, a reverse mortgage is a loan. So interest will accrue, and the balance will grow over time.

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Reverse mortgages also have several fees – an origination fee, mortgage insurance premiums, and closing costs. And a study by the Consumer Financial Protection Bureau found that reverse mortgages are complex products that are difficult to understand and deceptive marketing is common. So this should be an option of last resort. You can read more about reverse mortgages here.

Self-pay

Your parents might have retirement savings, investments or other assets they can tap to pay for long-term care. If so, it’s important that they put a plan for using those assets into writing so you know which ones they’re OK with you accessing to pay for their care.

It’s also important to understand the tax consequences of using certain assets to pay for care. For example, if they withdraw money from an IRA before age 59 ½, they’ll have to pay a 10% tax penalty in addition to regular income taxes on the withdrawal amount. On the other hand, if they have an IRA and don’t start taking required minimum distributions at age 72, the amount not withdrawn is taxed at 50%.

Working with a financial planner can help you and your parents create a plan for using the assets they have to pay for long-term care. You can find a Certified Financial Planner through the Financial Planning Association’s PlannerSearch or a fee-only financial planner through the National Association of Personal Financial Advisors. 

[ Keep Reading: Your Parent Was Diagnosed with Alzheimer's. Now What? ]