Long-term care services usually come at a cost and it can easily deplete your retirement nest-egg if you don’t have a plan on how you’re going to cover these expenses.
When planning for long-term care and retirement, one important area you need to strategize on is how you’re going to pay for possible care expenses in the future. There are several options when it comes to paying for long-term care and each has its pros and cons. Let’s explore each of them.
To self insure means to build a pool of money or a separate account for a particular purpose such as long-term care. This approach is simple, practical and appealing because you have an easy access to your money and you will only use it as the need arises. However, your care expenses might exceed what you saved. There’s also the tendency of using this fund for other purposes since the need for long-term care is still far off.
2. Long-Term Care Insurance
Long-term care insurance is a policy that’s specifically designed to pay for care expenses. It can provide coverage for all levels of care provided in the home and facilities. Services that are vital to the overall quality of care such as care coordination and home modifications can also be covered under this policy.
LTC insurance also has protection against inflation. This means its benefits will grow as time passes so that it could remain at pace with the changes in the cost of care.
The cost of long-term care insurance is dependent on the amount of coverage it provides, and this all depends on the policyholder. In other words, you can custom-fit this policy according to your needs and budget.
On the other hand, some are anxious about purchasing this policy because they think that their premiums will be wasted when they don’t need long-term care. However, this is not a disadvantage per se, because you don’t buy insurance hoping that you will face an accident or huge expense just so you can get your money’s worth out of the policy.
If you’re still worried about premiums being unused, you can incorporate a return of premium rider in your policy, which returns your unused benefits to your beneficiaries.
3. Combination Products
Individuals who are not so keen on purchasing a traditional LTCi can turn to combination products such as life insurance or annuities with long-term care benefits. Combination products are growing in popularity because they cover two risks in one policy and eliminate the risk of losing the unused benefits in a traditional policy.
Life insurance with long-term care components allow access to a portion of your death benefits to be used for long-term care expenses. What’s left will be given to your beneficiaries once you’re gone.
However, LTC coverage from these products may end up being insufficient and if your needs surpasses your benefits, your loved ones will not get anything out of the policy. Also, experts say that you should only buy life insurance only if you have a need for it. If you don’t, a traditional long-term care policy will make more sense for you.
Another combination product that you can use to pay for long-term care are hybrid annuities. When you put money into this product, you will decide how much coverage you want for long-term care, which is usually two to three times the face value of the annuity. You also need to decide on the benefit duration and whether or not to include inflation protection.
Annuities have few restrictions in terms of underwriting and how you’re going to use your benefits. This can be beneficial for older individuals who are having a hard time qualifying for traditional LTC insurance.
On the other hand, you need to pay a huge amount of money upfront. More so, returns on this type of annuity are not as big as what conventional ones generate. Look into your options and determine if it makes sense for you to purchase a traditional annuity and use the returns to pay for stand-along long-term care insurance.
4. Government Programs
Medicare and Medicaid are two government programs that can provide assistance for long-term care.
Medicare only covers skilled or medically required care and it’s very limited. This program only covers a stay in a nursing home for a maximum of 100 days. It doesn’t cover the custodial aspect of care such as assistance in Activities of Daily Living (ADL), which usually make up most of a person’s long-term care needs.
Medicaid, on the other hand, has more coverage for long-term care. However, you need to meet their asset criteria, which happen to be very low. Meaning, your assets must be close to depletion before you can receive benefits from this program.
Meanwhile, owners of traditional long-term care insurance under the state partnership program can qualify for Medicaid and still keep a considerable portion of their assets. Under this program, they are allowed to keep their assets amounting to the benefit amount of their policy and qualify for Medicaid benefits once their coverage from the traditional policy runs out.
5. Reverse Mortgage
Reverse mortgage is a loan against the equity or market value of your home. In order to qualify for this loan, you should be at least 62 years old, have the home as your primary residence and continue to live there, and settle property taxes. The loan must be paid once you die, sell your home, or move out of the property.
Reverse mortgage doesn’t require underwriting and it allows you to stay in your home. However, the equity of your home shrinks as your loan gets bigger.
Meanwhile, going for a reverse mortgage may not be the smartest move for if you want to leave this property to your family once you’re gone. Should you die and your family can’t settle the loan, they may need to sell the house in order to pay back the money owed. Otherwise, they can take out a new mortgage as if they are buying a new house—which means going through the process of application and meeting the requirements such as a stable income, credit check and a down payment.
When determining which among these options is best, always go back to your needs and financial strength. Also, you can look into the possibility of combining two or more of these strategies to meet your needs. Consult with a professional and discuss which strategy is the most appropriate for your situation.