Forty million Americans (13 percent of the population) are over the age of 65; by 2050, this number is projected to more than double to 88.5 million (20 percent). In addition, 5.7 million Americans (1.8 percent) are over the age of 85; by 2050, this number is projected to more than triple to 19 million (4.4 percent). Fifty percent of individuals over 85 will need assistance with daily functioning, and their home care can cost from $55,000 to $75,000 a year and up to $180,000 annually for nursing home care.1 This is both a national and an individual crisis—most middle income families can’t afford these costs, and a large segment of American society is being financially devastated.
How do Americans expect to pay for their long-term care (LTC) costs? Most expect that they can rely on Medicare. They’re wrong.
Medicare is America’s health insurance program for individuals over 65 who are entitled to Social Security retirement benefits and individuals with disabilities who have received Social Security disability benefits for two years. When Medicare was enacted in 1965, President Lyndon B. Johnson promised:
Every citizen will be able, in his productive years when he is earning, to insure himself against the ravages of illness in his old age. No longer will illness crush and destroy the savings that they have so carefully put away over a lifetime so that they might enjoy dignity in their later years.2
President Johnson was a great politician, but a lousy prophet. LTC costs do “crush” seniors. And Medicare doesn’t help. It provides coverage for acute care and skilled care, but only very limited coverage for long-term chronic care. After an individual has been hospitalized for at least three days and admitted to a nursing home within 30 days of that hospitalization, he may receive Medicare coverage for a maximum of 100 days, provided there’s a skilled need. Qualifying individuals will be fully covered for the first 20 days. For days 21 through 100, they’ll have a daily copay of $148. There’s no coverage after 100 days. And getting coverage is spotty at best. Most nursing home stays aren’t considered skilled. A dementia patient, admitted because he can’t remain at home, is generally categorized as a “custodial” patient, not “skilled.” And there’s a new wrinkle: Some hospital patients aren’t being deemed as “admitted,” but are classified as “in observation status;” therefore, they don’t fulfill the three day hospital stay requirement—thus no nursing home coverage.
Medicare home care benefits are also quite limited. First, the care must be considered medically necessary, usually meaning the patient requires skilled care, such as physical, occupational and/or speech/language therapy and is homebound. Although the statute allows for up to 35 hours a week for “part time and intermittent” benefits, in reality, beneficiaries get no more than a few hours a week. Medicare also won’t pay for home health aide services if that’s all an individual requires.
In actuality, Medicare fails individuals suffering from long-term, chronic illness. And there’s little in the Patient Protection and Affordable Care Act of 2010 (health care reform) or other health reform proposals that help in any meaningful way.3 This dearth is particularly disconcerting considering the rising number of elderly Americans and the rising cost of care. People are on their own and must piece together ways to finance their LTC. We’ll briefly discuss the limited options available, including LTC insurance and partnership plans (combining LTC insurance and Medicaid extended coverage), accelerated benefits riders for life insurance policies, life settlements and viatical settlements, reverse mortgages, congregate care communities and, finally, engaging in Medicaid planning.
LTC insurance is designed to cover LTC costs not covered by Medicare. For those who can afford it and who can meet medical underwriting criteria, these policies offer a viable option for financing (in whole or in part) LTC at home or in a nursing home. Indeed, having a policy may preclude the need for Medicaid planning or, in some cases, allow planning through divestiture because the policy benefits could cover costs during a period of ineligibility.
Premiums for LTC insurance depend on age, geographic location, the amount of coverage desired, exclusion period chosen and whether an inflation rider and waiver of premium rider are purchased. Benefits are payable when a licensed health care practitioner certifies that the insured is unable to perform at least two of five activities of daily living (usually toileting, bathing, ambulating, feeding and dressing) without substantial assistance for a period expected to last at least 90 days.
These policies receive favorable tax benefits. Individual policyholders who itemize deductions and have tax-qualified LTC policies are able to claim LTC insurance premiums as a medical expense deduction on their federal income tax returns. The amount of the deduction is based on the taxpayer’s age at the end of the tax year and is subject to the 10 percent of adjusted gross income limitation, although for individuals 65 or over, the limit will continue to be 7.5 percent until 2017.4 A few states offer a credit against state income taxes.5
Individuals may wish to purchase LTC insurance for their parents to ensure that their parents’ wishes to remain at home can be accomplished and to provide a psychological benefit. Those who do purchase such policies for their parents can also benefit from possible income tax deductions (if the child provides more than 50 percent of the parent’s support).
LTC insurance is a relatively new concept (in existence for only the last 30 years) and some companies haven’t reaped the financial success they expected. An increase in the number of people keeping their policies, combined with low interest rates preventing the companies from earning a return on policies whose benefits increase 3 percent to 5 percent each year, has resulted in some companies exiting the LTC insurance business. For companies who remain, there may be enhanced underwriting and higher premiums for women because women tend to live longer.6 Some policy owners are receiving substantial “across the board” premium increases. It’s also possible for an individual to exhaust the coverage available under his LTC policy and have to revert to self-financing his care. And, because an individual may have a daily benefit that won’t cover the actual nursing home cost (a policy with a $250 a day benefit with a nursing home cost of $450 a day), many people won’t find LTC insurance attractive.
Partnership for LTC
The Partnership for LTC program (sometimes called a “public-private partnership”) combines LTC insurance and Medicaid extended coverage with some asset protection. After the insured individual has exhausted the policy benefits, he becomes eligible for Medicaid benefits in the state where he purchased the policy. The program is currently available in 40 states.7 These plans vary from state to state. In most states, the insured receives asset protection to the extent of the LTC insurance benefits (“dollar-for-dollar” plan). New York offers an optional enhanced plan as well (the “total asset protection” plan). Medicaid extended coverage will allow the individual to be eligible for Medicaid without regard to resources to the extent of the “protected“ amount of assets. The policyholder’s spouse can choose between a total asset protection plan or a dollar-for-dollar asset protection plan. Medicaid extended coverage will allow the individual to be eligible for Medicaid without regard to the resources to the extent of LTC insurance benefits (or all resources, if under the New York total asset protection plan). The policyholder’s spouse’s assets are also protected. It’s important to note, however, that an individual’s income isn’t protected. Thus, if the plan beneficiary is in a nursing home, his income will need to be paid to the nursing home.8
Accelerating Life Insurance Benefits
Another source of financing for LTC is accelerating life insurance benefits. An accelerated death benefit rider can be a component of your client’s life insurance policy. This enables the policyholder to receive cash advances on account of the death benefit. Typically, the individual draws down the face value of the life insurance policy on a discounted basis. Most accelerated benefit riders allow withdrawal of a percentage of the face value on a monthly basis; some policies allow lump-sum withdrawals. These riders are state regulated. Generally, to obtain accelerated benefits, the insured must be terminally ill or suffering from a long-term, chronic illness.9 Many individuals who choose the accelerated death benefit have less than one year to live and use the money for treatments and other costs needed to stay alive.
Accelerated benefits can range from 25 percent to 95 percent of the death benefit. The payment depends on the policy’s face value, the terms of the contract and the policyholder’s state of residence. The amount of the benefit won’t be the total policy face value; it will be reduced to compensate the carrier for loss of interest on early payout and by any outstanding loans against the policy.10 Typically, accelerated benefits aren’t subject to federal income taxes. A planner should keep in mind that while using this resource may be appropriate under the circumstances, the policyholder’s beneficiaries won’t receive some or all of the life insurance policy benefits.
Life and Viatical Settlements
Unlike an accelerated death benefit, which allows the individual to receive an advance of some or all of his life insurance funds, a life settlement or viatical settlement entails the sale of an individual’s entire life insurance policy to a third party in exchange for an immediate payment of a percentage of the death benefit.11 The third party who purchases the life insurance then becomes the owner and beneficiary of the policy and receives the death benefit when the insured dies.
Generally, the third party will purchase the life insurance for substantially more than the surrender value of the policy, but less than the net death benefit,12 depending on the age, health and life expectancy of the insured and the terms of the policy.
Life settlements generally involve sales of policies by individuals who aren’t necessarily terminally ill and need not have a chronic illness, but have a life expectancy of two to 10 years. Viatical settlements are sales of policies by the terminally or chronically ill. The proceeds of the sale may be tax free, subject to the provisions of Internal Revenue Code Section 101(g), which, in general, provides that the funds received won’t be counted as income if the benefits are taken by a terminally ill or chronically ill individual. Life settlements and viatical settlements (also only around since the 1980s) are profitable, resulting in high competition and aggressive tactics by brokers eager to purchase a senior’s policy.13
Another option available to the elderly to finance their cost of care is to obtain a reverse mortgage. Individuals over the age of 62 may be able to borrow against the equity in a primary residence with no obligation to make any principal or income payments until the home is sold or the individual dies. The debt is limited to the value of the home, regardless of the fact that the value of the home may be less than the debt at the time of death.
The leading reverse mortgage program is the U.S. Department of Housing and Urban Development’s (HUD’s) Home Equity Conversion Program (HECM). The amount that can be borrowed will depend on the age of the youngest borrower, the current interest rate, the lesser of the value of the residence or the HECM FHA limit of $625,500 and the initial mortgage insurance premium. In general, the more valuable the home, the older the individual and the lower the interest rate, the more the individual can borrow.14 An individual can select from five different payment plans, ranging from equal monthly payments to a credit line.15 To be eligible for an HECM, in addition to being over the age of 62, the individual must own the home (it can be a two to four family home, provided the borrower occupies one unit). Fees can be substantial.
Private bank jumbo reverse mortgages are presently not as available as they were prior to the 2008 financial crisis. It had been possible to get a reverse mortgage on a cooperative apartment in New York for “jumbo” loans, but HUD rules don’t permit this for HECM loans, and it seems unlikely HUD’s position will change.
Congregate Care Communities
In most states, a person may purchase a residence in a congregate care community that provides several levels of care: independent living, assisted living and total care (nursing home). There’s a substantial initial cost (often not refundable) and monthly maintenance charges. But, in some cases, the monthly fees don’t increase, or increase only slightly, as the owner moves up through the various levels of care as the need arises. In effect, the owner has purchased a significant amount of cost protection—similar to insurance—in case the owner’s health deteriorates and a higher level of care becomes necessary.
Medicaid (the medical assistance program) is the option of last resort for some middle income families, even though it’s commonly believed to be only for the poor. While access is difficult, planning is possible, depending on the state, particularly for married individuals and individuals with disabilities. Medicaid covers nursing home care in all states and home care services in a few. Unlike Medicare, Medicaid generally provides benefits for care that’s deemed “custodial,” rather than skilled. Advisors should consult an elder law attorney experienced in Medicaid planning to ascertain if Medicaid can be tapped for a client’s needs.
Enhanced Estate Planning
The planner should always consider whether paying for LTC will be an issue for a client and, if so, how the client will be able to pay for the care. Even if accessing one of the resources described above isn’t necessary today, it’s important to do the planning for a future need by ensuring that the tools are in place to take the necessary action when the need arises. A durable power of attorney with a gifting power is critical to permit implementation of today’s planning when the client becomes ill or incapacitated. And, don’t forget to have health care advance directives in place (health care proxy and living will). These tools are a necessary part of a client’s life planning. Think of this as enhanced estate planning. Further, having these advance directives in place may well avoid the need to obtain a guardianship in the future to access such resources.
1. See www.genworth.com/corporate/about-genworth/industry-expertise/cost-of-care.html.
2. Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1965. Volume II, entry 394, at pp. 811-815 (Government Printing Office, Washington, D.C. 1966).
3. The Patient Protection and Affordable Care Act included the Community Living Assistance Services and Supports program and attempted to provide limited long-term care (LTC) benefits via a voluntary employee participation program funded by payroll deductions. The plan had limited benefits and was actuarially unsound. The Obama administration withdrew the launch of its proposal in 2012.
4. See www.ltcfeds.com/start/aboutltci_taxqual.html.
5. New York allows a 20 percent credit for LTC insurance premiums.
6. See www.nbcnews.com/business/long-term-care-insurance-may-be-harder-get-6C9633922.
7. Plans vary state to state. See www.nyspltc.org/reciprocity.htm; see also http://w2.dehpg.net/LTCPartnership/StateReciprocity.aspx.
8. But, the spouse may receive some income under spousal protection rules, and, to the extent the insured has resource protection, the protected resources can be transferred to the spouse, thus shifting the income on those resources and avoiding the payment to the nursing home.
9. See www.acli.com/Consumers/Life%20Insurance/Pages/Accelerating%20Benefits.aspx?PF=true&Pub=false.
11. It may also be possible to sell only part of a policy. See www.viatical-web.org/process.htm.
12. See www.finra.org/investors/protectyourself/investoralerts/annuitiesandinsurance/p018469.
14. See http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/rmtopten.