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Paying for Long-Term Care

Photo of a Black Leather Jacket with Money in the Pocket

Whether long-term care (LTC) insurance is suitable for you depends in large part on the options you have in paying for long-term care. Let us examine the two ways besides LTC insurance to pay for long-term care.

Letting the Government Pay

Medicare—the (almost) universal federal health insurance program for seniors—is not long-term care under any circumstances. Medicaid, on the other hand, is the state-federal welfare program that presently pays for the largest portion of the nursing home care in America. However, Medicaid is a program designed to assist only the impoverished.

In past years, some financial planners and attorneys have taken the position that qualifying for Medicaid is a viable personal financial planning strategy. Clients with little savings or real property have been advised that costly LTC insurance may not be suitable for them. It would be pointless, according to this view, to spend money on premiums when the clients could easily impoverish themselves to become eligible for welfare instead.

The law strongly discourages this practice, however. For example, the law provides "lookback" periods over which time the state will check to see whether assets have been transferred by the Medicaid applicant without receiving equal value in return. Assets so transferred are included in calculations used for qualifying Medicaid recipients. Such transfers result in a potentially unlimited period of Medicaid ineligibility determined by the value of the property transferred.

Some argue that a public assistance system under financial strain today will not be able to offer care for any but the neediest among us in 20, 30, or more years.

Government budgets are not likely to ever catch up with increasing demand for long-term care services by an aging population. Some argue that a public assistance system under financial strain today will not be able to offer care for any but the neediest among us in 20, 30, or more years.

Partnership Programs for LTC That Promote Insurance

Four states—California, New York, Connecticut, and Indiana—were originally authorized to have a "partnership for long-term care" program to encourage residents to buy long-term care (LTC) insurance coverage. State partnerships for long-term care offer a degree of asset protection to state residents who purchase limited LTC insurance but eventually need Medicaid assistance anyway. This avoids the need for someone to impoverish himself or herself in order to qualify for long-term care Medicaid benefits after exhausting his or her private long-term care insurance benefits. The law now permits every state to have such a program. Several other states have now adopted partnership programs, and more are expected to follow suit. Check with your state insurance commissioner for details on the partnership program if your state offers one.

Pay As You Go—Self-Insurance

Long-term care insurance may be an unnecessary expense for those who can afford to pay their own long-term care expenses, although some of these people purchase coverage as an extra measure of protection. Persons who pay their own expenses are said to be self-insured. In order to determine whether self-insurance is more cost-effective than buying a policy, you must weigh the future cost of premiums against potential future long-term care costs and policy benefits.

For example, based upon your family history, you estimate that by age 75, you will need about $250,000, adjusted for inflation, to cover your long-term care needs. You save and invest regularly and expect to have over $250,000 available exclusively for your long-term care needs by age 75. Alternatively, you could invest in an LTC policy that would provide accumulated lifetime benefits equal to $250,000 by diverting some of your savings and investments to the premiums. On the one hand, you will have $250,000 you may or may not need for long-term care. On the other hand, you won't accumulate the $250,000 investment, but you will have a policy that may or may not be used for LTC benefits. In this case, it might make better sense to self-insure.

Deciding how to pay for long-term care should be part of the financial planning process. Financial planners, however, generally agree that it would be difficult to invest a sum equal to a long-term care premium that would generate the same potential benefits simply due to the nature of insurance and pooling risk.