Long-term care is something no one likes to think about, but that almost two-thirds of those 65 and over will need. A common misconception is that Medicaid will pay for long-term health care costs, but this is not true, unless you earn very little and have no assets to fall back on. Some people try to bankrupt themselves, just to cover their long-term care costs under Medicare. A few states offer partnership programs to try and address this issue. Let’s look at what a partnership program is, California’s in particular, and the state of the program today.
Partnership Programs to Support Long-Term Care Expenses
California, New York, Connecticut and Indiana recognized that middle-class people who don’t have either traditional long-term care insurance or hybrid long-term care insurance occupied the awkward position of having too much money to qualify for Medicare but not enough to pay for long-term care out-of-pocket. They created Partnership program—a partnership between the state governments, private insurance companies, and consumers.
The premise was you would be allowed to keep more of your assets and still qualify for Medicare. The amount of assets you could keep was equal to the amount of benefits you purchased under the partnership program. So, for example, if you bought a $100,000 Partnership long-term care policy, you could keep $100,000 of your assets and still apply for Medicare (which, in California is called Medi-Cal). Usually, to qualify for Medicare you must earn less than $2,000 (roughly) a month and have less than $2,000 in assets. Your $100,000 worth of long-term care insurance would cover your care, but if you had a long-term illness and ran out of insurance, you would not have to bankrupt yourself to qualify for Medi-Cal.
What is California’s Partnership Program for Long-Term Care Rider?
California started the program in 1994, which is when traditional long-term care insurance was really taking off. The program was met with enthusiasm and sales were strong. Unfortunately, like all long-term care insurance, costs and premiums have risen so dramatically that few people can now afford it, especially with the mandatory 5% inflation protection included. A Partnership policy for two 55-year old adults with the 5% inflation protection might be as much as $15,000 a year. Obviously, not many people can afford that, and sales were pretty much non-existent.
California, to its credit, realized this was ridiculous and lawmakers met to discuss how to save the program. They first cut the inflation protection from 5% to 3%, which cut premiums almost in half, although that’s still expensive at about $7,500 a year.
They also discussed what would be helpful for the average middle-class Californian when it came to long-term care. This is still ongoing, but hopefully they will come to some kind of decision that will benefit most middle-class consumers.
With long-term health insurance so expensive, what is a middle-class Californian (or really, any other state) to do?
Hybrid Long-Term Care Insurance Policy (Linked with Life Insurance)
Hybrid long-term care insurance are life insurance policies linked with long-term care insurance. They used to be single-pay policies, but now you can find 10-year pay policies. For a single payment of $100,000, you’ll get something like $400,000 worth of long-term care insurance. If it turns out you don’t need long-term care, your death benefit will be worth at least what you paid for it, but probably more. That’s a nice tax-free lump sum for your heirs. There’s even a return of premium rider you can add, so you can get your money back if you change your mind.
Traditional Long-Term Care Insurance Policy
Although all but a dozen companies such as John Hancock and CalPERS have fled the long-term care market, you might still be able to find a policy. This way, you’ll get at least some coverage if you need it. Even if you go with a small policy so you can afford the premiums, it will be better than nothing. If you never need long-term care, you’ll have wasted that money (or spent a lot of money for peace of mind, depending on how you look at it). The odds are you, or your spouse, will need some form of care.
Permanent Life Insurance Policy with Long-Term Care or Chronic Illness Rider
If you have a permanent life insurance policy or are thinking of buying a permanent policy, you can add a long-term care or chronic illness rider to the policy. With either rider, the policy will pay for your long-term care expenses as an accelerated death benefit. There are some differences between long-term care rider and chronic illness rider. They both have pros and cons, so you might want to look discuss with an advisor before deciding on the rider and the best policy for you.
Annuities With Long-Term Care Benefits
You can get either a fixed-rate annuity or a indexed annuity, and both will pay you more if you need long-term care. Annuities normally pay a certain fixed amount per month, but with the long-term care feature, you’ll get more than you paid in premiums to fund your long-term care needs.
One disadvantage of annuities is that you’ll need a fairly hefty premium up front. Also, annuity payments are taxable. However, if you have a serious health condition, you’ll probably find it easier to get approved for an annuity.
Health Savings Accounts to Pay for Long-Term Care
If you have a qualified, high deductible health insurance plan, you can sock away money in a savings account to pay for future health care costs. Withdrawals are tax-free if you use them for health care.
Medicaid to Pay for Long-Term Care
This is a last resort option. You’ll have to get rid of most of your assets to qualify, and not every nursing home accepts Medicaid. Also, if you unload your assets just to qualify for Medicaid, you could be disqualified from the program and incur penalties.
Personal savings to Pay for Long-Term Care
A sad reality is that many people are forced to pay for their own long-term care out of their own pockets. It’s better than not having care, of course, but it’s expensive. And if you or your spouse needs care for a long time, you can easily bankrupt yourself. Although then you can qualify for Medicaid.
Long-term care insurance and long-term care in general could use an overhaul. Until that comes, prepare for this possibility as best you can, but don’t put it off and hope for the best.