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How have Americans actually been paying for long-term care needs up until now? According to the American Council of Life Insurers, 48% are paying out of pocket, 41% qualify for Medicaid, 8% are getting temporary coverage provided by Medicare, and only 3% are paying with private long-term care insurance. People who are impoverished or those who eventually exhaust their assets end up on Medicaid, though some of the 41% of those relying on Medicaid prepared for long-term care needs through the use of "Medicaid planning," a tactic people use to give away their assets in order to qualify for Medicaid, with the intended purpose of avoiding paying for their own long-term care expenses so they can leave more money to their heirs.
The passage of the Deficit Reduction Act (DRA) of 2005, signed into law Feb. 8, 2006, brought new rules that made it far more difficult for seniors in need of long-term care to get assistance from Medicaid. While Medicaid is intended to help the impoverished, it was starting to be used more and more by people choosing to intentionally impoverish themselves. One purpose of the new legislation was to prevent the use of Medicaid as an "inheritance protection" program for the middle class. According to the Center for Long Term Care Financing, about one-third of Medicaid long-term care costs are for recipients who could have purchased long-term care insurance, but did not, thereby imposing a $20 billion bill on taxpayers.
Under the old law, there was a three-year look-back period when someone made an outright transfer of assets out of their estate (certain trusts were subject to a five-year look-back). The beginning date for the penalty or "disqualification" period began the day the assets were transferred. Under the new legislation, the look-back period is five years for all transfers, and the beginning date for the penalty period is the later of the date the person enters a nursing home (or is receiving a Medicaid waivered care program), or the date the person applies for Medicaid. What this boils down to is that the penalty period will not begin until the nursing home resident has run out of money.
Medicaid issues to consider
Medicaid was never intended to supplement the middle or affluent class. Medicaid was meant to help care for the poor. While Medicaid planning is becoming a more often-used tactic, there are many issues seniors should be concerned with when thinking about hiding assets to impoverish themselves. For example:
In giving their money away, they could be liable for gift taxes, which could be far more expensive than purchasing long-term care coverage (assuming these transfers exceed the $1 million lifetime threshold).
The senior loses legal control of the assets given away, causing the possibility the senior will need to ask his or her children for the money that was theirs.
If married, the at-home spouse may keep the primary residence, a car, personal and household items and a small amount for burial. In addition, most states only allow the spouse to keep a maximum of $104,400 (in 2008) in financial assets. There also are income limitations; the 2008 limit in most states is $1,711 a month, and Social Security and pension benefits count toward this limit.
The community spouse of a nursing home resident may purchase an annuity to convert assets to non-countable income, but the state must be the first recipient of any leftover funds up to the amount Medicaid paid for the nursing home spouse. The community spouse can be protected for life, but not the children's inheritance.
Some nursing homes require proof that the prospective resident can pay privately for a defined period of time before accepting them for residence, and may refuse to take new patients on Medicaid, though they must keep current residents who later go on Medicaid.
Medicaid tends to use nursing home care as the only choice. Rarely is home health care or another community-based service an option.
Medicaid patients do not get private rooms. Care for Medicaid patients must, by law, be the same as for patients who can pay their own bills, but if they are not happy with the facility, they may have limited ability to change facilities.
Medicaid pays on average two-thirds as much as private-pay patients; therefore, many facilities prefer to fill vacancies with private-pay patients first. This can leave the Medicaid patient with fewer choices.
Role of the financial professional
As financial professionals, it should not be our goal to impoverish our clients. Medicaid should not be a plan, but a last resort, such as in instances where financial "triage" needs to be applied to a badly bleeding financial picture because of an unexpected and financially devastating illness that threatens to impoverish a healthy spouse.
If the client has the need of a financial professional, and enough assets to "hide" to protect an inheritance for a spouse or children, in many cases proper long-term care planning that includes some type of LTCI protection will not only better suit the client financially, but it will allow them to keep control of their assets, their life, and most importantly, their dignity.
Long-term care protection should be looked at as a more logical "inheritance-protection plan" and a strategy to help maintain dignity. In fact, the government agrees and has taken steps to encourage people to better plan for long-term care. Some states have implemented "Partnership Programs," which "partner" with the citizen by exempting more funds from spend-down requirements when the citizen buys long-term care protection. These programs vary from state to state and are not available in all states.
In addition to traditional stand-alone LTCI products, there are hybrid products. For a reasonable cost, a long-term care rider can be added to life insurance coverage being purchased, which allows for the death benefit to be collected to help pay for long-term care costs. Any unused death benefit will be paid to the heirs.
Another incentive provided by the government is from the Pension Protection Act of 2006. This legislation allows for the tax-free 1035 exchange from life insurance, annuities or endowment policies to a stand-alone long-term care policy. If using these funds to pay for a long-term care policy, there will be no tax due on the gain from these assets.
Conclusion
For many, the most important aspect to proper long-term care planning will be maintaining dignity. Seniors who resort to hiding money often find they sacrifice dignity when having to ask for money that was theirs. Does protecting more of an inheritance for their children outweigh comfort in their final days?
Financial, retirement and estate planning should include a serious look at long-term care needs. The changes brought about by DRA 2005 will make transferring assets to children much less practical with the five-year look-back and other changes to the rules.
As financial professionals, it is our job to help protect our client's financial health without sacrificing their dignity.
Why LTCI?
Here are some of the primary reasons long-term care protection should be seriously looked at to pay LTC costs:
o Less complications or ramifications if the senior decides to give a monetary gift or other gift of value to a family member.
o The senior keeps control of his or her money.
o With planning, the lifestyle for the at-home spouse is less likely to be negatively impacted.
o Inheritance plans are more likely to be implemented. The primary beneficiary of remaining assets will not have to be the state because the state will not have to be reimbursed for long-term care costs.
o The LTCI policy may provide the proof of private pay that is needed to get into the nursing home of their choice.
o Home health care, assisted living and other community-based services remain an option with the ability to private-pay with LTCI benefits.
o Private rooms are an option for the senior. If the senior is unhappy with the care he or she is receiving, the senior can move to a different facility. The senior maintains control of where he or she lives.
o The senior is more likely to be able to live in a way that is more commensurate with the style of living he or she had when living independently.
Shawn Britt, CLU, is a senior advanced sales consultant with Nationwide Financial Services. She is a member of Nationwide's Advanced Sales Team, concentrating on non-qualified executive benefits, wealth transfer, the long-term care rider, and Nationwide's Life Manager software system. She has been in the life insurance industry for more than 14 years. During that time, Shawn has had various responsibilities at Nationwide, including product development, sales ideas for marketing, software applications, case design and educating the field. She is also known at Nationwide for her extensive work with the long-term care rider.
Nationwide Investment Services Corporation, Columbus, Ohio, member FINRA. Annuities and life insurance products are underwritten by Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance Company, Columbus, Ohio.
