Summary of Funding Methods
Putting aside enough money to cover long-term care is not feasible for most people, and even when it is possible it leaves the individual vulnerable to an uncapped liability. But for a person who is paying for care out of her own pocket, either because she made no other provisions in advance or because she deliberately chose to self-fund, there are a number of funding sources.
If she owns her own home, she could take out a reverse mortgage. But the money cannot be used for an extended stay in a nursing home or assisted living residence, and her home equity will be substantially reduced, leaving her with less to rely on as a financial reserve and to pass on to heirs.
She could purchase an annuity, but unless she were able to invest a very large sum, the payments would not be enough to cover all her long-term care expenses. Alternatively, she could use the annuity payments to pay premiums on an LTCI policy.
If she owns a life insurance policy, she could apply for accelerated death benefits. Or she could sell the policy for a portion of the death benefit in a life settlement, or if she were terminally ill, a viatical settlement. If it is a permanent life policy, she could access the cash value by taking out a policy loan, making a withdrawal (if it is a universal policy), or surrendering the policy. But all of these actions would substantially reduce or eliminate the money paid to her beneficiaries after her death, defeating the purpose of life insurance, and the money obtained would likely not be sufficient to cover long-term care for more than a year or two.
Finally, if she has a health savings account, she can withdraw money from it tax-free to pay for long-term care or LTCI premiums. But given the annual limit on contributions and the recent creation of HSAs, the funds accumulated will cover only a fraction of costs.
Medicare is a federal program that pays healthcare benefits to the elderly and a few others. Medicare Part A primarily covers inpatient care in hospitals, while Medicare Part B covers physician services, outpatient hospital care, and some other medical services. Under the Medicare Advantage program (Medicare Part C), beneficiaries can receive Part A and Part B coverage (and some additional benefits) from a private health insurance plan.
Medicare provides some benefits in two areas associated with long-term care -- nursing home care and home healthcare. But these benefits do not meet the needs of those requiring long-term care, for the following reasons:
• No benefits are paid if the beneficiary needs personal or supervisory care only, not skilled care.
• No benefits are paid for skilled care unless it is medically necessary, meaning that only those recovering from an injury or illness generally qualify.
• The duration of benefits is in practice quite limited because people seldom continue to meet the medical necessity requirement for more than a short time.
Medicare supplement (Medigap) insurance policies and Medicare Advantage plans offer a few benefits not provided by Medicare, but they do not include any major coverage in the area of long-term care.
The new Medicare Part D program provides benefits for prescription drugs, which are a major expense for many of those receiving long-term care, but of course it does not provide any funding for long-term care services themselves.
Medicaid is a federal-state healthcare benefits program. It covers long-term care, but to qualify for benefits an individual must be poor or must spend almost all her income and assets on care. She may generally keep only a few assets (such as her home, car, household goods, and personal effects) and a very small amount of income.
The rules governing Medicaid eligibility are complex. They cover the assets and income that are counted in determining eligibility; the treatment of married couples when only one spouse needs Medicaid benefits; and the transfer of assets to another person by a Medicaid applicant or recipient, including transfers involving loans, annuities, and trusts.
For those who qualify, the long-term care benefits that Medicaid provides are substantial. Unlike Medicare, Medicaid pays for personal and supervisory care even if skilled care is not also needed, and it covers ongoing care needed to cope with a chronic impairment, not just care required for a short time to facilitate recovery from an acute illness or injury.
Those considering relying on Medicaid to meet long-term care needs should bear in mind that spending down to qualify means losing one's financial independence and the assets one has spent a lifetime accumulating. And as a Medicaid recipient, one may have only limited choices of types of long-term care and of facilities.