Why You Need a Plan for Long-Term Care

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More than half of adults 65 and older will need long-term care at some point, according to the Department of Health and Human Services. Yet, 69% of adults say they have done only a little or no long-term care planning, according to a study by The AP-NORC Center for Public Affairs Research.

Without a plan, most Americans will find themselves unable to pay for long-term care, said Nicole Wipp, an elder law attorney and founder of the Family and Aging Law Center in Michigan and Hawaii. Carefull family finance expert Cameron Huddleston spoke with Wipp to learn more about why it’s so important to have a plan to pay for long-term care and how to plan.

Below is an edited version of the conversation.  See the full interview.

The high cost of long-term care

Cameron Huddleston: Why is it important to have a plan for long-term care—not just a plan, but a plan to pay for long-term care?

Nicole Wipp: The reality is, for most Americans, it's absolutely essential that you have some type of plan to pay for long-term care. And the reason is because almost no average American has the ability to pay for their long-term care needs.

Why do I say that? Medicare, for example, which is the primary insurer for most elder Americans, does not cover long-term care services. Now some of you might be saying, “Well, yes they do because they covered X amount of our long-term care services in a facility.” 

Medicare will only cover up to 100 days in a long-term care rehab facility. Past 100 days, Medicare does not cover. And that is only for rehab. They don't pay for straight long-term care services. No private [health] insurance that I'm aware of pays for long-term care services. And very few people either have long-term care insurance or their long-term care insurance policy does not work the way that they thought or intended. 

Those are some of the reasons. What most Americans don't realize is the cost of long-term care is actually probably far more than what you realize it is. In the market areas in which I practice law, we're looking at $10,000, $12,000,  $15,000, $17,000 a month. 

A lot of times when we're talking about long-term care, we're talking about how to pay for it. The word Medicaid comes up, and people will say to me, “Well, I'm not going on the Medicaid. Medicaid's for poor people.” And I say, “At $12,000 to $15,000 a month, how fast are you going to become a poor people?” It's really a bigger expense than most people ever thought it was going to be. And then their insurance doesn't pay for it. So having a plan is absolutely necessary.

[ Find Out: What to Do If You Can’t Pay for Long-Term Care ]

Why counting on family for care isn’t a good plan

Cameron: What would you say to those people who consider family to be their plan? What is the flaw in that plan?

Nicole: First of all, you have to know somebody who's actually willing to do that. That somebody might be willing but not recognize what it actually means to provide long-term care services to another person. 

It's one thing to have your parent come live with you or if you're married and if your spouse just needs a little bit of cooking and helping with things. But when somebody needs true long-term care services—needing assistance with bathing, needing assistance with walking, needing assistance with using the toilet, needing assistance with activities of daily living—your ability to provide care to that person goes down exponentially. 

On top of it, the issue of caregiver burnout is massive. Especially if you're relying on your spouse. If you're in your 70s or 80s or 90s and you're relying on your 70-, 80- or 90- year-old spouse to take care of you, pick you up off the floor if you fallen, to clean you up if you've soiled yourself, these are significant caregiving duties that the heart might be willing to provide, but the body might not be capable of doing.

I see this over and over and over and over and over again in my law practice is that people make these promises, and then they can't keep them. It's heart-wrenching. I always tell people, if you say that to your spouse, if you say that to your children, that's not loving. “You have to take care of me.” That is not a love act of love because you are asking somebody to do something that they might not be capable of keeping that promise. 

So when we're thinking about this, your family is not a plan. 

[ Read: How Family Caregivers Can Protect Their Own Assets ]

Why long-term care insurance isn’t always the best option

Cameron: So what do you do to pay for professional care? I know long-term care insurance is an option, but I know you're not a huge fan of it. Maybe you could talk a little bit about long-term care insurance is and why it's not the right solution for everyone or anyone.

Nicole: In theory, I'm very much a fan of long-term care insurance. In theory, I think the intent behind it was good. I think that the idea that long-term care insurance was going to be there for this type of moment, you would buy into it then when you needed long-term care services, you had this insurance to cover your needs. That made a lot of sense about why it came to be. 

But the reality of long-term care insurance is what I have a problem with. I've been practicing law and I've been an elder law attorney for a long time now. I have yet to see a long-term care insurance policy that has worked in the way that the family or the person that purchased it intended. 

Long-term care insurance is quite expensive. What happens frequently is the cost of that insurance also is not capped. At the point when you are going to most likely need it, which is around 80, the cost goes up exponentially. We're talking 100%, 200%, 300%. Can you afford it then? Then what happens? People then give up that policy that they paid into for 20 some years, and they get nothing in return.

Then most, if not all, long-term care insurance policies have a waiting period before you can access the benefits. It's usually around 90 days. So in 90 days, that could mean that you've accumulated $30,000 or more of long-term care payment needs that will not be covered by insurance. Now for some people that is something that they can afford. For some people, though, that is not something they can afford. And so that's something that you need to be aware of.

The third issue is that the premium is based on how much insurance that you actually buy. And you get a daily rate associated with your long-term care insurance. So if you buy a policy that covers $200 a day, [it might seem like enough]. But here's the problem: We're looking at the actual average costs of care being $300, $400, $500 [a day]. So that 200 bucks isn't going to get you very far. 

If you had an existing policy, that's one thing. But if you're thinking about purchasing it at this point, what I tell clients all the time is to buy a life insurance policy with a long-term care rider. Then, at least you have life insurance that comes on the back end if you decide not to use [the long-term care benefit]. Otherwise, it can just be throwing a giant amount of money down the toilet for a lot of people. 

If you're going to buy long-term care insurance, you really want to understand what it is you're getting, how much it's really covering, and whether, in the end, it is going to be worth it to you.

Alternatives to long-term care insurance

Cameron: You mentioned life insurance with a long-term care benefit. Maybe you could talk a little bit more about that and talk about some other ways that people can plan for this expense that they're likely going to face as they get older.

Nicole: I want to preface what I'm about to say by telling you that I am not a financial planner or a financial advisor. But I am an elder law attorney, so I deal with these things every single day. If you have a life insurance policy, and you choose not to use your long-term care rider, then you at least will have life insurance on the back end. Conversely, the long-term care rider, if you choose to use it, then you use it. 

That being said, I don't even know that I'm a big fan of even that. But if you feel like you need to do that, you can. If you're going to do that, then I would absolutely recommend that you consider what I'm about to tell you. That policy should be held by some type of asset protection trust and not by an individual.

Why do I say that? Because policies have value to them, right? A life insurance policy with long-term care rider is more likely than not going to be a whole life policy, not a term policy. Whole life insurance has cash value. When things have cash value, one of the things that you should be considering as you age is having an asset protection trust—a trust that's specifically designed to protect your assets from the cost of long-term care.

I call it an asset protection trust. It's known across the elder law world as a Medicaid trust. It can be known as an IPUG—Irrevocable Pure Grantor Trust. These are some different names that you might hear. The purpose of it is to protect your assets for you during your life from bad things that happen to good people—lawsuits, creditors and the nursing home—and protect your family after death from probate. 

Whether that trust is right for you is something that you should be discussing with a qualified elder law attorney that specializes in this type of product. 

How a trust can help with long-term care planning

Cameron: Can you explain what the benefit is of having this sort of trust when it comes to long-term care? 

Nicole: Medicaid is the primary payer of long-term care services for people in skilled nursing care facilities. And I'm using these very specific words because I want people to realize that an assisted living facility is not a skilled nursing care facility. Skilled care facilities are what we might traditionally consider to be nursing homes. They are the facilities that provide the highest level of care … and Medicaid is the primary payer of that care. 

The problem with Medicaid, for most people, is that you have to qualify financially to receive Medicaid benefits. I'm going to give you some general numbers because it's different from state to state. Right now, we're looking at a situation where if you are a married person, meaning your spouse is still alive and your spouse needs care, the most you're going to be able to keep is about $120,000, your house and your car.

Now, if you are single and you need care, the most you are allowed to keep for the rest of your life is $2,000, your house and your car. When I say $2,000, your house in your car, I mean, $2,000 period—not $2,000 a month, not $2,000 a year, $2,000 period for the rest of your life. That's what you need to do to qualify for Medicaid. 

What that means is the government is going to force you to spend all of your money until you reach those levels that I just discussed. What can be done by using an asset protection trust is you can put some of the extra money aside into that trust. You can use this trust to legally keep more than what the government says you can keep. 

I always tell people, you want to look at your asset protection trust as it's like an insurance policy. Now, I want to be clear: It is not insurance. It is a legal product, but it's like insurance. Why do we buy insurance? I buy insurance for my house in case my house burns down. I hope it never happens. I pray it never happens. The likelihood it happens is pretty slim. But if my house burns down, I'm sure going to be glad I have insurance.

Similarly, you get an asset protection trust. Why? Not because you expect to go into the nursing home. Not because you're convinced it's going to happen. Not because you're not going to try and live your life in a way that's going to help you avoid it. But if you ever do, you're going to be glad you have it. And guess what? It's way cheaper than any long-term care insurance policy you could ever buy, presuming you qualify for one.

Even if you did have a life insurance policy with a long-term care rider, then you would take that policy, you'd put it inside your asset protection trust so that the value of that policy is not counted against you by the government if you ever need long-term care. 

That's what you want to be thinking about: How am I going to ensure—not insure—my future does not get compromised or my spouse's future does not get compromised, or my children do not get compromised by my potential need for long-term care? One of the tools in your toolbox can be getting this type of trust planning in place. It's very effective. It works in every state. 

You want to really realize that you can take control of this. You can plan and you can try and get ahead of it to the best extent possible and then hope you never need it. That's what I hope for you and your family.

[ Keep Reading: How to Use a Trust to Plan for Long-Term Care ]