Add a long-term care rider to your life insurance policy
This rider is tacked on to a life insurance policy and allows you to take part of your death benefit for yourself, while you're still alive, to cover long-term care. (If you don't have life insurance yet, Quotacy will let you compare policies quickly.)
You can access the money when you can no longer perform two of the six “activities of daily living” without assistance. The activities include: bathing; eating; dressing; continence; getting on and off the toilet; and getting from room to room or into a wheelchair. Severe cognitive impairment also is covered.
Claims made against long-term care riders may be paid out monthly through an indemnity policy or as reimbursement for actual costs through a reimbursement policy.
Use a health savings account
A health savings account, or HSA, isn’t ideal for taking care of exorbitant health care costs. But if you have the required high-deductible health plan, you can sock away tax-free dollars to pay for long-term care insurance. Unused funds roll over from year to year.
There are limits to how much you can withdraw tax-free each year to pay your insurance premiums, but they increase with your age. In 2019, a 40-year-old could tap $420 tax-free; a 55-year-old could take out up to $1,580. Limits are bumped up a little for inflation each year.
If you go this route, verify with your insurer that your policy is tax-qualified. It must cover only long-term care services and provide a payout if you need help with at least two of the activities of daily living or have cognitive issues.
Buy a long-term care annuity
Insurance companies sell annuities. For a lump sum up front, the insurer invests your money and spreads the wealth in the form of guaranteed regular payments. Your payments may start immediately or be deferred until a later time.
Long-term care riders are added only to deferred annuities, which give your investment time to grow. You could double or even triple your money by the time you need to take advantage of a rider’s long-term care benefits.
You must meet the usual activities-of-daily-living conditions to take the payouts, and there may be a monthly benefit cap.
Use personal savings
If your retirement fund has enough padding — try talking to a certified financial adviser to make sure — this may be the way to go. Self-insuring gives you greater flexibility and more control over the kind of care you receive, but there are some caveats.
You can’t predict how soon or for how long you’ll need long-term care. It’s not something you can just mark on the calendar. Your age also is a factor. Do you have time to save enough?
You may incur penalties if you prematurely dip into an IRA or 401(k) to fund your care. Also, traditional long-term care insurance can protect other assets and allow you to pass down your wealth. Even some long-term care riders have a built-in death benefit.
Self-insuring is an attractive option for people with significant savings or decent retirement income from a pension.
There’s always Medicaid
Medicare doesn’t cover long-term care, but Medicaid — the government health insurance program for the poor — does. Medicaid is primarily state-run and has limits on income and assets to qualify.
Many seniors who worry that they’ll need long-term care deliberately bankrupt themselves to qualify for Medicaid, but they could be in for unpleasant surprises because Medicaid differs from long-term care insurance in significant ways.
Nursing home care is fully covered in all states, but many facilities don’t accept Medicaid. In those that do, patients rarely have access to private rooms, spousal rooms, amenities or social outings. In-home care and assisted living, two popular long-term care options, are not covered in most states.
For these reasons, Medicaid should be considered a last resort.