Question #4: When I need Long Term Care, WHO pays for it?

This may be the most important of the four questions in this series.

Well, there are four clear answers.

Answer #1: We pay for it ourselves

Some people call this “self-insuring”. 

This is really just a fancy way of saying that we want to pay for it with our own money. 

We pay for it using our cash, our checking, or savings, our assets.

But remember, paying for long-term care is done with after-tax dollars, so trying to sell off assets to pay for care can be risky and carry a sizable tax burden. Assets can be subject to market fluctuations, meaning maybe the expected value of the asset we intend to liquidate isn’t what we thought it would be at the time that we need it. We need to know which of our assets we are going to liquidate first, a 401(k), IRA, annuity, maybe a life insurance policy, or other investments. 

Will we be generating a taxable event when liquidating assets? 

These are all very important considerations that must be taken into account when considering paying for our care ourselves.

Answer #2: Someone we love pays for it.

Someone who cares about us steps in and spends their money to pay for our care using the same methods we just discussed earlier with after-tax dollars.

This could be a sibling, a child, or a close friend.

Answer #3: Medicaid.

This one can be a bit tricky, because we have to spend our own cash and assets down to an uncomfortable level before the government will step in and help us with Medicaid. 

Medicaid is our country’s sparkly, shiny brand name for welfare.

Answer #4: Long Term Care Insurance

There are a lot of different types of long term care insurance options out there that will pay for our care when we need it. In a way, long term care insurance offers a way to pay a little over time in order to have someone else – the insurance company – pay a lot when the need becomes clear.

From a financial commitment, long-term care insurance has several options.

You can pay a monthly or annual premium.

You can use existing assets to pay the premium. 

This can be a brilliant way to fund your care plan, because you’ve already saved the money in some form or fashion. Remember that we have an income issue. The risk is not having enough money in existing assets to cover the monthly costs of Long Term Care.

However, we can use that money we’ve already saved, and turn it into a lifetime supply of income to pay for our care, no matter how long we need it. We can do this with a 401K, IRA, annuities, old life insurance contracts and other investments, and it can all be done without creating a taxable event. 

Using this arrangement means you don’t actually ‘give’ your money away. It’s still your money – if you use assets to fund a plan, and then live a long, healthy and happy life and never need to use your care policy, the money goes back to your beneficiaries, typically as a tax-free benefit.

Or, if you need to use the plan, the plan will pay out benefits for as long as you need it, even if it significantly exceeds the amount of money that you put into the plan.

It’s called a ‘guaranteed payout’ policy.

Someone, somewhere will get paid – and either the plan pays for benefits if it gets used, or your beneficiaries get the money if you don’t end up needing it, just like they would have if you never got an insurance policy – except in most cases, in this way, they’ll get the money tax-free.

To get an LTC policy, we need to work out how many dollars per month you’ll need in care benefits, and submit an application to the insurance company you identify with the help of a long-term care planner. 

The insurance company will then do their underwriting; that’s where they’ll look at your medical history, review your records, and decide whether you are the appropriate amount of risk to insure. 

When they tell us ‘yes’, you pay the premium.

Pretty straightforward.

Once you have a policy, if you need care, you simply submit a claim to your insurance company. The company will confirm with your doctor that you do indeed require care either for the Activities of Daily Living we’ve previously discussed, or for dementia, Alzheimer’s, or other chronic illness.

Once the insurance company receives this confirmation, they will then begin paying the monthly benefit (the cash) either to you directly, or to your care providers, whichever you choose.

One of the best parts is that in most cases, once you start using the policy to pay for care, you stop paying the premium!

Look, long term care is traditionally a big, elephant in the room conversation that individuals and families avoid until, unfortunately, it’s too late. 

But, the good news is you’ve finished this series of videos on how it all works.

If you would like any help or guidance for you or your family, reach out to us below.