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If you're heading toward retirement and assume proposed cuts to Medicaid in the Senate's Obamacare replacement bill could never affect you, think again.
The Better Care Reconciliation Act includes a $772 billion reduction in Medicaid funding through 2026, and a recent Kaiser Family Foundation report found that 62 percent of all nursing- home residents use Medicaid to pay for it. The study also found that a third of people turning 65 will need nursing-home care at some point.
"The proposal that's out there right now is especially hard on our elders," said Hyman Darling, an attorney with Bacon Wilson and president of the National Academy of Elder Law Attorneys.
Although the fate of the Senate measure is unknown — work on it resumes this week with Congress' return from its Fourth of July recess — experts say that with Medicaid cuts on the table, now's a good time to consider the importance of planning for long-term care.
Even if you're like most people and assume you'll never need help with things like bathing and eating, someone turning 65 today has a 50/50 chance of needing such services in their lifetime, according to the Health and Human Services Department.
"There's a lot of denial about the whole long-term-care issue," said certified financial planner Hans "John" Scheil, CEO and owner of Cardinal Retirement Planning.
On average, an American turning 65 today will spend $138,000 in future long-term-care costs. In general, Medicare — which most people register for at age 65 — does not cover long-term care.
The average yearly cost of a nursing home is $82,000, roughly three times the typical income of most seniors, according to Kaiser. Home-based care, depending on the level of services needed, can hit more than $3,000 a month. So can the cost of an assisted-living facility.
Medicaid, meanwhile, is generally available to people who have no more than $2,000 in assets and meet strict income tests. And even if that doesn't describe your financial situation now, many people unexpectedly spend down their assets on long-term care (including in nursing homes), which is when Medicaid can kick in.
But even that safety net is not a guarantee, whether Medicaid funding is cut or not. When applying for coverage, Medicaid looks back at the previous five years to see if you've gifted or transferred any of your assets. If so, you might be ineligible for some benefits (i.e., potentially nursing-home care) for a certain length of time, depending on the amount you gave away.
There are elder-care attorneys who specialize in setting up irrevocable trusts to protect assets from Medicaid's look back. For these clients — who are less than wealthy but own a house or other assets that would disqualify them — the reason for establishing a trust usually goes beyond their own needs. In other words, depleting their savings by paying for long-term care would leave a spouse unable to fund living expenses.
But even going this route involves planning far in advance because of the look-back period, Darling said.
"You want to do these sooner rather than later because it gets the clock on that five years ticking," Darling said.
One asset-protection strategy becoming more popular is a hybrid insurance policy that combines a traditional death benefit with a long-term-care feature. In simple terms, you can pull money tax-free from the policy as long as it's used to pay for long-term care.
"One way or another, someone will benefit from the policy," said Scheil. "Either you'll pay for long-term-care costs, or your beneficiaries will get the money when you pass away."
Going this route assumes you can afford the premium as well as pass a medical review. Unlike a straight long-term-care policy, the premium can never increase, Scheil said. Some people put a big chunk of money in at one time — say, $50,000 or $100,000 — or pay premiums over time. The cost tends to be 5 percent to 15 percent more than a straight life insurance policy.
Scheil said the typical retiree who uses this insurance typically has amassed a nest egg worth $300,000 or $400,000, and has limited sources of retirement income.
"These aren't wealthy people, but they've saved well and want to protect it," Scheil said.
In contrast to the hybrids, straight long-term-care insurance can involve rising premiums and no death benefit.
And while they come with tax advantages — premiums are considered medical expenses and thus can be deducted — these policies can be pricey. A married couple, both age 60, would pay a combined $2,200 yearly for $328,000 of coverage, according to the American Association for Long-Term Care Insurance. If inflation protection were added, the yearly cost jumps to $3,790.
Worse, if you never use the benefits, the money you paid is gone unless you purchased a rider that provides for premium reimbursement or a partial benefit.
"People need to accept the reality that this happens to a lot of families," Scheil said. "And the consequences of needing care are devastating to the family if you haven't financially planned for it."