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Options for Financing Long Term Care

by Betty Soldz

I have previously written about how the purchase of Long Term Care Insurance can help to pay for care when assistance with daily living is needed.  However, such insurance is only one way to finance the cost of care.  There are other options to be considered.  Since each person's health and financial situation is unique the choices available to each will differ. The following information should assist you in making a wise choice for the future. 

     Good financial advice and planning may be all that is necessary for some individuals. People with high assets and/or incomes that will allow them to pay $50,000 or $60,000 a year for long-term care will not need to worry about how they will pay for it because they already have the needed assets. 

     Younger people may be able to save and invest in order to provide for care in their later lives. However, they should consider whether they can save enough for protracted care if it is needed. It would be wise to consult an accountant or an estate planner when deciding on this option.

     Annuities are another way to plan for long term care.  Deferred or immediate annuities are sold by most life insurance companies.  Annuities are insurance contracts that pay interest on the premium you pay the insurance company. You pay one large premium up front, and the annuity begins periodic payments immediately or later, according to your choice.   Immediate annuities provide for periodic payments for a certain number of  years or until a specified event, such as your death. With deferred annuities, your funds accumulate tax free until a specified event, such as retirement or the need for long-term care. After purchasing such an annuity, should you need to go into a nursing home, you will have these periodic payments to help pay for your care. Please take note that there can be a penalty if you need an early withdrawal or a lump sum payment.  Before purchasing any type of annuity consult an accountant, lawyer or financial planner because the cost may outweigh the benefits; investing in Certificates of Deposit or other such investments may be more flexible for your needs.

     Insurance products (other than LTC Insurance) may be the appropriate mechanism for some people.  Some insurance companies sell Whole-life Insurance Policies with "advanced death benefits" or "living benefits" riders.  These riders allow you to request that the insurance company pay a reduced amount of the value of your insurance policy before your death if you are diagnosed with a terminal illness.  If you meet the criteria set forth in the policy you may use the proceeds for long term care (or for other purposes as well).  If you own a life insurance policy without a "living benefit" you may want to investigate if it is possible to add this benefit.  Also investigate other life insurance  policies with Long Term Care riders. Life Insurance policies with this option can be sold with a single large premium or may be purchased over time with periodic payments.  They may vary widely and the methods used to pay benefits are very complex.  These policies may be attractive to you but it is wise not to purchased them without advice from an accountant, tax attorney or financial planer.

      If you already have an insurance policy you may be able to sell the equity you have accumulated in it.  This is called a Viatical Settlement. This type of contract/settlement pays you a discounted price for the equity in your life insurance policy.  If you meet the eligible criteria for such a settlement, you could use the proceeds to pay for long-term care.  These companies should be licensed by your Department of Insurance.

     If you own a home,  you might choose a Home Equity Loan to pay for your care.  This is essentially a second mortgage on your home.  The funds can be paid to you either in a lump sum or be drawn upon as needed.  Although the interest rate of such a loan may be lower than for some other types of loans you need to be sure you will be able to repay it.  There are dangers to this type of loan because your home is collateral and if you miss your payment(s) the lender can foreclose and you would be evicted. 

     Another option might be a Reverse Mortgage.  These are sometimes referred to as Home Equity Conversions (do not confuse with a Home Equity Loan).  Reverse mortgages were developed to help older people tap into the value of their homes which, for many, is their most valuable asset. Such a mortgage allows you to remain in your home and receive payments from the equity that you have built up. The amount you might receive will depend on your age, the value of your home and the cost of the loan. It may be paid out in a lump sum or in monthly payments.   No income tax is due on these payments to you. Principal and interest charges will accrue until your home is sold.  Some Reverse Mortgages require the sale of the home if you move into a nursing home.  The Federal Housing Administration now insures reverse mortgages in most states and "Fannie Mae" has a reverse mortgage program.  Potential borrowers must be over sixty-two (although some plans require borrowers to be at least 65 or even 70), have little or no outstanding mortgage on their home, and the home must be their principal residence for the duration of the reverse mortgage. 

     Recently some new types of income plans have been marketed.  They differ from the "traditional" reverse mortgage in that they have annuities tied to their loan packages.  Usually a portion of the equity is used to purchase an annuity at the start of the loan period.   The homeowner still receives lifetime monthly income but the income from the annuity can have tax implications and could affect such things as Social Security, Medicaid and other government benefits.  Reverse mortgage programs are complex and you should contact your Area Agency on Aging for information and reverse mortgage counseling before deciding to use this option.It would also be advisable to have such a contract reviewed by an attorney.

     The American Association of Retired Persons (AARP) has a free consumers' Guide to Home Equity Conversion entitled Homemade Money, which you can order free of charge by writing to AARP, Consumer Affairs Department, 601 E St. N.W. Washington, DC 20049.

     If your income is low and your assets few, the Federal Medicaid program may assist you.  (Medicaid is, in fact, the nation's largest financier of long-term care.) Based on income eligibility, it pays for long-term care in a nursing home, as well as some in-home care and some community based programs in addition to health care.  Eligibility rules differ from state to state so contact your local Department of Social Services for more information.

     Lastly, I would like to suggest that you reread the articles on this website  "Home is Where the Heart Is" and "Long-term Care Insurance." Alternative living arrangements should be considered along with Long Term Care Insurance and the options above.  Consider all of your alternatives,  learn more about each and then seek financial and legal advice.  The earlier you plan for your future needs the more options will be open to you.

 

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