Summary of Funding Methods

Putting aside enough money to cover long-term care is not feasible for most people, and even when it is possible it leaves the individual vulnerable to an uncapped liability. For a person paying for care out of her own pocket, several alternative funding sources exist:

If she owns her home, she could take out a reverse mortgage. But the money cannot be used for an extended stay in a nursing home or assisted living residence, and her home equity will be substantially reduced, leaving her with less to rely on as a financial reserve and to pass on to heirs.

She could purchase an annuity, but unless she were able to invest a very large sum, the payments would not be enough to cover all her long-term care expenses. Alternatively, she could use the annuity payments to pay premiums on an LTCI policy.

If she owns a life insurance policy, she could apply for accelerated death benefits, sell the policy in a life settlement or viatical settlement, or (if it is a permanent policy) access the cash value via policy loan, withdrawal, or surrender. But all of these actions would substantially reduce or eliminate the benefit paid to her beneficiaries after her death, defeating the purpose of life insurance — and the money obtained would likely not be sufficient to cover long-term care for more than a year or two.

Finally, if she has a health savings account (HSA), she can withdraw money tax-free to pay for long-term care or LTCI premiums. But given the annual contribution limits, HSA funds will cover only a fraction of costs.

Medicare is a federal program that pays healthcare benefits to the elderly and a few others. Medicare Part A primarily covers inpatient hospital care; Medicare Part B covers physician services, outpatient hospital care, and some other medical services. Under Medicare Advantage (Part C), beneficiaries can receive Part A and Part B coverage from a private health insurance plan.

Medicare provides some benefits in two areas associated with long-term care — nursing home care and home healthcare. But these benefits do not meet the needs of those requiring long-term care, because:

• No benefits are paid if the beneficiary needs personal or supervisory care only, not skilled care.
• No benefits are paid for skilled care unless it is medically necessary — meaning only those recovering from an injury or illness generally qualify.
• The duration of benefits is in practice quite limited because people seldom continue to meet the medical necessity requirement for more than a short time.

Medicare supplement (Medigap) insurance and Medicare Advantage plans offer a few additional benefits, but they do not include any major coverage for long-term care. Medicare Part D provides benefits for prescription drugs — a major expense for many receiving long-term care — but does not provide any funding for long-term care services themselves.

Medicaid is a federal-state healthcare benefits program. It covers long-term care, but to qualify for benefits an individual must be poor or must spend almost all her income and assets on care. She may generally keep only a few assets (such as her home, car, household goods, and personal effects) and a very small amount of income.

The rules governing Medicaid eligibility are complex. They cover the assets and income counted in determining eligibility; the treatment of married couples when only one spouse needs Medicaid benefits; and the transfer of assets to another person by a Medicaid applicant or recipient, including transfers involving loans, annuities, and trusts.

For those who qualify, the long-term care benefits that Medicaid provides are substantial. Unlike Medicare, Medicaid pays for personal and supervisory care even if skilled care is not also needed, and it covers ongoing care needed to cope with a chronic impairment, not just care required for a short time to facilitate recovery from an acute illness or injury.

Those considering relying on Medicaid should bear in mind that spending down to qualify means losing one’s financial independence and the assets accumulated over a lifetime. And as a Medicaid recipient, one may have only limited choices of types of long-term care and of facilities.