As Parents Age, Think About Financing Long-Term Care

(This article written by By John A. Zucker, Attorney, Rose & Zucker, LLC)

As more and more people find themselves in a caretaking role with respect to their aging parents, they often find themselves completely unprepared.  Men and women in their 40s, 50s, and 60s who have successfully managed their careers, their children, and every other aspect of their lives may be caught off guard by suddenly having to learn everything they can about an entirely new realm – often under time pressure and great emotional stress. 

In addition to the psychological demands of coping with an aging parent, the family has to deal with financial considerations, as well.  Many adult children are astonished to learn that nursing homes cost upwards of $9,000 a month.  They are even more surprised that Medicare doesn’t cover this cost unless the elderly individual was transferred to a nursing home following a hospitalization.  Even then, Medicare may only pay for 20 to 100 days, and only if the individual will be receiving rehabilitative care, meaning he or she continues to improve.

But what about aging individuals who need custodial care – in other words, those who become residents of a nursing home because of the level of care they need?  The stark reality is that the family is required become a private payer, meaning it covers all costs, until the individual becomes qualified for Medicaid.

The Role of Medicaid

While Medicaid is currently the number one payer for long-term care, qualifying for it is difficult.  The individual’s total assets must be valued below a few thousand dollars.  In addition, there is a five-year look-back period, meaning the government reviews the individual’s finances for the past five years to make sure he or she didn’t gift money to children in order to qualify for Medicaid more quickly.  While there are no actual fines for gifting, there is a penalty in the sense that Medicaid simply won’t pay for long-term care until the individual qualifies according to its formula. 

Basically, for approximately every $7,000 gifted during that five-year look-back period, that’s one more month Medicaid payments will be delayed.  This even includes tuition payments a grandparent may have made for a grandchild’s education. 

Financing Long-Term Care

There are several good ways of financing long-term care that avoid depleting the family’s financial resources.  They include using an existing life insurance policy, using long-term care insurance, and getting a reverse mortgage.

Life Insurance Policy.  One option that’s not particularly well known but which is becoming increasingly useful is for the family to convert an existing life insurance policy into a long-term care benefit – in other words, an asset that is used to pay for home health care, assisted living, or a nursing home.          

Many life insurance policy holders are only familiar with two options: surrendering the policy for its cash value or, if they can’t or don’t want to continue making payments, letting it lapse and losing all the money they’ve already paid in.  Yet policy holders have another option that in many cases is the answer to the question of how to pay for long-term care: policy holders who are 61 or older, or who have a medical condition that is chronic or terminal, can use their policy to pay for the care they need.

The advantages are that there is no waiting period, since the conversion process only takes about three weeks.  Once the policy has been converted, the family stops making premium payments.  Instead, a third party organization makes monthly payments directly to the long-term facility or the family gets a cash payout to use for long-term care.             

While the principle is simple, the best way to use a life-insurance policy to pay for long-term care is to work with a senior care consultant who has experience and expertise in working with insurance companies.  “Converting a life-insurance policy can be done quickly and effortlessly,” says Howard Chernin, Managing Director of Elder Care Financial Solutions in Hackensack, New Jersey. “Suddenly finding yourself the caretaker for someone you love is extremely stressful.  Our goal is helping families get the financing they need, leaving them to instead focus on the emotional demands of taking care of a parent.”

Long-Term Care Insurance.  Another possible solution to the dilemma of how to pay for long-term care is the long-term care insurance market.  This is a good option for some people, especially those who are healthy and can afford it.  It’s much easier to buy it in your 50s than in your 70s.  And when the policy that’s purchased has inflation protection, it’s a good tool for preserving the family’s assets.  Of course, buying long-term care insurance requires planning far in advance. 

To encourage individuals to purchase long-term care insurance, some states have developed incentives. New Jersey’s Long-Term Care Insurance Partnership Program allows policy-holders to shelter from Medicaid the amount of money that’s equal to the amount of the policy.  In other words, someone who holds a $250,000 long-term care insurance policy is permitted to shelter $250,000 in cash when applying for Medicaid. 

Reverse Mortgage.  A third option is a reverse mortgage which allows a homeowner to withdraw equity from his home.  The homeowner is not required to repay the mortgage, either the principal or the interest, until the house is sold or the borrower passes away.

There are advantages to taking out a reverse mortgage.  For example, the borrower’s credit rating is not an issue.  However, there are several disadvantages, as well.  When the borrower dies, the house, which serves as collateral, must be sold to repay the mortgage.  Reverse mortgages also tend to have larger origination costs than most other mortgages, and because those costs become part of the original loan balance, interest accrues on them.  Still, for many people the home is their primary asset and being able to use the equity to finance home health care, for example, is a terrific benefit.

Other Things to Know

In addition to becoming familiar with options for financing long-term care, there are a few other things the children of aging parents should know.

For one, it is critical to obtain Power of Attorney from an aging parent early on.  Something as simple as writing a check for the electric bill while a parent is in the hospital becomes impossible without it. 

Another important thing to know is that an aging individual can gift his or her house to an adult child, without a penalty from Medicaid, if that adult child has resided in the home for two years preceding institutionalization.  The presumption is that the adult child was caring for the parent and therefore delaying the need for institutional care.  This is an excellent way to preserve a major asset.

As parents age, it’s important for their children to prepare themselves in every way possible – not only emotionally, but also by consulting an elder care attorney and learning about all their options.  Planning ahead and becoming knowledgeable are the most important tools for coping with what is invariably an extremely difficult and demanding time.

About John Zucker-

Mr.  Zucker is an experienced Elder Law attorney and general law practitioner.  Prior to joining Rose & Zucker, LLC in 2003, Mr. Zucker was a legal consultant at Hill & Knowlton, Inc. specializing in crisis and litigation communications.  From 1997 to 2000, he served as Senior Advisor to the National Chairman of the Anti-Defamation League.  From 1994 to 1997, he served as a legislative aide to Congressman Tom Lantos in Washington, D.C.

Mr. Zucker received his Juris Doctor in 1991, from the George Washington University School of Law.  He earned his Bachelor of Arts degree from Cornell University in 1988. 

Mr. Zucker is a member of the New Jersey State Bar Association, National Academy of  Elder Law Attorneys and the Hudson County Bar Association.