Retirement often starts with high hopes and good health and, for those who saved, a paid-off home and money for travel. But there’s a 900-pound gorilla hiding just beyond tomorrow – the chance that ill-health or mental incapacity will require long-term care in a nursing home or assisted-living facility.
Caring for the elderly is becoming an American crisis as the post-65 population soars and the cost of medical services climbs even faster. Many people don’t realize that Medicare only pays certain costs, and that most people who need long-term care rely on Medicaid to cover costs that can top $300,000 during their final years.
Long-term care costs vary greatly by where you live and what sort of help you need. A one-bedroom unit in an assisted living facility (ALF) averaged $48,000 a year in 2018, and the price rose an average 3% a year over the previous five years. Nursing home care for a year averaged nearly $90,000 for a semi-private room and more than $100,000 for a private room.
Medicare doesn’t cover those costs. Medicaid, the government health-care program for low-income and low net-worth people, will pay but only after you’ve used up your other assets. In a nation where people in their 60s have median savings of less than $180,000 and Social Security benefits average less than $17,000 per beneficiary, the prospect of paying for long-term care is daunting.
Paying for Assisted Living
Assisted living costs are most frequently paid for out-of-pocket by residents and their families, using personal savings, retirement accounts, veterans’ benefits, pensions and annuities, as well as Social Security payments.
Long-term care policies carried an average annual premium of about $2,800 in 2015, and 7.5 million individuals had such policies in 2014. But the insurance industry, which enthusiastically promoted long-term care insurance in the 1990s and early 2000s, has backed away after payments on policies increased dramatically. In 2000, 125 insurers offered long term care policies. By 2014, fewer than 15 did. Many insurance companies worry that increasing longevity will mean more cases of age-related dementia and Alzheimer’s Disease, major reasons why people need long-term care.
Long-term care policies differ in what they cover and for how long. Most limit daily reimbursement and put a limit on how long payments will be made. The number of new policies issued each year plummeted from 380,000 in 1990 to 129,000 in 2014.
Medicare does not pay for assisted living rent or services, but will pay for medical expenses incurred at an assisted living facility, just as it would if the care was delivered in a hospital, doctor’s office or private home.
The Department of Veterans Affairs (VA) covers some assisted living costs for veterans and their spouses via its Non-Service Connected Improved Pension Benefit with Aid and Attendance program. The service member must have served on active duty for at least 90 days and at least one day during wartime.
In 2017, 43 states provided certain Medicaid reimbursements to assisted living facilities, if the resident is financially and medically qualified. Coverage varies from state to state, with some only paying for personal care and others also paying for room and board.
Paying for Nursing Homes
About half of all nursing home residents use savings, employer group health plans, pensions, veterans’ benefits or long-term care insurance to cover their costs. There are alternatives, including Medicare and Medicaid, but the federal programs come with restrictions that limit how long payments will be made and which facilities you can use.
Medicare covers limited, short-term nursing home costs, and generally does not cover assisted living expenses, except those related to covered medical expenses.
Medicare will pay for skilled nursing home care under certain circumstances:
- The care must be medically necessary and ordered by a physician.
- The care must follow an inpatient hospital stay of at least three days.
- The facility must be Medicare-certified.
- The time period is limited.
For the first 20 days of nursing home care, including a semi-private room, meals, medications, supplies and skilled nursing, Medicare pays the full cost. For days 21-100, Medicare will pay all costs, minus a daily co-payment ($167.50 in 2018). Medicare stops paying after 100 days.
While most Medicare Part C plans, or Medicare Advantage Plans, provide coverage for skilled nursing care, costs and benefits vary. Medicare supplement plans, also call Medigap policies, help pay for skilled nursing care, but only if the care is covered under original Medicare.
Medicaid covers assisted living or nursing home care costs for financially qualified seniors — those with limited income and assets — but only at Medicaid-certified facilities. There are no time limits on payments or the length of stay in such facilities. Eligibility varies from state to state.
Medicaid pays between 45% and 65% of U.S. nursing home costs and is the most common way people cover stays in nursing homes and ALFs. But Medicaid has stringent eligibility requirements that factor in age, marital status and place of residence, and change annually. It also has strict income and asset requirements. Generally, a single person’s assets must be nearly depleted to qualify and his or her monthly income can’t exceed $2,250. The applicant’s home is exempt from the computation, and certain amounts of marital assets can be exempted by a non-applicant spouse.
Other Payment Options
Even though various private and public insurance plans cover most senior health care costs, out-of-pocket expenses can be very high. A recent study by the Employee Benefit Research Institute (ERBI) revealed that a U.S. couple reaching 65 in 2018 needs $265,000 for health care expenses in retirement, excluding the potential costs of assisted-living and nursing-home care.
In addition to long-term care insurance, seniors might consider using a home equity loan or line of credit to pay for long-term care, or taking out a reverse mortgage. It’s important to check the tax consequences, since interest paid borrowing against home equity is no longer tax deductible.
Since ALF and nursing-home costs vary widely from place to place, some families opt to send their disabled relative to another city or state with lower costs. The daily cost of nursing home and convalescent care averaged $235 for a shared room in 2018, but the difference between states was striking. In Alaska, the most expensive state, the cost was $800 a day; in Oklahoma, the least expensive, it was $147 a day. For families that can live with sending their relative for care in a lower cost state, the savings can be considerable.
Military veterans are eligible for nursing home financial aid through two federal programs.
The first, called the Aid and Attendance Benefit, assists wartime veterans with limited financial assets with benefit payments that can be used to cover nursing home and ALF costs. Applicants must show they need the aid of another person to perform daily-living tasks.
The second option, open to all veterans and their spouses, provides access to state VA nursing homes. In order to qualify, an applicant must be 70% disabled and there must be space available in the state nursing home. Since each state runs its own program, there isn’t a standard application process and eligibility requirements vary. Many state VA nursing homes have waiting lists and have a limited number of spaces allotted to long-term care. Be sure to check
Nursing Home Tax Deductions
Nursing home expenses and assisted living residents who are classified chronically ill can deduct expenses on their federal income tax returns. If an assisted living resident is suffering from Alzheimer’s Disease, the person has a chronic illness. But if the resident is in the ALF for some other reason and cannot get a doctor or nurse to certify chronic illness, the expense probably isn’t deductible.
In order to qualify to the deduction under the Medical and Dental Expense Tax Credit, total medical-related expenditures for the year must be greater than 10% of income in 2019. Internal Revenue Service Publication 502 provides detailed information about medical deductions. It’s a good idea to discuss whether you can take the deduction with a tax preparer or accountant, since tax rules change from year to year.
If you have long-term-care insurance that reimburses your costs at a nursing home or assisted-living facility, you won’t deduct any money you receive from your taxes.