Four couples and the long-term care plan that fits each

There is no single right way to plan for long-term care, because the right plan depends on three things that differ from couple to couple: how much money you have, how healthy you are today, and who is realistically able to help. The four couples below are invented, as are the prices, care costs and policy terms. They are chosen to show how the same worry produces four different plans, and what could go wrong in each.

Long-term care means help with daily living, such as bathing, dressing, eating, moving around or supervision for memory loss, over a long period. It differs from medical treatment, and that difference is why ordinary health coverage often does not pay for it. The paths people use to pay are self-funding from savings and income, a long-term care policy or a hybrid life and care policy, unpaid help from family, and Medicaid for people who qualify. Each couple below leans on a different mix.

The shared assumptions

To keep the arithmetic comparable, every scenario uses the same illustrative care price: $7,000 a month today for a full-time arrangement (home care with substantial hours, or a residential setting). This is a round number we chose. Real costs vary widely by state, setting and level of need, so use local quotes for your own planning.

Care prices tend to rise over time. To show what that does, we assume a growth rate of 4% a year for illustration only. This is not a forecast. Twenty years of 4% growth multiplies a price by about 2.19 (1.04 multiplied by itself 20 times), so:

• $7,000 x 2.19 = about $15,300 a month in 20 years.
• Three years of that: $15,300 x 36 = about $551,000.

That is the number to keep in mind for the youngest couple. A couple who is 62 and planning for care at 82 is planning for roughly double today's price.

Couple one: the Hendersons, self-funding

Both are 62. Combined, they have about $2.4 million in retirement savings, a paid-off home, and pensions plus Social Security that cover their living costs. They have two grown children in other states.

The plan. They will pay for care themselves. They do not want to buy a policy that may never pay out, and they have enough assets that one spouse's care would not threaten the other's lifestyle.

The test. Suppose one spouse needs three years of care at age 82. At the assumed $15,300 a month, that is about $551,000. Out of $2.4 million, that is about 23% ($551,000 / $2,400,000 = 0.23). If both spouses need care in overlapping years, the number doubles to about $1.1 million, or 46%. Still survivable, but not trivial.

What could go wrong.

• A long stay. Some people need care for five or six years, not three. At six years the single-spouse cost in this example is about $1.1 million.
• Poor timing. If the market falls just before care begins, the family may be selling investments at a bad moment.
• The healthy spouse's needs. The survivor still has to live for years on what remains, and a drawdown for one spouse's care reduces the survivor's income.
• Inflation above the assumption.

How they can improve it. They can set a mental dollar reserve for care, say $600,000, and treat it as untouchable for other uses. They can look at whether a small hybrid policy, bought while healthy, covers part of the risk at a price that fits their budget. They can also write down their wishes for where they want care to happen and who will oversee it. Self-funding is not "no plan"; it is a plan to write down.

Who it suits. Households whose assets are large enough that a long care event would hurt but not break them. A fee-only planner can test the numbers against their actual portfolio.

Couple two: the Okonkwos, a hybrid policy

He is 58 and she is 60. They have about $350,000 in savings, a home with equity, and modest pensions. They have seen a parent's care use up a lifetime of savings and do not want that to happen again.

The plan. They each put a single premium of $60,000 into a hybrid life and long-term care policy (see hybrid life and long-term care policies). The terms are invented. Each policy has:

• An LTC benefit pool of $180,000 (three times the premium).
• A monthly maximum of $5,000, so the pool lasts 36 months ($180,000 / $5,000 = 36).
• A death benefit of $90,000 if no care is ever needed.
• A 90-day waiting period before benefits begin.
• No inflation protection, to keep the premium lower.

The arithmetic. They commit $60,000 x 2 = $120,000. That is about 34% of their $350,000 in savings ($120,000 / $350,000 = 0.343), which is a lot to place in one product.

If one spouse needs 36 months of care costing $7,000 a month at today's prices:

1. Total care cost: $7,000 x 36 = $252,000.
2. The policy pays $5,000 x 36 = $180,000.
3. The family pays the rest: $252,000 - $180,000 = $72,000 (or $2,000 a month).

That is a good outcome compared with paying all $252,000. If care is needed in 20 years at roughly $15,300 a month, though, the same $5,000 payment covers about a third of the bill. Without inflation protection, the policy's usefulness shrinks over time. The gap would then be $10,300 a month, or about $371,000 over 36 months.

If no care is ever needed. The heirs receive the death benefit of $90,000 per policy (or the owner may be able to surrender for some amount, subject to the contract). The return on the money compared with leaving it invested is lower, and that opportunity cost is the real price of the guarantee.

What could go wrong.

• Underwriting. Hybrids require health screening. One spouse may qualify and the other not.
• Lock-up. The $120,000 is largely tied up. Surrender charges may apply in early years.
• Trigger rules. Benefits start when a licensed health care practitioner certifies that the person cannot perform at least two of six activities of daily living for at least 90 days, or needs substantial supervision because of severe cognitive impairment (the federal standard for a tax-qualified benefit). The contract may also require a plan of care.
• Reimbursement vs. indemnity. Some pay what you spend; others pay a set amount. Know which.

Who it suits. People in their 50s and 60s who are healthy enough to be approved, who have savings to spare without crippling their liquidity, and who dislike paying for coverage they might never use. a hybrid policy or self-funding long-term care: how to decide goes deeper on how to choose between this and the Hendersons' route.

Couple three: the Marchettis, a diagnosis changes the options

He is 64 and she is 66. Gina was diagnosed with early Parkinson's disease last year. They have about $420,000, most of it in a home and retirement accounts, and an older permanent life policy with $40,000 of cash value. Their daughter lives twenty minutes away and has said she will help.

The problem. Gina cannot realistically buy a new long-term care or hybrid policy now. An applicant with a progressive neurological diagnosis is generally declined or offered very limited terms by underwriters. Her husband, Hank, is healthy and may qualify. Insurers screen each applicant individually. So a couple's options can split: coverage may be available for one spouse and not the other.

What they consider.

1. A hybrid policy for Hank only. It protects him and, indirectly, the household. It does not cover Gina.
2. Using the existing life policy. A 1035 exchanges: swapping policies without tax can move cash value from an old life policy into a policy with a tax-qualified long-term care benefit without immediate tax on the gain, which is how some people repurpose an old policy. The new policy still needs underwriting for its insured, so Gina's diagnosis may block it. The keep, surrender or sell your policy? can compare keeping the old policy, surrendering it or selling it. turning an old cash value policy into long-term care coverage covers the exchange.
3. Home care supported by family. Suppose Gina needs 20 hours a week of paid help at a hypothetical $30 an hour: $30 x 20 = $600 a week; $600 x 52 = $31,200 a year, or $2,600 a month. Over four years that is $124,800. The daughter's unpaid help would reduce that but costs her time and possibly her paid work.
4. A conversation with an elder law attorney. Because the couple's main assets are modest and Gina's needs may eventually exceed what they can fund, the attorney can explain how Medicaid treats a married couple, including protections for the spouse who stays at home, the five-year look-back for gifts (see medicaid eligibility and life insurance cash value), and what a life policy's cash value does to eligibility. These rules are set partly by each state and change.

What could go wrong.

• Relying on family with no backup. A caregiver burns out or moves, or the care need outgrows what a person can safely do.
• Giving assets away informally to "protect" them. A transfer within the look-back period can delay Medicaid for long-term care.
• Waiting. Each year that passes makes the options narrower. A decision to explore a plan for Hank while he is healthy has a deadline.

Who it fits. Couples where one spouse's health has changed and assets are moderate. The key lesson is that the time to act is before a diagnosis, and after one, the useful move is professional advice.

Couple four: the Pruitts, planning around Medicaid

Both are 70 and live on Social Security. They have about $60,000 in savings and a home. Premiums for a long-term care policy would take too big a share of their income, and they would not pass underwriting at a price they could keep paying.

The plan. Their realistic safety net for long-term care is Medicaid. They want to understand how it works so there are no surprises.

What they learn.

• Medicaid pays for long-term care for people who qualify on both medical need and finances. The asset limit is low (the state sets it) and income rules apply. Some assets, such as a primary home within limits and one car, are often exempt, but the details vary by state.
• Medicaid looks back 60 months at transfers for less than fair value before an application for long-term care (42 U.S.C. section 1396p). Giving the house to a child for nothing can cause a penalty period.
• Medicaid generally pays only providers that accept it, and in many states, the choices of facility or home-care arrangement are narrower than with private pay. Waiting lists for some home and community services exist in some states.
• States must try to recover costs from the estates of people who received long-term care after 55. The treatment of the home and of life insurance varies.
• A small life policy that has cash value may count as an asset; term insurance generally does not. The federal SSI rule counts cash value only if total face value on a person exceeds $1,500, and many states follow it.

What could go wrong.

• Spending down badly. Paying for something that does not help eligibility, or making gifts, can waste money.
• Assuming eligibility. Unclear income or an unexpected asset can disqualify them.
• A paperwork delay while a family member is in a facility and bills accumulate.
• Believing "Medicare will pay." It generally does not pay for custodial long-term care. Long-term care myths about Medicare, family and savings tests that and similar assumptions.

Who it fits. People with limited assets who cannot afford private coverage. For them, an elder law attorney or the state's agency on aging is the right adviser, and the plan should be written down while both spouses can take part.

Putting the four side by side

Questions that sort a household

If you are trying to place your own household, these questions point the way.

1. What is the realistic price of care where you live? Call two local home care agencies and one assisted living or nursing community and ask for rate sheets.
2. How many years of care could you pay for? Divide the assets you would use by the monthly cost.
3. Are you healthy enough to be insured today? If yes, the window is open. It may close.
4. Who would help, and what would it cost them? Be specific. Unpaid care has a price in lost income and health.
5. What do you want to leave? If leaving an estate matters, a hybrid with a death benefit may fit better than spending.
6. What does your state's Medicaid program do? Ask the state agency or an elder law attorney.

None of this is tax, legal or financial advice. A fee-only planner, a tax professional, an elder law attorney and your state insurance department each cover a piece of it.

Key takeaways

• The right long-term care plan depends on assets, current health and realistic family help, and the four couples here land on four different plans.
• Care prices rise over time: at an assumed 4% a year, a $7,000 monthly cost becomes about $15,300 in 20 years, so a fixed benefit loses buying power.
• A hybrid policy can fund part of care but commits a large sum, requires underwriting and may leave a gap without inflation protection.
• A diagnosis can close the door to new coverage for one spouse while the other remains insurable, so act while both are healthy.
• Medicaid is the safety net for people with limited assets, and the rules, including the five-year look-back, vary by state and merit an elder law attorney.