(This is the third installment of our discussion of long term care insurance. This month we will apply using long term care insurance along with Medicaid planning.)
In the last two newsletters, we have discussed long term care insurance (“LTCI”). The articles set forth some suggested guidelines regarding the need for LTCI based on the amount of your assets (you probably do not need LTCI if your total assets are under $200,000; a good idea if total assets are over $500,000; a case-by-case determination if total assets are between $200,000 and $500,000). The last article addressed provisions you should look for in a policy: cost (may be important, but should not be the deciding factor); cancellation (can the company cancel without cause or is it a non-cancelable policy); amount and length of coverage (it may be that you want to only cover a portion of your LTCI and for only a fixed period of time – that will help hold down premium costs); types of coverage (will it cover home care); elimination period (how long do you have to be in long term care before the insurance begins to cover your stay); increasing costs coverage provisions (does the coverage increase with inflation or as other factors increase the costs of care in a nursing home); and who to consult about LTCI (insurance agents, accountants and attorneys familiar with elder care issues).
In this article we are going to apply an instance of using LTCI in that gray area when total assets are $200,000 to $500,000, combined with a Medicaid plan.
In August 2005, Mary came in to see me. John, Mary’s husband, has been in the nursing home since January 2004. John’s LTCI is a two-year policy that is going to run out in February 2006. The nursing home is charging $3,200 per month. John’s LTCI pays $1,200 per month.
John has fixed income from a retirement program and Social Security of about $2,000 per month. Mary has Social Security benefits of $641 per month. John’s retirement income ($2,000) and his LTCI ($1,200) pay most of his nursing home care costs. John and Mary have the following exempt (noncountable) assets: a home valued at $40,000; Mary’s IRA; one vehicle; and a life insurance policy with a whole value of $1,500. All of these are exempt assets under current law.
John and Mary have non-exempt (countable) assets of $122,000.
Under one option, after the division of assets by Medicaid, Mary will have $61,000 in assets, plus her exempt assets, and an income of $641 per month. John’s retirement income of $2,000 will go to the nursing home. It will take him approximately 49 months to utilize (spend down) his $61,000, minus the $2,000 he is entitled to keep under Medicaid law.
The second option is a gifting plan that will allow John and Mary to more quickly qualify for Medicaid and preserve assets. Under this solution, John and Mary will gift away $30,000 to their children in August 2005. As a result of the transfer, John and Mary will have a Medicaid disqualification period of ten (10) months. Remember that the insurance and retirement funds will pay for John’s care until the end of January 2006. The insurance will run out at that time. Beginning with February 2006, John and Mary will self-pay the insurance portion of $1,200 per month for four months (the remainder of the disqualification period), for a total of $4,800.
However, we are not done. Mary can continue to make gifts to the children of $2,999 per month, from September 2005 to April 2006, totaling $23,992. These transfers under $3,000 per month do not incur a Medicaid disqualification period.
The result: $122,000 in countable assets, minus the $30,000 gift to their children, minus the monthly gifts of $23,992, minus $4,800 to the nursing home for self-pay, leaving a balance of $63,208. At the time of the Medicaid application (May 2006), there will remain countable resources of $63,208. The amount will be divided between Mary and John, giving each $31,604. John’s share will need to be spent down to $2,000. From his $31,604, we have about $30,000 earmarked for the following improvements: Prepayment of funeral expenses, a new bathroom for the residence, other repairs to the residence, and prepayment of taxes.
In the first scenario, Mary and her family will end up with $61,000 in countable assets. Mary will be living on $641 per month until John’s share of the assets is spent down (not until October 2010). Under the second scenario, by using Medicaid planning, Mary and her family will end up with cash of $31,604, improvements to the home of $30,000, and gifts to the children of $53,992, a total of $115,596. In addition, beginning in May 2006, Mary will be entitled to $961 of John’s income, 39 months earlier than in the first scenario – $37,713 more income for Mary.
Keep in mind that John’s LTCI and his retirement funds will have paid over $76,800 in coverage to the nursing home for John’s two-year stay, and before his coverage runs out.
This is an example of a couple that did a good job of protecting themselves for over two years by a combination of LTCI and Medicaid planning. Having LTCI allows John and Mary to avoid Medicaid for two years, and then, at the end, do some real planning.
If John and Mary had not had LTCI, two years ago the assets would have been divided, and John would go on Medicaid after the spend down. Mary would be entitled to $963 of John’s income. The spend down would have only taken 14 months, and Medicaid would be paying about $2,000 per month for John’s care beginning in March 2005, rather than starting in May 2006 (a savings for Medicaid of $14,000).
The efforts by John and Mary have actually saved Medicaid a substantial sum.
As you can see, the parties are wisely using the combination of long term care insurance and Medicaid planning, if the latter becomes necessary. Sometimes, two years’ worth of coverage can be sufficient to allow you to make some other plans to protect your assets. That two years of coverage can be very, very important in order to preserve some assets for the at-home spouse and the family.