Do Nothing vs. Long Term Care Insurance vs. Gifts vs. Irrevocable Trust–Part 2

June 2, 2015

This edition of the Koldin Report E-Newsletter is Part 2 in a series comparing the pros and cons of (1) Doing Nothing (2) Purchasing Long Term Care Insurance (3) making gifts to your children, and (4) transferring your savings and family home to an Irrevocable Family Trust (also sometimes referred to as Irrevocable Medicaid Trust).

If you need long term care in a Nursing Home or at Home, which in Upstate New York costs around $10,000 per month, there are 3 ways to pay for it:
(1) Pay for your care with your life savings
(2) Pay for your care with Long Term Care Insurance
(3) Pay for your care with Medicaid

In planning for how you are going to pay for Nursing Home or Home Care if you someday need these services, you have 4 basic choices:
(1) Do Nothing
(2) Purchase Long Term Care Insurance
(3) Make Gifts to your Children
(4) Transfer to an Irrevocable Trust

In the previous newsletter in this series, we reviewed the consequences of doing nothing. In this newsletter we review the pros and cons of purchasing Long Term Care Insurance.

Doing nothing, transferring to children, and transferring to an Irrevocable Trust all result in your ultimately applying for Medicaid to pay for your long term care at home or at a nursing home.


Long Term Care Insurance: Stand Alone vs. Partnership Policy

With long term care insurance, you can either purchase a stand alone policy that pays for your care or you can purchase a "partnership" policy where your care is first paid for by the policy and after a few years Medicaid will then step in and pay for your care.

When Medicaid pays for your care as part of a partnership policy, the government does not require you to spend away your life savings, but you are required to contribute your monthly income and generally you must remain in a Nursing Home in New York State unless you have a policy where New York has a reciprocal relationship with another state. This means that if your children live in another state, you might not be able to move to a Nursing Home to live near them.


Wide Variety of Coverage Options with Long Term Care Insurance

There is a wide variety of policy coverage options with long term care insurance. You should retain the services of a knowledgeable financial planner to assist you in selecting the ideal coverage. Some examples are:

(1) The daily benefit for nursing home and home care such as $200 or $300 per day
(2) The length of the coverage term such as 3 years, 5 years, or life
(3) The maximum policy limits such as $250,000 or $500,000 or unlimited
(4) Inflation rider
(5) Whether the policy covers home care, assisted living, day care or just nursing home care

The premiums for your policy will be based on how comprehensive the coverage is that you purchase.


Home Care with Long Term Care Insurance

A major advantage of long term care insurance is that if you purchase a good policy, you may be able to receive more home health care services than if you were receiving Medicaid covered home care. Medicaid rarely provides extensive hours of home care coverage, whereas with long term care insurance, you can receive comprehensive home care coverage to help keep you home and out of a Nursing Home.


Protect Your Retirement Accounts and Fixed Income with Long Term Care Insurance

You cannot transfer your retirement accounts to your children or to an Irrevocable Trust without causing tax consequences. With long term care insurance, you can protect these retirement accounts without incurring any taxes.

Since you cannot transfer your fixed monthly income from Social Security or pension to your children or to an Irrevocable Trust as part of advance planning, long term care insurance can protect your income for a healthy spouse and for your children's inheritance while you are in a Nursing Home or receiving Home Care.


Cost of Long Term Care Insurance

The major disadvantage of long term care insurance is the cost. The premiums tend to be very expensive if you purchase comprehensive coverage. If you purchase lower coverage to reduce the premium costs, the policy might run out and you could still lose your life savings and family home.

For example, if you purchase a $200/day coverage, but your Nursing Home costs $350/day, you will lose your life savings at a rate of $150 per day ($4,500 per month).

Another example is if you purchase a policy that only covers you for 3 years and if you stay in the Nursing Home for longer than 3 years, you will lose your life savings rapidly after the 3 year policy runs out.

Also, annual premiums can increase over time. Recently we had a client come to our office who told us that he just received a letter from his insurance company that his premium was going to double.

Therefore, long term care insurance is an excellent option if you can afford the premiums for comprehensive coverage and if you are healthy enough to be insurable. If you cannot afford the premiums or are not healthy enough to be insurable, then the next 2 options to be discussed in the next two newsletters in this series, transferring to children and transferring to an Irrevocable Trust should be considered.


Basic Estate Planning and Avoiding Probate

Purchasing long term care insurance is not a substitute for doing basic estate planning. You should still have a Will, Power of Attorney and Health Care Proxy. Also, you may want to consider establishing a Revocable Trust for your life savings and your home to avoid probate. Probate is a Court proceeding to determine the validity of your Will and to carry out the terms of your Will. Probate can be expensive and time consuming. For a detailed discussion about Revocable Trusts, please go to our website by clicking here.


Long Term Care Insurance with an Irrevocable Trust-Best of Both Worlds!

If you are unable to afford the premiums for lifetime coverage, but you desire the benefits of having a long term care policy such as for the extensive home care coverage, another option is to purchase long term insurance that covers you for a shorter period of time and also set up an Irrevocable Trust to get by the 5 year lookback period and protect you from losing your life savings after the long term care policy coverage runs out and you need to apply for Medicaid. This way you get the best of both worlds.


At the Koldin Law Center, P.C., with offices in Syracuse and Rochester, New York, we have over 50 years of experience helping individuals plan for immediate crisis and long term care. Our attorneys are available to discuss your estate planning options. We do not charge a fee for the initial consultation. At that appointment, we will review with you all of these options: (1) Doing Nothing (2) Purchasing Long Term Care Insurance (3) making gifts to your children, and (4) transferring your savings and family home to an Irrevocable Family Trust. We welcome your children, family attorney, accountant, and/or financial planner to be present at the initial consultation.


There is something you can do.