We know from the news that people frequently confuse "The Affordable Care Act" and "Obamacare" - even though they are the same thing. In addition, people don't understand how long-term care, or custodial care, is also covered. Here are some of facts about how long-term care is covered by health insurance programs.
Who will pay if you need long term care?
Many people mistakenly believe their health insurance, whether provided by an employer, bought on an exchange such as Obamacare or Medicare, will pay for long term care. But regular health insurance definitely does not. Medicare sometimes pays for a portion of your long term care but only up to 100 days. And the requirements are very strict, such as requiring a hospital stay for a specific amount of time.
Okay, so I can’t count on Medicare, and regular health insurance won’t help at all. What about Medicaid?
If you need long term care there is a government program that can help, but it’s a last resort: Medicaid. Medicaid is the medical welfare system for people who have almost no money left. The specific limits vary, but most states force you to pay for your care until you are down to your last $2,000. All your financial assets are vulnerable, including pensions, IRAs, retirement plans, life insurance, bank accounts, mutual funds, and annuities. Basically, if you can get your hands on the cash you are required to spend it. You are allowed to keep your primary residence and one vehicle. You can’t avoid it by giving away your money to your kids, either. There is a look-back period to prevent people from gaming the system that way.
If Medicaid does pay for your long term care (or any medical bills) your state keeps track of every penny they lay out. Then when you die they are allowed to reclaim as much of it as they can. For example, let’s say Medicaid pays $100,000 for your long term care. Then when you die you leave your house to your daughter. The state will step in to reclaim the $100,000 they paid for your care. Your daughter would be forced to come up with the money even if it means selling the house you left to her.
It sounds like Medicaid really is a last resort. So what’s left?
Without Medicaid, there are two ways left to pay for it: Either out of your own pocket, or use long term care insurance.
The hidden expense when you pay out of pocket
Paying out of pocket is much more expensive than using the insurance company’s money. Let’s say you pay someone $1,000 to help care for you. You actually had to earn $1,300 or more because the government took taxes out before you could put the remainder in the bank. If you pull that $1,000 from a regular IRA or retirement account, you get hit with income tax as the money comes out. Paying for long term care with “after-tax” money immediately makes it more expensive. This is true even if you are able to take a tax deduction, because the deduction is only on part of the cost, not all of it.
Tax-free long term care?
When your long term care insurance pays for care it’s completely tax-free. You get the full benefit from each dollar and none of it will is diverted to the IRS.