It’s something no one wants to think about: Going into a nursing home. You tell yourself it won’t happen to you, but the reality is that more and more Americans are living into their elderly years, and with that comes the need for more advanced care. In fact, it’s estimated that 68% of Americans turning 65 will require long-term care in their lifetimes.
If you or a loved one find yourselves needing to move into a nursing home full time, there are a lot of financial repercussions that can impact your whole family. Most people have no idea how the system works until they’re in the middle of it. That’s why it’s important to know ahead of time what to expect, and how you can best prepare to deal with the situation ahead.
First, the life insurance death benefit won't pay for it, but long-term care insurance can. Second, a primer on Medicare and Medicaid. Medicare is health insurance that covers everyone over age 65. But like every health insurance, Medicare has limits and things it won’t pay for. One of those things is a nursing home. If you need to go to a nursing home but can’t afford it, Medicaid kicks in to pay for it. So it’s possible for seniors to have both Medicare and Medicaid, with each paying for different things. Got it? Good.
What’s largely misunderstood (or just not understood at all) are the rules around what qualifies or disqualifies one for Medicaid. Is it true that you need to be basically flat broke before the social safety net of Medicaid kicks in to cover a nursing home? This question is a source or anxiety for seniors—and will become an even hotter source of political debate as people start living longer.
The rules get complicated and they vary by state, so to get a clear picture of your family’s situation you’ll need to consult your state medicaid agency or an attorney. But my grandmother’s recent experience with elder care can give you a picture of the broad strokes.
Nursing home costs: What happens if you have no assets
My grandmother recently moved into a nursing home after developing dementia. She had lived in subsidized elderly housing for more than a decade before that and had a leased car that was repossessed because she had neglected the payments due to her illness. In other words, she had no assets. So what happened to her finances after she went into a nursing home?
I talked to my mother about their experience. (They live in Massachusetts. This may vary state-by-state, but the system is broadly the same for everyone.)
When it was determined by doctors that her mother was no longer legally allowed to live alone, my mom said "I realized I had to apply [for her to have] MassHealth because nursing home care is $400 a day." (MassHealth is Medicaid in Massachusetts.)
"MassHealth is available if you don’t have money of your own. A maximum amount of money she could have [to qualify] is $2,000, and in addition to that amount I was able to put $1,500 to pay her funeral expenses at a funeral home."
Paying for a funeral while you’re still alive can be disconcerting, so be prepared for that.
"I had to take six months’ worth of her checking account statements which shows where her money is coming from to prove that she had no money," my mom continued. "Her only income was her Social Security check, so what the state did was they took that amount, they subtracted what her Medicare costs, what her prescription plan costs per month, and they took that off of the top of her monthly [income]."
So, my grandmother’s finances were essentially swallowed into the system of paying for her nursing home, with the exception of $2,000 that could stay in savings, and $73 per month she was allowed to pay for personal expenses. My mom said that she uses that to buy her things like deodorant, her favorite snacks, and little comforts that the nursing home does not provide.
What happens if you have assets
If all goes well, there is a good chance that you will have some assets to your name by the time you reach the age to go into a nursing home. If that happens, there is a system to make sure that your belongings are accounted for before you begin receiving Medicaid assistance to cover that $400 a day for nursing home care.
If a couple shares assets at the time that one of them goes into a nursing home, there are Medicaid spousal impoverishment rules that make sure that the spouse is able to reduce how much of their assets are taken into account before the patient qualifies. According to Marshall, Parker, & Weber, LLC, a law firm in Pennsylvania that specializes in elder law and estate planning, the couple is allowed to spend their money "to pay off existing debts" to prepay real estate taxes, insurance, or other large bills; or to prepay funeral expenses" before qualifying for Medicaid.
What happens to the rest of your money? Well, the good news is that spouses can keep half of the amount saved. The other half will have to be spent on the list of items above (among a few other things) to get their assets down to the qualifying $2,000. Otherwise you’ll end up paying the rest out of pocket to the nursing home.
Still confused? Marshall, Parker, & Weber provide a great case study that illustrates what happens:
John and Marian Jones have a home and $50,000 of savings when John enters a nursing home for a long term stay. Under Medicaid spousal impoverishment rules, Marian is allowed to keep $25,000 as her protected allowance and John is permitted to retain $2,000. They have $23,000 in excess resources that prevent John from being eligible for Medicaid.
After John’s admission to the nursing home, Marian spends the $23,000 excess by paying off the mortgage on the couple’s home, some credit card debt, and by making an advance payment of real estate taxes. Because Marian now has only $25,000 and John has only $2,000 left, John is eligible for Medicaid.
While at first glance it may seem grim to have to spend their savings in such a hurried way, it is important to remember that nursing home costs hundreds of dollars a day, and now Medicaid will be covering that for John so Marian does not have to.
If you aren’t married, your assets can be sold in order to pay for your care until you reach the $2,000 threshold, thus qualifying for Medicaid. As was the case with my great grandmother who did have assets at the time she had a stroke and went into a nursing home, her assets paid for her care for the first months in the facility. Because she paid out of pocket, she was able to have a private room. After she reached $2,000, she qualified for Medicaid and was moved to a room that was shared with other patients. This change, of course, depends on the nursing home and situation.
Seniors who have some assets that they would prefer to leave to their kids rather than pay to a nursing home have been known to get creative in trying to get around these rules. For starters, IRA accounts for people over the age of 70 and a half are generally considered off-limits as assets that disqualify a person for Medicaid. And some seniors choose to give their money to their kids early, so that if the time comes that they need a nursing home they’ll technically be asset-less and Medicaid will pay.
However, while your IRA savings may be off-limits in your lifetime, they might be claimed to retroactively pay back Medicaid after you’re gone. And if you give money to your kids the government will still consider it "your" money for five years -- so you’ll have to stay healthy enough to avoid a nursing home until year six for this plan to work.
Long-term care insurance
You’re probably reading this and wondering if there is a way to avoid the whole process, and luckily there is. Your life insurance carrier may offer a long-term care insurance rider in addition to your standard coverage.
Long-term care insurance can cover the costs of a nursing home or other similar medical care, though different plans involve different deductibles and cover different amounts of time. The average deductible is equal to the cost of 90 days.
The average age of someone buying a personal plan for LTC insurance is 60, while those who buy it through their employer are 50. Of course, the younger you are when buy the insurance, the cheaper it is. If you are interested in the rates and conditions, get a long-term care inurance quote or see our primer to learn more.
Long-term care insurance can be expensive, but it comes with a lot of benefits. For starters, it’s a lot cheaper than paying for a nursing home out of pocket, which can easily hit $150,000 per year. It allows you to get coverage without having to spend or give away all your money first. And it allows you better and more flexible care than Medicaid would, with options like at-home nursing care, which Medicaid won’t provide.
Whether higher quality elder care should be a part of the guaranteed social contract is a political debate that won’t end anytime soon. But long-term care does not have to be a looming, unknowable threat in the future. Knowledge is power, and now that you know a bit about what happens to your finances when it happens you will be more prepared for the road ahead.