Activities of Daily Living Measure the Need for Long-Term Care Assistance

 

Most long-term care involves assisting with basic personal needs rather than providing medical care. The long-term care community measures personal needs by looking at whether an individual requires help with six basic activities that most people do every day without assistance, called activities of daily living (ADLs). ADLs are important to understand because they are used to gauge an individual’s level of functioning, which in turn determines whether the individual qualifies for assistance like Medicaid or has triggered long-term care insurance coverage.   

The six ADLs are generally recognized as:

• Bathing. The ability to clean oneself and perform grooming activities like shaving and brushing teeth.  
• Dressing. The ability to get dressed by oneself without struggling with buttons and zippers.
• Eating. The ability to feed oneself.
• Transferring. Being able to either walk or move oneself from a bed to a wheelchair and back again.
• Toileting. The ability to get on and off the toilet.
• Continence. The ability to control one's bladder and bowel functions.

There are other more complicated tasks that are important to living independently, but aren't necessarily required on a daily basis. These are called instrumental activities of daily living (IADLs) and include the following:

• Using a telephone
• Managing medications
• Preparing meals
• Housekeeping
• Managing personal finances
• Shopping for groceries or clothes
• Accessing transportation
• Caring for pets

Long-term care providers use ADLs and IADLs as a measure of whether assistance is required and how much assistance is needed. In order to qualify for Medicaid nursing home benefits, the state may do an assessment to verify that an applicant needs assistance with ADLs. Other state assistance programs also may require that an applicant be unable to perform a certain number of ADLs before qualifying. In addition, long-term care insurance usually uses the inability to perform two or more ADLs as a trigger to begin paying on the policy.  

Medicaid's Benefits for Assisted Living Facility Residents

 

Assisted living facilities are a housing option for people who can still live independently but who need some assistance.  Costs can range from $2,000 to more than $6,000 a month, depending on location. Medicare won’t pay for this type of care, but Medicaid might.  Almost all state Medicaid programs will cover at least some assisted living costs for eligible residents.

Unlike with nursing home stays, there is no requirement that Medicaid pay for assisted living, and no state Medicaid program can pay directly for a Medicaid recipient’s room and board in an assisted living facility. But with assisted living costs roughly half those of a semi-private nursing home room, state officials understand that they can save money by offering financial assistance to elderly individuals who are trying to stay out of nursing homes. 

As of May 2016, 46 states and the District of Columbia provided some level of financial assistance to individuals in assisted living, according to the website Paying for Senior Care, which features a“State by State Guide to Medicaid Coverage for Assisted Living Benefits” that gives details on each state’s programs.   According to the website, the Medicaid programs of Alabama, Kentucky, Louisiana and Pennsylvania are the only ones that provide no coverage of assisted living, although non-Medicaid assistance may be available.

Nevertheless, the level and type of support varies widely from state to state.  Prevented from paying directly for room and board, some states have devised other strategies to help Medicaid recipients defray the cost of assisted living, including capping the amount Medicaid-certified facilities can charge or offering Medicaid-eligible individuals supplemental assistance for room and board costs paid for out of general state funds. States typically cover other services provided by assisted living facilities.  These may include, depending on the state, coverage of nursing care, personal care, case management, medication management, and medical assessments and exams.   

In many states, this coverage is not part of the regular Medicaid program but is delivered under programs that allow the state to waive certain federal rules, such as permitting higher income eligibility thresholds than regular Medicaid does.  To qualify for one of these waiver programs, applicants almost always must have care needs equivalent to those of nursing home residents.  These waiver programs also often have a limited number of enrollment slots, meaning that waiting lists are common.  In some states, the support programs may cover only certain regions of the state.  And one state’s definition of “assisted living” may differ from another’s, or other terms may be used, such as “residential care,” “personal care homes,” “adult foster care,” and “supported living.”

If your state does not cover room and board at an assisted living facility, help may be available through state-funded welfare programs or programs run by religious organizations. If the resident is a veteran or the surviving spouse of a veteran, the resident’s long-term care may be covered. 

Nursing Home Care Costs Are Only Slightly Higher in 2016

 

The median cost of a private nursing home room in the United States has increased slightly to $92,378 a year, up 1.24 percent from 2015, according to Genworth's 2016 Cost of Care survey, which the insurer conducts annually. Genworth reports that the median cost of a semi-private room in a nursing home is $82,125, up 2.27 percent from 2015. The rise in prices is modest compared to the 4.2 percent and 3.8 percent gains, respectively, in 2015.

The price rise was even lower for assisted living facilities, where the median rate ticked up only .78 percent, to $3,628 a month.  The national median rate for the services of a home health aide was $20 an hour, the same rate as 2015, and the cost of adult day care, which provides support services in a protective setting during part of the day, actually fell from $69 to $68 a day. 

Alaska continues to be the costliest state for nursing home care, with the median annual cost of a private nursing home room totaling $297,840. Oklahoma again was found to be the most affordable state, with a median annual cost of a private room of $60,225, which did not increase in 2016.

While prices may not have increased drastically from last year, the survey found that Americans underestimate the cost of in-home long-term care by almost 50 percent. Thirty percent believe it will be less than $417 a month. In fact, an in-home aide working 44 hours a month would cost $3,861, according to Genworth.

The 2016 survey was based on responses from more than 15,000 nursing homes, assisted living facilities, adult day health facilities and home care providers. The survey was conducted by phone during January and February of 2016.

Should an Annuity Be Part of Your Retirement Planning?

 

Annuities can be valuable retirement and longevity planning tools, but they are complex financial products that can be misused. There are two kinds of annuities: variable and immediate. Variable annuities have gotten a bad reputation in recent years because they are often sold to people, especially seniors, for whom they are inappropriate. Immediate annuities, on the other hand, may be undersold.

Variable Annuities

Let's start with an explanation of what an annuity is: It is a contract with an insurance company under which you, the consumer, pays a lump sum in exchange for certain benefits. In the case of a variable annuity, those benefits are based on an investment package. Often the insurance company will guarantee a minimum rate of return on the annuity even if the investments perform poorly. For instance, if you put $200,000 into an annuity with a guaranteed 5 percent rate of return, the annuity will pay you $10,000 a year even if the value of the investments dropped to $160,000, for which a 5 percent return normally would be just $8,000 a year. But if you chose to cash out the annuity, you could only withdraw $160,000. In addition, you might be hit with a penalty for early withdrawal. Typically, variable annuities charge penalties of up to 10 percent for withdrawal over the first few years of the investment, with the penalty gradually declining each year. In addition, you are not taxed on the investment earnings but are taxed on income when the annuity is withdrawn, whether in regular payments or as a lump sum.

Immediate Annuities

Immediate annuities are fixed contracts under which the insurance company pays the consumer a fixed amount, usually on a monthly basis, and usually for life. For instance, you might pay the company $200,000 in exchange for a guaranteed income stream of $1,000 a month for the rest of your life. The amount of the payment and the cost of the annuity will depend on your age since the company, in determining these numbers, will be making an estimate of how long it will have to pay, or in other words what it thinks your life expectancy is.

In our example, if you live longer than 17 years, you will "win" because the insurance company will ultimately pay you back more than $200,000, but if you live for a shorter period of time, you will "lose" (in more ways than one) because you will receive back less than your investment. If the buyer of the annuity in our example passed away after just five years, she would have received only $60,000 in payments on her $200,000 investment. For this reason, many consumers purchase annuities with guaranteed terms of payment ("term certains") meaning that if you were to pass away before the end of the term, payments would continue for your beneficiaries or they would receive a lump sum upon your death. For instance, if you were to buy the annuity in our example with a 10-year term certain and were to pass away after five years, the insurance company would still pay out an additional $60,000 to your heirs, either by continuing the monthly payments or in a lump sum. Of course, the length of the term certain will affect the amount of the monthly payments since the insurance company will be committing to pay for a longer period of time no matter how long you live. If you want a longer term certain, you will either have to pay more for the annuity or accept a smaller monthly payment.

The Rap on Variable Annuities

Variable annuities are extremely complex products and it is doubtful that very many consumers fully understand them when they purchase them. That doesn't mean that these products are bad, just that they're confusing. In addition, they pay generous premiums to the brokers who sell them, payments which many of the brokers don't disclose. They also generally don't disclose whether they are paid more or less by one insurance company than another or whether the annuity being sold is the best option for the consumer.

This relates to another debate going on in the financial services industry. Broker dealers are held to a "suitability" rather than to a "fiduciary" standard. This means that they need only sell products and give advice that is "suitable" for the client. A fiduciary standard would require them to act in the best interest of the client. (This article more fully explains the difference.) The Obama administration is working to adopt the higher fiduciary standard for retirement accounts.

All of this means that the purchaser of a variable annuity needs to be cautious and should seek a second opinion.  Some people have been greatly helped by variable annuities, receiving higher retirement income due to the guaranteed rate of return even after the sharp drop in investment values and low interest rates after the recent recession. For others, however, variable annuities have been problematic. This is especially the case when a senior needs to access capital to pay for long-term care or accounts need to be transferred between spouses to qualify an ill spouse for Medicaid benefits. In either case, this may require withdrawal of funds after the underlying asset value has dropped and often means paying early-withdrawal penalties. For these reasons, older or sicker seniors should be wary of purchasing variable annuities. The products may not be in their best interest and may not even be suitable. It's always important to get a second opinion from an advisor who will not benefit from the sale of the annuity.

The Benefits of Immediate Annuities

Immediate annuities, on the other hand, are much less complicated products. They are often used in Medicaid planning, but they can also be used to guarantee a retirement income no matter how long you live. Some people call this "longevity protection." For instance, let's assume you plan to retire at age 65 and you have calculated that with your Social Security income, savings and investments you have enough money to live comfortably for 20 years, taking into account likely inflation during that time. That's fine if you only live to age 85, but what happens if live past that age?

A bit more than a fifth of men and a third of women who are 65 today will make it to age 90. Your own health and your family's longevity may give you even more guidance as to whether you will need income past age 85. But based on these statistics, if you're a woman (or are married to one) your planning should make sure that you have sufficient income until age 90. (You may not need to be as concerned after age 90 since only 13 percent of 65-year-old women and a measly 7 percent of 65-year-old men make it to age 95.) An immediate annuity can be a solution since it will continue paying for the rest of your life even if you run through your savings and even if you live to 100 or beyond.

Variations can enhance the usefulness of immediate annuities for this purpose. For instance, if you calculate that you can give up current income in exchange for more income in the future, insurance companies will pay you a higher monthly benefit. If at age 65 you were to purchase an annuity that did not begin paying until age 85, it would pay you far more than if it were to begin paying immediately.  According to one on-line annuity calculator, a 65-year-old woman paying $100,000 for an immediate annuity that pays out for her life beginning now would receive $528 a month. If she postponed payments until age 85, she would receive $3,608 a month beginning then, almost seven times as much (and more than three times the $1,125 a month she would receive if she purchased the annuity at age 85). She would, of course, have given up both the income of $126,708 ($528 x 12 x 20) and the use of her capital, but it might be a good hedge against outliving her savings.

Final Thoughts

For both variable and immediate annuities, because the payments may have to last a lifetime, you want to be sure the insurance company you pick will still be around. Make certain that the insurer is rated in the top two categories by one of the services that rates insurance companies, such as A.M. Best, Moodys, Standard & Poor's, or Weiss.  And don't put too much of your savings into any one type of investment, whether that be variable annuities, immediate annuities, stocks or bonds.

Beware: Your Estate May Contain an Unnecessary Bypass Trust

 

A once-popular estate planning tool may now cost families more in taxes than it saves. Changes in the estate tax have made the "bypass trust" a less appealing option for many families.  If your estate plan includes one, you should reconsider its necessity because it could be doing more harm than good.

When the first spouse dies and leaves everything to the surviving spouse, the surviving spouse may have an estate that exceeds the state or federal estate tax exemption. A bypass trust (also called an "A/B trust" or a "credit shelter trust") was designed to prevent the estate of the surviving spouse from having to pay estate tax. The standard in estate tax planning was to split an estate that was over the prevailing state or federal exemption amount between spouses and for each spouse to execute a trust to “shelter” the first exemption amount in the estate of the first spouse to pass away. While the terms of such trusts vary, they generally provide that the trust income will be paid to the surviving spouse and the trust principal will be available at the discretion of the trustee if needed by the surviving spouse. Since the surviving spouse does not control distributions of principal, the trust funds are not included in the surviving spouse's estate at his or her death and will not be subject to tax.

In 2013, estate taxes changed dramatically and now very few people are subject to federal estate taxes. Currently, the first $5.45 million (in 2016) of an estate is exempt from federal estate taxes, so theoretically a husband and wife would have no estate tax if their estate is less than $10.90 million. The estate tax is now also "portable" between spouses, accomplishing the same purpose as a bypass trust. This means that if the first spouse to die does not use all of his or her $5.45 million exemption, the estate of the surviving spouse may use it (provided the surviving spouse makes an “election” on the first spouse’s estate tax return).

One problem with a bypass trust is that the surviving spouse does not have complete control over of the assets in the trust. The surviving spouse's right to use assets in the trust is limited and requires the filing of accountings and separate tax forms. In addition, if the trust generates income that is not passed to the beneficiary, that income can be taxed at a higher tax rate than if it wasn't in a trust.  

Another problem is that a bypass trust can actually cost more in capital gains taxes than it saves in estate taxes. When someone passes away, his or her assets receive a step-up in basis. When an asset is in a bypass trust, it does not receive a step-up in basis because it is passing outside of the spouse's estate. If the assets are sold after the surviving spouse dies, the spouse's heirs will likely have to pay higher capital gains taxes than if the heirs had inherited the asset outright.

A bypass trust can still be useful in some circumstances. If your estate is greater than the current estate tax exemption, a bypass trust is still a good way to protect your assets from the estate tax. In addition, some states tax estates at thresholds much lower than the federal estate tax, and a bypass trust may help in those states. For other people, these trusts have other uses besides avoiding estate taxes.