Many retirees face confusion when it comes to understanding who truly covers the costs of long-term care, often mixing up the roles of Medicare and Medicaid. These two government programs serve different purposes and offer varying levels of support, but this distinction is not always clear.
Many believe Medicare will cover extended care needs, a misconception that can result in serious out-of-pocket expenses.
According to financial news outlet TheStreet, relying only on Medicare for long-term care “doesn’t reveal much” about actual coverage limits, leaving many unprepared. Recognizing the specific roles of both Medicare and Medicaid is crucial for effective planning and avoiding costly mistakes.
Understanding the Likelihood of Needing Long-Term Care
Studies indicate that about 80% of Americans may require long-term care services at some point. Approximately 4 in 10 will have high-intensity care needs lasting more than a year. These figures suggest that long-term care is a common concern for retirees and their families.
However, the Kaiser Family Foundation reports that only 6 million Americans currently receive long-term care services, representing about 10% of the 58 million Medicare beneficiaries over age 65.
This discrepancy may stem from how long-term care is defined.
Short-term rehabilitative care—such as after a knee replacement requiring a week or two in a rehab facility—is often included in these statistics but does not represent financially catastrophic long-term care and is typically covered by Medicare.
Such stays also do not trigger traditional long-term care insurance policies.
No recent data exists on the percentage of long-term care insurance contracts that actually pay benefits, making it difficult to gauge actual risk precisely.
Evaluating Risk Transfer and Insurance Options
Transferring the risk of long-term care expenses to a third party, such as an insurance company, has become more challenging.
Historically, Partnership policies provided a valuable option.
These policies allowed policyholders to pay an affordable premium, retain a dollar of investments for every dollar the policy paid, and eventually rely on the state to cover further costs.
These policies are still available in some states but have become too costly for many middle-class retirees.
Some policies included a return of premium rider, reimbursing the insured or beneficiaries for all premiums paid if the policy was unused, minus investment gains lost. This feature allowed people to “not lose by winning.”
An illustrative example from personal finance highlights a couple planning retirement with $1 million in investments, $60,000 in annual Social Security payments, and a $12,000 annual pension.
They have three children, including one with special needs relying on them for housing and additional support not fully covered by state programs. For this family, the fear of exhausting assets and dying broke is significant.
The Role of Government Programs in Long-Term Care Coverage
Medicare primarily covers short-term skilled nursing and rehabilitation services but does not cover most custodial or extended long-term care needs.
Medicaid serves as the main public program funding long-term care for eligible individuals with limited income and assets. However, the coverage comes with significant drawbacks. As noted by the authors of
It’s All About The Income: A Simple System for a Big Retirement” (2022), “Keep It Simple, Make It Big: Money Management for a Meaningful Life” (2020), and “Taking Care of Your Future: The Nurse’s Guide to Retirement
Medicaid is a safety net, but not an effective form of insurance, since its deductible is virtually all a household’s assets.
Understanding eligibility requirements and the limitations of these programs is essential for effective long-term care planning. Many retirees mistakenly believe Medicare will cover extended care expenses, which is not the case.
Considering Individual Circumstances in Long-Term Care Planning
Long-term care planning involves assessing the likelihood of needing care, the availability and affordability of insurance options, and government support programs. Individual circumstances, such as caring for a child with special needs, add complexity to preserving wealth and managing risks.
The fear of losing one’s assets and being unable to support dependents outside state coverage underscores the importance of planning.
Long-term care remains a complex topic requiring careful evaluation of risks, costs, and resources. Recognizing the distinct roles and limitations of Medicare, Medicaid, and insurance options provides a foundation for developing strategies tailored to personal needs.
Further discussions will address additional risk mitigation approaches beyond insurance and government programs.
