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'Medicaid planning' a grim option for long-term care

Nobody wants to envision a day when an accident, illness or the circle of life requires a caregiver, such as a nursing home. According to a July 2012 Harris Interactive study on behalf of Nationwide Financial, 51 percent of advisers have clients who don't want to pay for their own care and have considered drastic measures to make sure they don't - even at the expense of their own future livelihood.

The 501 financial advisers surveyed have clients who have asked about giving their money to their kids in order to qualify for government assistance for long-term care (LTC). In addition, 42 percent say that some clients look to "Medicaid planning" as a way to preserve their children's inheritance.

Here is the thought process in a nutshell, and nutty it is: Transfer assets to adult kids now so that their own LTC expenses do not eat it up later. They figure Medicaid will take care of long-term care needs, so why pay for LTC insurance or drain their bank accounts or their equity out of the house to pay for care?

The problem with 'Medicaid planning'

But there are multiple ways this plan can backfire, in addition to leaving a spouse with little to live on.

The first one is that Medicaid pays only for nursing homes, not home health care, according to Kevin McGarry, director of the Institute on Income Planning at Nationwide Financial. "People who have lived in their homes for 20, 30, 40 or more years may not want to leave." Without LTC coverage to provide at-home care, leaving the comfort and security of home may be the only option.

The problem with "Medicaid planning"Second, McGarry points out, the limited selection of nursing homes that take Medicaid may not be geographically convenient to family members who would visit. "Considering the consequences to the entire family is key in long-term care planning," he says.

Third, if the facility and/or staff is substandard, transferring somewhere else may be difficult or impossible. Having a private room when Medicaid is paying is very unlikely, and the odds of having a request honored to be moved away from an undesirable roommate is slim to none as well.

Long-term care insurance provides more attractive options. Community-based care such as assisted living or adult day care are other options generally covered by LTC insurance. Without LTC insurance, many people might be forced into nursing homes or have to live with relatives who may not be equipped to properly care for them.

A look at long-term care insurance claims shows that most policyholders use their LTC insurance for non-nursing home care. According to the American Association for Long-Term Care Insurance, 56 percent of new claims are for home care, 31 percent are for nursing home stays and 19 percent are for assisted living.

Michael Kitces, director of research for Pinnacle Advisory Group and publisher of the financial planning industry blog Nerd's Eye View, says that LTC policies will generally pay for at-home care if you need assistance with at least two out of six "activities of daily living," a term the health care industry uses to describe everyday tasks, such as toileting, eating or transferring in or out of bed.

In addition, needing physical therapy, managing a chronic medical condition or being unable to perform household tasks may also be "qualifying events," depending on the patient's condition, the care needed and the terms of the policy.

However, without LTC insurance, people may end up in a nursing home to receive care that could easily be obtained at home with the right planning.

Sticker shock

But the right planning can have a high price tag, and the rates of LTC insurance scare some people away. Some policies have imposed substantial premium increases after insurers were surprised by the actual costs of care after the policies were originally sold. Several insurers have fled the market altogether.

According to the Harris Interactive study, only 15 percent of financial advisers say that clients understand well the costs of LTC insurance and what it covers, and 50 percent of advisers say their clients understand it somewhat well. Thirty-five percent say their clients don't understand LTC insurance at all.

It is understandable to be apprehensive about spending money now on a service you may not even need later. The insurance industry is responding with policies that combine long-term care and life insurance, giving buyers flexibility in how to use their insurance.

Before you decide to have a public-assistance program take care of you in your old age, consult a financial planner about options that put more choices in your hands.

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