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How do Medicare, Long Term Care and Annuities Interrelate?

Todd D. Heckman

The Medicare program began life as an addition to President Franklin Roosevelt’s vision to meet the needs of older workers living in America. Medicare was created in 1965 under Title XVIII of the Social Security Act to include health benefits for those retirees eligible for Social Security retirement.  

What is Medicare? 

Within 3 months prior to and up to 3 months after your 65th birthday, you are eligible to enroll in Medicare. There are no income qualifications (minimums or maximums) for the program, just turn 65 (and have worked 40 quarters or 10 years, but there are exceptions). The period prior to and after your birthday is known as your initial enrollment period. As an example, a person born September 15 would see their initial enrollment period start on June 1 and run until December 31. If you fail to enroll during the initial period not to worry, you can still obtain Medicare coverage. It only means that you will need to enroll during the catch-all general enrollment period that begins on January 1 of the following year and lasts until March 31, with benefits starting on July 1st. 

The difference between taking advantage of the initial enrollment period and general period is cost. When you enroll you are eligible for Part A hospitalization (or in-patient) coverage, which comes at no cost. Part B, which covers out-patient medical services (i.e. doctor’s visits, routine examinations, durable equipment, etc.) costs a monthly premium (which in 2013 is around $104.90) that goes up approximately 10% a year, according to information provided by the Centers for Medicare & Medicaid Services (CMS). The longer you wait to enroll, the more costly Part B will become. 

Additional Benefits Provided Under Medicare 

In addition to Parts A & B, a person may enroll in Part C, known as the Medicare Advantage program offered by private insurers contracted through CMS. Part C provides coverage for benefits that may not be picked up by Parts A & B in HMO, PPO, special need or private fee-for-service style plans. Part D is the prescription drug benefit, which allows Medicare enrollees to cover the cost of medications (which would have required separate insurance or have been purchased as an out-of-pocket cost prior to passage of the 2005 expansion). Despite general feelings, 90% of Medicare enrollees opt for Part D and the program enjoys a 90% satisfaction rating.

Myth of Medicare and Meeting the Cost of Long-Term Care

Now let’s play a game. You are 65, have just enrolled in Medicare Parts A, B, C & D and begin receiving benefits under the program. Five years later you are diagnosed with dementia, a degenerative cognitive disease and require regular assistance to perform basic tasks associated with daily living, such as taking a bath or eating a meal. You do not necessarily need to be placed in a nursing home or assisted living facility as of yet but a home health aide will need to look in on you at least 3 times a week for about 5 hours a day at a rate of $19 per hour (or roughly $15,000 per year). When the need for a nursing home does arise as your condition worsens, the cost for a semi-private room will run around $83,000 per year ($227 a day). 

No worries because all of this is covered by the Medicare insurance you enrolled in and have been paying for all these years, right? Sorry, the answer is no. Medicare covers those expenses associated with sickness and illness but what it does not cover are those costs associated with longevity. We know this today as long-term care. Interestingly Medicare enrollees who meet lower income and asset requirements may also be eligible for Title XIX of the Social Security Act, which is the Medicaid program. 

Hmmm, what to do? Meeting the cost of long-term care, the purpose of which is to provide an individual with a life of dignity and comfort toward the end of life, is done through planning and the use of such sources as personal assets, annuities, life insurance benefits and even equity in your home (reverse mortgage).  One option is to consider a “hybrid” insurance plan, such as a Long-Term-Care ‘linked’ annuity. Typically a single premium annuity, the annuity uses a portion of the interest it earns to purchase Long Term Care coverage thus doubling, and in some cases, tripling the original annuity value for the purpose of paying for long term care! Since the tax law of 2010 when benefits are received from this type of an annuity and are used to pay long term care related expenses, the benefits are tax-free! 

Understanding what Medicare does and does not cover and creating a plan of action today to meet your long-term care needs is an important first step toward insuring your future dignity!

To learn more from this annuity professional, simply click here (Todd Heckman).

About the Author:

Todd D. Heckman CLU, ChFC, CFP®, AEP®, MSFS is the President of Life resource Planners of the Treasure Coast (a division of  the Estate Planning Advisors) , a firm specializing in Retiree Healthcare and Retirement Income issues is located in Vero Beach, Florida. He can be reached @ 772-567-7970 x102 or a www.octoagent.com.

 

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