Don't Let Nana Drive You Into Bankruptcy

Nana bankruptcy
Nana bankruptcy

As children, excursions with grandma were an adventure, with trips to the ice cream shop, the movies, and local restaurants letting her brag about her grandchild to everyone in earshot. As years pass, the ride into the golden years can get bumpy: If you're financially unprepared, it can take a dramatic turn for the worse and even drive you and your family straight into bankruptcy.

However, there are steps you can take prevent a head-on financial collision when you or a loved one needs expensive care.

The big, sick picture
According to data from author and nursing home law specialist Gabriel Heiser, the average cost of a nursing home today is -- fasten your seatbelt -- nearly $7,000 per month, and a typical Alzheimer's patient will spend almost $400,000 for their nursing home care after diagnosis. The folks at MetLife (MET) report that the national average monthly base rate for a berth in an assisted living community is about $3,300.

Even if Alzheimer's doesn't strike you or a family member, you might still be in trouble. According to a recent Fidelity Investments study, an average 65-year-old couple retiring today can expect to pay $230,000 for health care during retirement. That's just an average, meaning that you may get away with less, but you might also be socked with higher costs.

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If you're thinking that it's unlikely that you'll end up in a nursing home or needing long-term care, think again. The National Academy of Elder Law Attorneys has found that though the risk of financial devastation because of a car accident or home fire is less than 1%, it rises 50% when it comes to long-term care. Research by the folks at Conning & Co. reveals that 60% of those who reach age 65 will need long-term care at some point in their lives. And The Wall Street Journal has reported that there's a 75% chance that at least one member of a 65-year-old couple will need long-term care.

Clearly, there's a good chance that you or a loved one will require some expensive care down the line.

Protect yourself
Fortunately, you can protect yourself from being wiped out financially. Long-term care insurance can be a smart option for some. It's not cheap, but that's because there's such a good chance that you'll need it. The price is far lower, though, if you buy it while you're still relatively young, such as in your 50s, instead of your 70s. Putting off the purchase can also end up with you developing a condition that leads to being denied coverage. A few points about long-term care:

  • Prices can vary widely by insurer, so shop around. But be sure to buy from a company with a high rating, as you don't want them to be out of business when you suddenly need them.

  • Consider paying a little more for your policy in order to add an inflation-adjustment rider, especially if you expect to live for several more decades.

  • You can cut the cost a bit by only buying three years of coverage, as the average stay in a nursing home is 28 months, and also by including a waiting period of, say, 90 days before the policy kicks in.

Read up more on long-term care insurance at sites such as the National Clearinghouse for Long-Term Care Information.

The Medicaid option
For some, long-term care insurance may not make sense. If you're relatively wealthy, you may be able to handle your health-care costs out of your own pocket. If you're nearer the other end of the wealth scale or your current age makes available policies unaffordable, you're not necessarily out of luck.

Heiser notes that Medicaid can cover much of your health care needs in retirement -- "but only if you know what it takes to qualify for those benefits." He also recommends that people start planning now, even if they're many years from retiring.

It's true that many people won't qualify for Medicaid, but if you know the requirements, you can manage your affairs in order to meet them. Here are some of the current asset limits for Medicaid applicants, according to Heiser:

  • Cash: You can hold $2,000 in cash that does not get counted as an asset in determining your Medicaid eligibility.

  • Home: Homes valued at $500,000 or less are not counted as an asset, and some states set a higher bar at $750,000.

  • Car: You can own one automobile of any value.

  • Death funds: The entire value of preplanned funeral or memorial arrangements are excluded. If you don't have such arrangements, you can exclude a separate bank account of up to $1,500 set aside for funeral expenses. Prepaid burial plots are also excluded.

  • Property: Any real or personal property that's required to support you, such as rental properties or other income-generating real estate investments, may be excluded. Rental income needs to be at least 6% of the value of the property to qualify.

  • Life insurance: Term life insurance policies aren't considered at all, and only the cash value of a whole life policy is counted.

There's more to it, of course, and rules can change over time. But if you're interested in qualifying for Medicaid assistance, you may be able to swing it. You'd do well to consult a financial planner or elder law expert for more guidance.

Yes, some health-care costs related to caring for ourselves or our loved ones can wipe us out. But they don't have to. A little planning can make a big difference.

Also See: Social Security: Why Seniors Are Just Plain Angry

Longtime Motley Fool contributor Selena Maranjian holds no position in any company mentioned.