Long-Term Care Insurance Vs. Irrevocable Trust

Any plan for retirement and end of life should contain a number of elements designed to provide for your needs should you become disabled or ill and need extended medical care. Two terms that often come up in these discussions are irrevocable trusts and long-term care insurance. Understanding these tools is an important step toward planning your future.

Definition of Long-Term Care Insurance

• Long-term care insurance is a policy you purchase in order to acquire a monetary benefit should you need extended medical care. Most policies provide a fixed benefit over a particular period of time regardless of what you spend for your medical care. In practical terms, this means that if you have a benefit that pays $100 per day for care, you can claim up to that amount each day and any additional amount is paid out of pocket.

  Some companies may offer a pooled benefit option. This means they will provide up to a set dollar amount, such as $300,000, for a variety of services. You may claim that amount over time--100 days or 1,000, depending on your need.

  Premiums are based on the amount and type of coverage you select, and may cover a variety of different health care needs.

Definition of an Irrevocable Trust

• An irrevocable trust is a legal entity that holds assets on your behalf. These assets are managed and distributed according to your instructions in the trust document. Irrevocable trusts cannot be altered or repealed once they have been established. Irrevocable trusts can be set up for a number of reasons and hold a variety of assets.

  An irrevocable trust may be designed to provide for your long-term medical care. In this case, trust assets would be accessed to pay for medical bills, hospice, prescription drugs and other necessities during your illness. The trustee (a person or entity you designated to manage the trust) is responsible for distributing assets and for maintaining your quality of life.

Benefits and Drawbacks of Long-Term Care Insurance

• Long-term care insurance will pay out a benefit that is far greater than any premium paid in. This means that you are afforded more help with your medical concerns than if you had just set aside the cash yourself. However, you must pay the premium up front to be eligible for the benefit and you may never need it. In addition, you may encounter restrictions on the type of care covered by your policy.

Benefits and Drawbacks of an Irrevocable Trust

• An irrevocable trust is restricted only by the parameters you create when you set it up. It may pay for non-medical expenses such as the upkeep of your home or the maintenance of a spouse or dependent child. When you die, the assets left in the trust can be used to pay estate expenses or be distributed to your beneficiaries. An irrevocable trust is limited by the value of its assets--it cannot pay out vastly more than you put into it as it is limited by the ability of the assets to earn income.

Medicaid Planning

• Both irrevocable trusts and long-term care insurance can be used to aid in planning to qualify for Medicaid benefits. The assets held in an irrevocable trust are no longer under your control, and under certain circumstances this may disqualify them from being counted as assets for Medicaid purposes. Long-term care insurance may be used to cover the Medicaid five-year ineligibility period following any gift of assets to a child or other entity. In either situation, you must plan carefully. It is wise to consult a qualified financial planner when considering any Medicaid eligibility issues.