Many people worry that they might lose their life savings when faced with illness or the need for long-term care as they age. One strategy to help cover long-term care costs is applying for Medicaid, the federal-state hybrid program that provides health care coverage to individuals, including seniors, who have limited income and resources.
Many people assume they won’t be eligible for Medicaid, but a Medicaid spend down, which involves “spending down” your finances to meet eligibility criteria, may allow you to qualify for the program.
[READ: How to Pay for Nursing Home Costs.]
What Is a Medicaid Spend Down?
A Medicaid spend down is the process of reducing your assets to qualify for Medicaid. Each state has its own financial eligibility requirements and level of care criteria, which can make navigating the process tricky.
In New York, for instance, the income eligibility limit per month for individuals is $1,836 and $2,489 for couples. In Texas, it’s $2,982 for individuals and $5,964 for couples.
Ultimately, depending on your assets, income and a variety of other factors, you may be required to contribute to the cost of your care.
Institutional Medicaid vs. Medicaid waivers
Medicaid assistance can appear in two different ways:
— Institutional Medicaid covers long-term care in a nursing home or similar facility for people who meet strict income, asset and medical-need requirements.
— Medicaid waivers allow states to offer long-term care services outside of nursing homes, often at home or in community settings.
What assets count toward a Medicaid spend down?
While each state varies, there are a number of assets that are normally considered “countable” (must be spent down) and “noncountable” (do not need to be spent down). Below is a breakdown of some common assets:
Your home and vehicle
— Primary residence: Noncountable. However, for it to remain exempt, you must intend to return home or your spouse or dependent child must live there. The home’s equity value must also fall under your state’s specific cap.
— Other real estate: Countable. This includes any property you own, including a vacation home.
— Vehicles: Variable. One vehicle is exempt, but any additional vehicles may be countable.
Your bank accounts and investments
— Everyday cash: Countable. This includes checking, savings, money market accounts and certificates of deposit (CDs).
— Market investments: Countable. Any investment accounts, mutual funds, bonds and other securities you hold count.
— Retirement accounts: Variable. IRAs, 401(k)s and any other retirement accounts you may have may be countable, depending on the state.
— Annuities: Variable. Depending on the type of annuity (a financial product where you pay money either as a lump sum or in installments to an insurance company or financial institution and in return you receive a steady income, usually in retirement), payments may be countable.
— Trusts: Variable. Depending on the state and the type of trust, some are considered countable while others are not.
Insurance and future planning
— Life insurance (cash-value policies): Countable. The cash surrender value of life insurance policies is counted.
— Funeral planning: Noncountable. Burial plots and prepaid funeral expenses are exempt.
Personal belongings
— Household goods: Noncountable. Your furniture, appliances and other personal belongings are not counted.
[SEE: Financial Planning Timeline by Year: A Step-by-Step Guide to Affording Senior Living]
Navigating the Medicaid Spend-Down Application Process
The Medicaid spend-down program application involves several steps, which may vary slightly depending on the state.
Here’s a general guide on how to apply:
— Check eligibility. Confirm that your income exceeds the Medicaid eligibility limit in your state but is close enough that a spend down can bring it within qualifying levels. Also, make sure your assets meet the state’s Medicaid limits. This spend-down calculator may help give you an idea; however, it should not be used in place of guidance from a qualified Medicaid specialist or elder law attorney.
— Gather necessary documentation. Collect all income and asset documentation, such as pay stubs, Social Security benefit statements, bank account statements and real estate documents. Gather all medical bills, receipts, insurance premium statements and other documents that can be used to demonstrate your medical expenses. Make copies of everything just in case.
— Submit an application. Fill out the Medicaid application form, which can usually be done online through your state’s Medicaid website, in person at your local Medicaid office or by mail. Include all necessary documentation to show your income, assets and any applicable expenses.
— Meet with a case worker. You may be required to meet with a Medicaid case worker to review your application and discuss the spend-down process. Be prepared to provide any additional information or clarification requested by the case worker.
Professional resources to help you apply
Applying for Medicaid can feel overwhelming, but there is plenty of help out there. The biggest mistake is not knowing what your state requirements are, says Diane Omdahl, president and co-founder of the Medicare consulting firm 65 Incorporated.
“I have referred many people to the law firm I used with my own parents,” Omdahl says. “They know the rules and how to ensure you have an accurate application. Paying a bit more upfront for professional guidance can save you later on.”
Other resources include:
— Your local State Health Insurance Assistance Program (SHIP), which has counselors providing free, unbiased guidance
— A Medicaid planner, who can help you stay organized and steer clear of financial penalties. Consult the American Council on Aging’s website to find a reputable professional Medicaid planner.
— Your local Area Agency on Aging, which may be able to help you locate free planning assistance
[READ: Family Financial Alignment: A Financial Checklist for Starting the Senior Care Conversation]
Other Ways to Pay for Senior Living
If you or your loved one have significant savings, it may be tempting to consider paying for senior living out of pocket. However, a stay that stretches into years can eat up your savings quickly.
To give you a sense of how much senior living can cost each year, below are two common senior living situations and what you would potentially pay. (Keep in mind there are many variables in price, including geographic location and what the senior living community offers.)
Besides paying out of pocket or spending down to qualify for Medicaid, there are other ways to pay for senior care. No matter what you choose, you will always benefit from long-term planning.
“People don’t want to think about getting sick and needing long-term care, but addressing this early can enable you to retain some assets and have something left to leave for your heirs,” says Michael Botta, the president and co-founder of Sesame, a health care marketplace based in New York City.
Payment options include:
— Long-term care insurance. This option is specifically designed to cover the cost of care, including assisted living and other senior care options. However, policies must be purchased well in advance of needing care, and not all policies cover every type of senior living.
— Veterans benefits. Those who are military veterans and a surviving spouse may qualify for the Aid and Attendance benefit, which provides additional financial support for senior living. Some states also operate veterans homes that offer long-term care to eligible veterans, often at a lower cost than private facilities.
— Life insurance policies. Some of these can be cashed out or converted into a long-term care benefit plan to pay for senior living. Policies may also allow for the early payout of a portion of the death benefit if the policyholder is diagnosed with a terminal illness, which can be used for senior care expenses.
Since leaving a legacy is important for most people, “you will be glad down the line if you plan ahead while everyone is still healthy. It’s part of good financial planning,” Botta explains.
Does Medicare cover long-term skilled nursing care?
No, Medicare, the federal program that provides health care insurance for people age 65 and older, as well as some younger individuals with certain disabilities or other conditions, does not cover long-term nursing care.
Medicare Part A does pay for some short-term stays in a skilled nursing facility, but only if you come from the hospital after a qualifying three-day stay.
Bottom Line
Paying for long-term care is prohibitively expensive for many seniors, and a lifetime of savings can be depleted quickly. One financial strategy to avoid this is to spend down assets in order to qualify for Medicaid. Medicaid is required to pay for long-term care of those who qualify and must receive the same quality of care that private-pay patients receive in the same facility.
A Medicaid spend down can be complex, and the rules differ between states. It’s advisable to consult with a Medicaid planner or elder law attorney to understand your state’s specific requirements. Be honest when submitting your application. To prevent asset hiding, Medicaid has a five-year look-back period where they may examine your financial records to see if you’ve transferred assets to qualify for benefits. Dishonesty can lead to temporary or permanent ineligibility to the program.
Start planning now for the future possibility that you or a loved one will need long-term care services. Early planning can help reduce stress and confusion, and it can also help preserve an inheritance for your family.
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What Is the Medicaid Spend Down? Everything You Need to Know originally appeared on usnews.com
Update 05/29/26: This story was previously published at an earlier date and has been updated with new information.