Posted On: APRIL 2023
Few things can derail your estate plan as quickly as unanticipated long-term care (LTC) expenses. Most people will need some form of LTC — such as a nursing home or assisted living facility stay — at some point in their lives. And the cost of this care is steep. According to a 2021 survey by Genworth, the national median cost of a private room in a nursing home is about $9,000 per month. For assisted living facilities, the median cost for a one-month stay is about $4,500, while home health aides cost more than $5,000 per month.
Contrary to popular belief, LTC expenses generally aren’t covered by traditional health insurance policies, Social Security or Medicare. So, to help ensure that LTC expenses don’t deplete savings or other assets meant to go to your heirs, have a plan for funding them. Here are some of your options.
If your nest egg is large enough, it may be possible to pay for LTC expenses out-of- pocket as (or if) they’re incurred. An advantage of this approach is that you’ll avoid the high cost of LTC insurance premiums. In addition, if you’re fortunate enough to avoid the need for LTC, you’ll enjoy a savings windfall that you can use for yourself or your family. The risk, of course, is that your LTC expenses will be significantly larger than anticipated, eroding the funds available to your heirs.
Any type of asset or investment can be used to self-fund LTC expenses, including savings accounts, pension or other retirement funds, stocks, bonds, mutual funds, or annuities. Another option is to tap the equity in your home by selling it, taking out a home equity loan or line of credit, or obtaining a reverse mortgage.
Two vehicles that are particularly effective for funding LTC expenses are Roth IRAs and Health Savings Accounts (HSAs). Roth IRAs aren’t subject to minimum distribution requirements, so you can let the funds grow tax-free until they’re needed. And an HSA, coupled with a high-deductible health insurance plan, allows you to invest pretax dollars that can be withdrawn tax-free to pay for qualified unreimbursed medical expenses, including LTC. Unused funds may be carried over from year to year, making an HSA a powerful savings vehicle.
LTC insurance policies — which are expensive — cover LTC services that traditional health insurance policies typically don’t cover. Determining when to purchase such a policy can be a challenge. The younger you are, the lower the premiums, but you’ll be paying for insurance coverage during a time that you’re not likely to need it.
Although the right time for you depends on your health, family medical history and other factors, many people purchase these policies in their early to mid-60s. Keep in mind that once you reach your mid-70s, LTC coverage may no longer be available to you.
In evaluating LTC insurance, be sure to find out whether your employer offers a less costly group LTC policy. Also, consider whether tax benefits are available to offset some of the cost. (See “Tax benefits for long-term care” below.)
Hybrid policies combine LTC coverage with traditional life insurance. Often, these take the form of a permanent life insurance policy with an LTC rider that provides for tax-free accelerated death benefits in the event of certain diagnoses or medical conditions.
These policies can have advantages over stand-alone LTC policies, such as less stringent underwriting requirements and guaranteed premiums that won’t increase over time. The downside, of course, is that to the extent you use the LTC benefits, the death benefit available to your heirs will be reduced.
Life insurance exchanges or settlements
If you have a permanent life insurance policy, it may be possible to do a tax-free exchange for a traditional or hybrid LTC policy. Alternatively, it may be possible to do a “life settlement,” in which you sell a permanent or term life insurance policy for its current value and use the proceeds to fund LTC expenses.
Weigh your options
There are several potential strategies for funding LTC expenses. Work with us to review your financial and health circumstances, weigh your options, and develop a plan that meets your needs.
Sidebar: Tax benefits for long-term care
Covering long-term care (LTC) costs is expensive, whether you self-fund or purchase LTC insurance. Fortunately, there are tax benefits available that can help offset some of the expense. If you self-fund the cost of your LTC, your out-of-pocket expenses generally will be deductible as medical expenses, provided you itemize deductions on your tax return. Medical expenses are deductible to the extent that they exceed 7.5% of your adjusted gross income (AGI).
If you purchase LTC insurance, any benefits you receive will not be taxable. In addition, if the policy is “tax qualified,” you’ll be entitled to deduct a portion of your premiums. Currently, deduction limits range from $480 per year for taxpayers aged 40 or younger and up to $5,960 per year if you’re over 70. A tax-qualified policy is one that’s guaranteed renewable and noncancelable regardless of health, doesn’t condition eligibility on prior hospitalization, doesn’t exclude coverage based on a diagnosis of Alzheimer’s disease or dementia, and meets certain other requirements.
Keep in mind that LTC premiums are treated as medical expenses, which are deductible only to the extent they total more than 7.5% of your AGI and only if you itemize. Also, be aware that tax-qualified policies may have higher premiums and stricter eligibility requirements than nonqualified policies, so weigh the advantages of tax deductibility against the potential disadvantages of a qualified policy.