Most people will need some form of long-term care (LTC) at some point in their lives, whether it’s a nursing home or assisted living facility stay. But the cost of unanticipated long-term care is steep.
LTC expenses generally aren’t covered by traditional health insurance policies like Social Security or Medicare. A preemptive funding plan can help ensure your LTC doesn’t deplete your savings or assets.
Here are some of your options.
Self-funding
If your nest egg is large enough, paying for LTC expenses out-of-pocket may be possible. This approach avoids 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 here is that your LTC expenses will be significantly larger than what you anticipated, and it completely erodes your savings.
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
- Annuities
Another option is to tap your home equity by selling your house, taking out a home equity loan or line of credit, or obtaining a reverse mortgage.
Both Roth IRAs and Health Savings Accounts (HSAs) are particularly effective for funding LTC expenses. Roth IRAs aren’t subject to minimum distribution requirements, so you can let the funds grow tax-free until they’re needed.
HSAs, coupled with a high-deductible health insurance plan, allow you to invest pre-tax dollars that you can later use to pay for qualified unreimbursed medical expenses, including LTC. Unused funds may be carried over from year to year, which makes an HSA a powerful savings vehicle.
LTC insurance
LTC insurance policies—which are expensive—cover LTC services that traditional health insurance policies typically don’t cover.
It can be a challenge to determine if LTC insurance is the best option for you. The right time for you to buy coverage depends on your health, family medical history, and other factors.
The younger you are, the lower the premiums, but you’ll be paying for insurance coverage when you’re not likely to need it. 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, or it may become prohibitively expensive.
Hybrid insurance
Hybrid policies combine LTC coverage with traditional life insurance. Often, these policies take the form of a permanent life insurance policy with an LTC rider that provides tax-free accelerated death benefits in the event of certain diagnoses or medical conditions.
Compared to stand-alone LTC policies, hybrid insurance provides less stringent underwriting requirements and guaranteed premiums that won’t increase over time. The downside, of course, is that the more you use LTC benefits, the fewer death benefits available to your heirs.
Potential tax breaks
If you buy LTC insurance, you may be able to deduct a portion of the premiums on your tax return.
If you have questions regarding LTC funding or the tax implications, please don’t hesitate to contact us.
Questions? Smolin can help.
If you’re concerned about planning for long-term care, don’t put it off any longer. We’re here to help! Contact your Smolin accountant to learn more about your options for LTC expenses so you can rest easy.