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 an assisted living facility stay — at some point in their lives. And the cost of this care is steep.
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.
Self-funding
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 And an HSA, coupled with a high-deductible health insurance plan, allows you to invest pretax dollars that can be withdrawn tax-free to pay for qualified unreimbursed medical expenses, including LTC.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
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 to buy coverage 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 or may be prohibitively expensive.
Hybrid insurance
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.
Potential tax breaks
If you buy LTC insurance, you may be able to deduct a portion of the premiums on your tax return. And if you need LTC, you may be able to deduct some of the costs. If you have questions regarding LTC funding or the tax implications, please don’t hesitate to contact us.
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