According to LongTermCare.gov, approximately 70% of Americans will need long-term care (LTC) at some point in their lives. This could mean in-home nursing help or an extended stay in a nursing home or assisted-living facility. You've probably heard of LTC insurance and may have received mixed messages about it vs. other funding options. The truth is, the best LTC option generally depends on your specific circumstances, including what you hope to leave to loved ones in your estate plan.
The cost of LTC is steep. According to the National Council on Aging, the 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. Consider one or more of the following options:
It may be possible to pay for LTC expenses out-of-pocket as they're incurred. If you have the money available, you can avoid the high cost of LTC insurance premiums. And 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.
You may use any type of asset or investment to self-fund LTC expenses, including savings accounts, retirement account 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 can be 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 And an HSA, coupled with a high-deductible health insurance plan, allows you to invest pretax dollars that can be withdrawn tax-free to pay for qualified unreimbursed medical expenses, including LTC.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 HSA funds may be carried over from year to year.
LTC insurance policies — which are typically expensive — cover LTC services that traditional health insurance policies usually don't cover. Determining when to purchase such a policy can be challenging. The younger you are, the lower the premiums, but you'll be paying for insurance coverage when you're not likely to need it.
Although the right time for buying depends on your health, family medical history and other factors, many people purchase policies in their early to mid-60s. 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, ask your tax advisor whether tax benefits are available to offset some of the cost.
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 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 is that if you use the LTC benefits, that portion of the death benefit won't be available to your heirs.
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.
Tax benefits may be available to help offset some LTC expenses. If you self-fund the cost, your out-of-pocket expenses generally will be deductible as medical expenses, provided you itemize deductions on your tax return. Medical expenses that exceed 7.5% of your adjusted gross income (AGI) generally are deductible.
If you purchase LTC insurance, any benefits you receive won't be taxable. But if the LTC policy is "tax-qualified," you'll be entitled to deduct a portion of your premiums. To qualify, such policies must be guaranteed renewable and noncancelable regardless of health, can't condition eligibility on prior hospitalization, can't exclude coverage based on a diagnosis of Alzheimer's disease or dementia, and must meet certain other requirements.
LTC premiums are treated as medical expenses for tax purposes, so the rule about exceeding 7.5% of AGI applies. Also, tax-qualified policies may have higher premiums and stricter eligibility requirements than nonqualified policies.
The choice of how to pay for LTC costs will depend on many factors. The important thing is to make a plan before you actually need these funds. Discuss options with a professional advisor who can help you take a holistic approach to this critical decision.
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