What’s your plan for paying for long term care as you grow older? Given the cost involved, protecting your retirement funds through advance preparation and a well-conceived strategy is the way to go.
The U.S. Department of Health and Human Services estimates that 70% of all Americans over the age of 65 will need some type of long term care in their lifetime. This includes everything from nursing homes to assisted living facilities, memory units for those with Alzheimer’s or dementia, home health aides, and more. Contrary to popular belief, these pricey custodial services aren’t covered by Medicare. If you don’t plan ahead, long term care can be a financial drain that eats up a significant portion of the money you set aside for your retirement or your heirs. While it’s expensive and there is no ‘magic formula’, a number of payment options do exist, some you may not even be aware of.
In this article, we’ve outlined seven potential ways to fund future long term care needs.
1. Self-pay with savings. Paying out of pocket yourself comes with a hefty price tag. According to the 2019 Genworth Cost of Care Survey, here are the national median costs for a sampling of typical long term care services:
- Home health aide services: $25/hour
- Assisted living facilities: $4,000/month
- Private room nursing home care: $8,500/month
The average use of long term care services is approximately three years, so you can see how the expenses add up. And, due to continuously rising healthcare costs, it can be difficult to anticipate how much savings you’ll require to cover the care you’ll need. Even if you can afford the substantial expense of long-term care, who wants to deplete their life savings to get the quality care they need and deserve?
- Long term care insurance. This insurance provides coverage for home care, nursing homes, adult day care, hospice, home modifications, and much more. Like most other types of insurance, the annual premium depends on the amount of coverage chosen, the duration, and how quickly the benefits kick in. Long term care insurance is least expensive when you’re young and healthy and generally becomes more expensive and harder to qualify for as you get older. Like most insurance, a downside of long term care insurance is the risk of paying premiums for many years and never needing to utilize the benefits.
3. Hybrid policy combining life insurance with long term care benefits. This policy provides coverage through a rider when Medicare and your regular health insurance plan won’t cover the expenses. Essentially, a portion of the paid premiums is earmarked for long term care expenses. Should these funds be needed, they can be withdrawn tax-free up to a specified maximum amount to pay for long term care. Death benefits are then reduced by the amount that has been used to pay long term care. Your beneficiary will receive this remainder as a tax-free payout upon your death. He or she will receive a full tax-free death benefit if you pass away without ever using your long term care benefits.
4. Health savings account. If you have a high-deductible health insurance plan (HDHP) as defined by the government, you may be eligible to open a health savings account (HSA). HSAs are funded with pre-tax dollars and are not subject to taxes at withdrawal when you use them for qualified health care expenses, including long-term care and long-term care insurance premiums. The maximum annual tax-free amount is based on your age. To qualify, the long term care policy must cover only long term care services. The money in your HSA is allowed to roll over and accumulate each year, so it’s wise to open one sooner rather than later to begin taking full advantage of this benefit.
5. Funding through adult children. In this creative option, adult children who are in their peak earning years purchase long term care insurance for aging parents. Paying the long term care insurance premium is much less expensive than paying someone else to provide care at $4,500 per month or more, and less taxing than providing the care themselves. This option assumes that you are still relatively healthy and can qualify for long term care insurance, but it can be a viable way to remove the burden for you and your adult children. If the expense is too prohibitive, you might consider splitting the cost of the monthly premiums.
- Veterans Aid and Attendance benefit. Are you or your spouse a veteran who served in World War II, the Korean or Vietnam conflicts, or the Persian Gulf War? You may be eligible for this little-known U.S. Department of Veterans Affairs program which provides up to $2,000 a month toward the cost of home health care, a nursing home, or assisted living. While the program is income-based (in general, an applicant must have less than $80,000 in assets, excluding a home and vehicle), veterans with more assets may qualify if they have high unreimbursed medical costs.
- Continuing Care Retirement Community (CCRC). A CCRC is a community living arrangement, typically on a single campus, that provides housing, health care, and social services. CCRCs offer different levels of services ranging from independent housing to skilled nursing care. Joining a CCRC is a way of obtaining long-term care services more easily. You move into a CCRC as a resident of an independent housing unit where you can purchase and receive support services as needed. When you require more care or are unable to live independently, you can move to the assisted living facility on campus. Should you need the next level of care, you can then move into the on-site nursing home.The fee arrangements for CCRCs vary, but generally include both a monthly payment based on the size of the housing unit, along with a sizable one-time entrance fee.
While these options each protect your retirement fund in different ways, certain strategies may be better than others for your unique financial situation. If you’re ready to explore your long term care funding plans, FAI is here to help. Please contact our financial professionals today.
About FAI Wealth Management, Inc.: Located in Columbia, Maryland, FAI focuses on helping clients create the financial future they desire by protecting their wealth, making the most of their assets, and planning for life’s uncertainties. The firm combines fee-only, fiduciary-driven guidance with highly personalized, consultative financial planning and investment services that enable individuals, families, and businesses to navigate complex life transitions. Founded in 1987, FAI currently manages more than $350 million in client assets nationwide. For more information about FAI Wealth Management, please visit the website at https://www.faiwealth.com or call 410.715.9200.