Health and long-term care costs are often some of the largest expenses we face in retirement. Janney’s Head of Investment Solutions, Jessica Landis, suggests exploring an alternative to the pay-as-you-go approach most people use to cover these costs.
When it comes to making large one-time purchases, such as purchasing a home, I and my colleagues here at Janney frequently hear folks say that they plan to borrow to make that purchase.
The common responses we get when we ask, “Why not pay cash?”:
- It doesn’t make sense with interest rates so low.”
- “ There are tax benefits associated with the loan.”
- “ I like to leverage ‘other people’s money’ to grow my wealth.”
When we pose the same question about how people intend to fund their long-term care (LTC) needs, the response is often: “We should have enough to cover it.”
While that may be true, let’s also pose this question back to you: “Why would you want to cover 100% of that expense with your dollars when alternatives exist?”
The conversations around purchasing a new home and paying for health and long-term care are similar. You’ve worked incredibly hard to build the nest egg you’re heading into retirement with, so why not protect that nest egg against one of the largest retirement risks you’ll likely face.
COST OF HEALTH AND LONG-TERM CARE IS HIGH
Health care and long-term-care costs are likely to be one of the largest expenses you’ll face during the later years of your life.
Estimates on lifetime out-of-pocket health care expenditures often reach in excess of $250,000–$300,000, depending on the report. Meanwhile, long-term-care costs can easily exceed $200,000.
Many people fall into the trap of looking at the average costs for retirees. It can be particularly dangerous when someone falls outside the averages. Some common reasons why include living with Alzheimer’s or dementia, or dealing with a persistent medical issue that requires ongoing treatment. Those with ample retirement assets may decide that self funding is their preferred option. However, a Financial Advisor may help them to consider alternatives to fund their future care needs.
WHY CONSIDER ALTERNATIVES TO SELF FUNDING?
There are several benefits to exploring other strategies:
Keep your options open.
One of the main misconceptions about long-term-care insurance is that you can only use it if you enter a long-term care facility.
This assumption is simply incorrect.
There are many policies on the market today that will provide benefits if you need care at home. These policies may even give income for a family member delivering care to offset their lost earnings and compensate them for their time.
When you purchase a long-term-care policy, you’re making sure that all of your choices stay on the table without you and your family having a difficult conversation about whether to deplete your assets to obtain your preferred level and method of care.
This way, the focus stays where it should be—on you and your health.
Explore hybrid LTC policies for portfolio protection.
Leverage is one of the main reasons individuals consider purchasing a long-term-care policy to help pay for future care needs.
Why risk spending more than $200,000 out-of-pocket in the future if you could take a much smaller portion of your assets now to help cover the costs when they arise?
When many people think about long-term care policies, they’re most familiar with traditional “use it or lose it” type policies.
Traditional LTC policies didn’t offer cash accumulation or death benefits to policyholders or their families. If you didn’t need the coverage, there were little-to-no benefits for the cost incurred to maintain the policy over the years.
However, the marketplace has changed. There are several hybrid products on the market that do accumulate cash, allow you to take your premium back if you decide to terminate the policy, and/or provide a death benefit.
Help your family make the necessary choices.
Many long-term care insurance policies now come with care-coordinator benefits, providing a free service to the policy owner’s family members when they’re making difficult decisions. These types of services help the family talk through the possibilities and understand how to use the policy.
It can be an emotionally trying time whenever someone needs to make important medical decisions for another person. These services support your loved ones so they can continue to support you.
Avoid becoming a financial burden.
The average woman loses $650,000 in lost wages and benefits for providing care for an aging loved one.1
This loss can be a taxing financial drain on those you love. Purchasing a long-term care policy allows you to make sure that if your family wants to care for you themselves, they’re able to do so without jeopardizing their own financial situations.
Make sure to consider a policy that provides benefits that will give income to your family member/caregiver.
Long-Term Care Partnership Program.
Depending on the rules of your state and the policy you choose, your policy may be considered a “Partnership Policy.”
The Long-Term Care Partnership Program is a joint federal-state policy put into effect to promote the purchase of long-term-care insurance.
Essentially, if you purchase a partnership policy, you receive $1 of asset protection for every $1 of insurance you have. For example, if you had $200,000 in insurance benefits, you could be able to keep $200,000 of assets above your Medicaid-eligibility level.
Premiums for “qualified” long-term care policies may be tax deductible if they, along with your other unreimbursed medical expenses, exceed 10% of your AGI (2019).
Speak to your accountant about whether this deduction might apply to you.
1. “Value Your Independence? Make Time to Make Long-Term Care Plans.” Minnesota Women’s Press (November 2013).
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