For most of us, planning for long-term health care is something that tends to be left for tomorrow. But a 2021 survey estimated that care in an assisted living facility or nursing home can cost anywhere from $5,000 to $9,000 a month — and that's not taking into account subsequent inflation!
As financial planners, it's our job to see that clients have the funds to meet whatever health challenges advancing age may bring. Many people assume that Medicare will cover their long-term health care needs, but this isn't necessarily the case. While Medicare covers many costs for people over 65 or those with specific disabilities, it only covers skilled nursing facility care for up to 100 days for qualifying patients or those on hospice care.
Shann M. Chaudhry is principal attorney and managing member at Shann M. Chaudhry, Attorney at Law.
Initiating a comprehensive discussion with clients now will help them live out their lives to the fullest. Here are some strategies to cover long-term health costs for your clients, and their pros and cons.
Home equity Those who are transitioning into long-term health care facilities may consider using their home equity to cover costs. A reverse mortgage allows a client to convert their home equity into cash, and is particularly useful in providing income if they don't have other funds to cover long-term health care expenses. But keep in mind that this arrangement is still considered a loan. Clients continue to pay maintenance, home insurance and property taxes, and interest and fees can add up quickly. If and when the client decides to sell their home, the balance of loan must be paid in full, which could have serious implications for estate planning.
Health savings account Another way to prepare for significant medical issues is with a health savings account. Some HSAs, when paired with high-deductible health plans, are eligible for tax advantages including deductible contributions, tax-free withdrawals for qualifying medical costs and tax-deferred growth. An HSA can also be used to pay for long-term care insurance (discussed in greater detail below) and Medicare premiums.
The current HSA contribution limit is currently $3,850 for individuals and $7,300 for family coverage. Clients aged 55 or older can benefit from employer contributions and make catch-up contributions of up to $1,000 per year on top of the maximum contribution limit to get their savings up to speed. It's important to note, however, that once enrolled in Medicare, a client can no longer pay into their HSA, and an advisor must ensure that this factored into a long-term financial plan.
A long-term care annuity is essentially a deferred annuity with a long-term care "rider" that offers extra features, namely payments for long-term care and associated costs. It comes with either a single upfront payment or a monthly payment, and one may receive payments on a monthly or single-sum basis. If one has already paid for long-term care expenses, the annuity provider may reimburse you for those costs after the fact or provide funds to use as required. To activate the long-term care rider and commence receiving annuity benefits, the buyer must satisfy medical criteria certifying the need for long-term care. This could entail receiving a prognosis of a degenerative disease or a chronic or terminal illness that necessitates nonstop care, be it at home or in a nursing home.
A single payment immediate annuity (SPIA), also known as an immediate annuity, is an insurance contract financed through a single upfront payment or premium, which may be contributed from a savings account, 401(k) or individual retirement account. The frequency and duration of payouts is determined at the time of purchase. Initial withdrawals are permitted to commence within 30 days. Individuals who have limited or no pension income may wish to contemplate immediate annuities, which can furnish them with a consistent stream of income throughout their retirement years. These funds can be used for any purpose.
With a deferred lifetime annuity, a client can decide on the age at which they think they might need long-term care, and have the annuity take effect at that time. If the client arrives at that age and is still healthy, the capital can be used to meet other needs.
Long-term care insurance Long-term care insurance can be used for both in-home care and facility care and can be used in addition to a traditional insurance policy. While long-term care insurance is a good option for some, it's important to understand that preexisting conditions — including Parkinson's disease, cystic fibrosis, schizophrenia and Alzheimer's or similar forms of memory loss — can disqualify one from being able to purchase coverage. It's wise to apply for this kind of insurance at a younger age, as premiums for elderly applicants can be very costly.
Medicaid Medicaid is typically available for low-income households, and eligibility and benefits vary depending on which state one lives in. This is a popular option for many who can't rely on Medicare to cover their long-term care expenses and might be unable to afford options like annuities or HSAs. Medicaid planning can be a difficult and confusing process for those unfamiliar with state requirements and regulations, and a financial advisor may wish to consult a Medicaid planning attorney or recommend one to the client.
Personal savings Personal savings can be one of the most flexible ways to pay for health care, but an advisor recommending this route must be aware of all a client's resources, including 401(k)s, 403(b)s, pensions and IRAs. Given the ever-rising costs of health care, using personal savings can have a sizable impact on an estate plan and may reduce the assets available for beneficiaries.
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