7 ways to pay for long-term care

According to LongTermCare.gov:

• Roughly seven out of 10 Americans turning 65 today will likely need some form of long-term care in the future.

• On average, women need care longer (3.7 years) than men (2.2 years).

• Of those who need long-term care, 20% will need it for more than five years.

SeniorLiving.org estimates the median cost of a private room in a Missouri nursing home is $221. In Illinois, it’s closer to $294. That’s more than $80,000 and $107,000 per year respectively. And rising.

Contrary to what nearly half of adults older than 65 believe, Medicare doesn’t cover that cost beyond a limited stay. More than 60% of the people in nursing homes rely on Medicaid, the government program that helps cover medicals costs for people with limited income and resources.

Suffice it to say that if you don’t qualify for government assistance, nearly all of the cost of any long-term care you might need in the future will be on you.

How to pay for it? Here are seven ideas:

1. Traditional long-term care insurance.  It’s expensive, especially if you never need to use it. The younger you purchase it, the less you’ll pay – but you’ll probably pay for longer. Whatever premium you pay, expect it to increase significantly in future years. If you reach the point where you can no longer afford the cost, you risk losing your coverage or having to reduce it, even if you have been paying into the policy for years.

    

2. Hybrid life insurance.  These policies pay a tax-free benefit to beneficiaries when you die, but if you can tap them to cover long-term care expenses if you need them in the meantime. This solves the issue of paying for traditional LTC insurance and never receiving a benefit. Hybrid life insurance is more expensive than a policy that covers long-term care alone and often requires substantial upfront payments.

    

3. Long-term care annuities.  You pay a lump sum or regular premiums into a tax-deferred investment vehicle that provides a benefit for long-term care. If you never need the money, you have access to the funds for other needs, and whatever is left in the annuity goes to your beneficiaries when you die. You’ll need to explore the cost and complexities of these policies to understand the benefits and drawbacks.

    

4. Health savings account.  If you have a high-deductible health insurance plan, you may be able to contribute to an HSA and withdraw funds to pay for eligible medical expenses. Contributions reduce your taxable income, can appreciate tax-free, and withdrawals for qualifying medical expenses are not taxed. You may also be able to access funds in your HSA to pay long-term care insurance premiums, subject to annual limits.

    

5. Roth IRA.  There are many potential benefits to a Roth IRA compared with traditional IRAs, such as tax-free withdrawals and no required minimum distributions. You must be age 59½ or older and have held the Roth for at least five years to avoid taxes and penalties on the appreciated portion of the account. Distributions from Roth IRAs can be used for any reason, including paying for long-term care.

    

6. Home equity.  Perhaps not the best first choice, a reverse mortgage or home equity line of credit (HELOC) could be a source of funds if you need long-term care, unless you choose to sell your home outright.

    

7. Self-insure.  If your savings and investments support it, you might be able to pay the cost of long-term care out-of-pocket without purchasing insurance or exhausting your assets. Because of the large number of constantly changing variables, however, this is not a decision you should make based on rules of thumb or casual guesses.

Have a conversation with your financial advisor to consider how you might best pay for long-term care in the event you need it one day. Chances are, in some form, you will.

Any opinions are those of Mike Brown and not necessarily those of Raymond James. This information is intended to be educational and is not tailored to the investment needs of any specific investor. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Past performance is not indicative of future results.

Long Term Care policies have exclusions and/or limitations. The cost and availability of Long Term Care insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of Long Term Care insurance. Guarantees are based on the claims paying ability of the insurance company.

Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.