With nursing home care running north of $68,000 per year, many families who have a "comfortable retirement" could find themselves facing the prospect of spending down a large chunk of their savings and investments should the need for nursing home care arise. Without long-term care insurance some will find their only option may be to apply for Medicaid assistance.
While Medicaid rules vary from state-to-state, typically a person needing long-term care benefits must spend down their assets to $5,000. If there is a surviving spouse, they can usually keep the family home (but states can consider home equity in excess of $500,000), a prepaid burial plan, and between $50,000 and $100,000 in resources.
For couples aged 60, the average cost of long-term care insurance runs about $3,500 per year. For many this is expensive; some alternatives you might consider are long-term care annuities and life insurance policies with long-term care riders.
Regardless of cost, you should shop for a policy from a company with the financial stability to pay a claim if it becomes needed. Limiting your coverage and extending the waiting period can help reduce costs as well.
You should choose a policy that meets your needs and include in-home care and policy triggers that are reasonable. A report from the American Association for Long-Term Care Insurance suggests that for the majority of policy owners, three years of coverage is sufficient. With high cost of coverage, the primary reason for not having coverage this study suggests that some coverage is better than none, and for most, is all that is needed.
What Triggers Your Long-Term Care Benefits?
Most companies will pay benefits if you are unable to complete two of the six activities of daily living, which include:
Or if you have severe cognitive impairment.
When Do Benefits Begin
Often long-term care policies have an exclusion period before benefits will begin. There can be some flexibility here if you have the resources to pay for some expenses yourself, for a few months. The most common exclusion period is 90 days. That means you would pay the first 90 days of expenses out of your pocket. This is reasonable and ties in with Medicare, who will generally cover the first 90 days of care if you are in a nursing home for something you are expected to recover from, such as surgery or a stroke.
What Long-Term Care Insurance Covers
Virtually all policies are comprehensive plans, which cover care provided in many settings: at home, adult daycare centers, assisted living facilities, nursing homes, and Alzheimer’s facilities. A home care benefit will typically cover skilled nursing care and occupational, speech, physical, and rehabilitation therapy. Most importantly, it can help with personal care, such as bathing and dressing.
Where to find Long-Term Care Facilities
You may at some time in your life be involved in selecting a nursing home facility for a loved one. The US Department of Health and Human Services Medicare site now has a feature called Nursing Home Care Compare. You can use this site to find and compare nursing homes by state, zip code, county or name.
Once you have found nursing homes in your area you can view information on the quality of care provided. Each home is compared to the state and national averages for each category; for example, the number of nursing staff per-resident, per-day; or the percentage of residents who are physically restrained. Although the grading is measured against negatives and a little confusing (it seems a lower score is better), it is an excellent resource and a good place to start should you ever need nursing home facilities.
A health savings account is a tax-deductible savings plan for individuals covered by a qualified High-Deductible Health Plan (HDHP). This program allows for tax deductible contributions to a special account that allows you to pay for expenses your insurance plan does not cover with pretax and tax-free dollars.
A high deductible plan for 2019 requires a minimum deductible of $1,350 for individuals and/or $2,700 for a family. These plans must have a maximum out-of-pocket expense of at least $6,750 for an individual and $13,500 for a family.
If you’re covered by a spouse’s workplace policy, Tricare, the Veterans Administration, or Medicare you are not eligible. If you are a dependent on someone else’s tax return or covered by a Flexible spending account or Health reimbursement account, you are not eligible.
How an HSA Works
The beauty of an HSA is you make contributions that are deducted from your taxable income, yet when you spend the money for qualified expenses, the distribution is tax-free as well. Any growth within the HSA account is also tax-free. So, the contributions are deductible like a Traditional IRA, but earnings and distributions are tax-free, like a Roth IRA – you get the best of both worlds!
Contributions to an HSA are deductible from your taxable income in the years you contribute, and like a Traditional IRA, you can make contributions until April the 15th or your normal tax filing deadline of the following year. For 2019, the maximum HSA contribution is $3,500 for and individual and $7,000 for a family, with an additional $1,000 per year “catch-up” contribution for those over age 55. It is important to know that for married couples the $1,000 catch-up provision applies to each spouse. If you and your spouse are each over 55 your HSA contribution limit for 2019 would be $9,000.
If you contribute to an HSA plan through your employer, your annual contributions are reduced dollar-for-dollar by any contributions your employer makes on your behalf. For example, if you and your spouse are under age 55 and your employer makes a $1,200 annual contribution on your behalf, you would only be allowed to contribute and deduct from your taxable income $5,800 for 2019 ($7,000 contribution limit minus $1,200 employer contribution).
If you drop out of a high deductible plan before the end of any calendar year, say you become eligible for Medicare, or you change employers and the new coverage does not qualify as a high deductible plan, your contributions for that year are simply pro-rated. Meaning if you participate for three months then changed to a plan that is not eligible for HSA contributions, you would be eligible for a 3/12ths deduction in that calendar year.
On the other hand, if you become eligible for HSA contributions during a calendar year, you can make contributions as if you were covered by a high-deductible plan for the full year. So, if you moved from an employer plan that was not HSA compliant to another employer plan that was HSA eligible in October you would be allowed to contribute as if you were eligible for the entire year. This is known as the last month rule.
The contribution rules for HSA accounts also allow others to contribute to the account on your behalf. For example, if you have a working child who is covered by an HSA compliant insurance policy, you can contribute directly to the account for them. The contribution is considered a gift so you will not receive an income tax deduction, but it may be an important step to helping your child become financially stable.
Qualified HSA Funding Distribution
An important funding technique is the ability to make a trustee to trustee transfer from an IRA into your HSA account. Each taxpayer may only do one qualified transfer in their lifetime and the amount of your HSA contribution will be reduced dollar-for-dollar in the year you make a conversion. This is an outstanding opportunity to convert dollars that are potentially taxable in the future to dollars that can be tax-free. If you are young and make a conversion, the potential for tax free growth can’t be beat. Even if you’re just shy of Medicare eligibility, the income tax savings of this strategy make it worthy of consideration.
An important note for couples is that only one person can own an HSA account. To maximize the Qualified HSA funding distribution benefit, one spouse will open a family HSA for a calendar year and use their qualified funding distribution. In the following year the other spouse will open a separate HSA account and use their own once in a lifetime qualified funding distribution to fund that account. This would allow a couple to convert up to $18,000 from IRAs where distributions are likely to be taxable--into HSA accounts that compound tax-free and provide tax-free future benefits.
You are allowed to rollover funds, via a trustee-to-trustee transfer, from one HSA account to another without triggering a taxable event. This means if you leave an employer’s plan and wish to establish an HSA account through a different provider, you can consolidate your account with the new provider and simplify your finances. Or if you wish you can change HSA account custodians anytime.
If you name your spouse as the beneficiary of your HSA account, the account will be treated as the spouse’s HSA upon your death. For other beneficiaries, the fair market value becomes a taxable distribution to the beneficiary.
Funds from your HSA account can be used for qualified medical expenses for you and your family. The IRS is a bit liberal in their definition of family. Anyone who qualifies as a dependent on your income tax return can have medical expenses paid from your HSA account. You, your spouse, your children under age 19 or under age 24 if a full-time student, grandchildren, parents, and foster children are all included.
Medically necessary expenses not covered by insurance can be paid from your HSA account without taxation. Even things like drug and alcohol rehab, home modifications for disabilities, acupuncture, dental and vision care, and over the counter drugs prescribed by your doctor, are all allowed expenses.
Although your current insurance premiums cannot be paid from you HSA account, you can use those funds to pay for Long-Term Care insurance and Medicare Part B and Part D premiums.
For a complete listing of eligible expenses see IRS publication 502.
Look Back Provision
If you have an HSA account open during any tax year and do not have enough money contributed to cover all the allowed reimbursements, you can use future years contributions to pay yourself back. For example; In 2018 you had an HSA balance of $4,000 but in December you had a large unexpected $5,000 medical expense. You would be able to make 2019 contributions and then reimburse yourself for the extra $1,000 expense you incurred in 2018.
Like IRA accounts, there are certain transactions that are prohibited inside your HSA account. You cannot have any self-dealing transactions such as sale leasing or exchange of property between yourself and your HSA account, you cannot charge your HSA account for services you provide, and you cannot use your HSA account as collateral for any loans. A violation of these rules will trigger a deemed distribution from your HSA account and subject all the funds to taxation in the year the violation occurs. For more information on prohibited transactions see section 4975 of the tax code.
For the full IRS guidance on Health Savings Accounts see Publication 969.
Insurance Coverage: Basic Concepts
Part of Oak Street Advisors’ 10 Financial Commandments for Millennials series, basic insurance knowledge will help you get the coverage you need and help clarify some misconceptions.
Employer group health insurance plans are the most common option for young investors. Often, you don’t have much say in the plan, but the pricing is generally much cheaper for at least the employee, if not their entire family, than paying for private insurance through the Healthcare Marketplace. If you do have a robust menu of options in your healthcare and supplemental plans, it’s best to sit down with your advisor or HR department to discuss how you can optimize these features.
If you’re paying for private health insurance, you likely have a high deductible health care plan. Using a Health Savings Account (HSA) you can reduce your taxable income, experience tax-free growth, and make tax-free purchases on qualified medical expenses. Talk with your financial planner to discuss how to set an HSA up and an appropriate strategy if investing inside the account.
Auto insurance coverage can often be boiler-plate, but you should understand these concepts. First, you only need personal collision coverage up to the value of your car; other vehicle collision coverage should be at least $50,000 to cover damage to a more expensive vehicle while at fault.
Second, make sure you have enough “under insured motorist coverage. This is different from “uninsured motorist coverage” where you are paying for people who are driving around uninsured all together. Under insured motorist coverage makes up the gap between someone who has the bare minimum auto insurance and the actual money needed to pay for collision damage and medical bills. It is important to remember this is further protection for you, not any other motorist.
The basics of life insurance are broad, but we have shortened it down for you HERE.
You should purchase life insurance to cover your family debts and provide income to survivors, if needed. In your life insurance calculation make sure to insure your home mortgage, kids’ college expenses, any other outstanding debts, and your final burial expenses. Often investors can self-insure some of this with their current retirement savings, but rarely all.
Here’s a quick way to determine how much insurance coverage you’ll need to replace employment income for your family:
Every $1,000,000 can produce $50,000 of income at a safe withdrawal rate of 5%. So add $1 million for every $50,000 of annual income you need to provide, $500,000 for every $25,000 etc.
In general, if you’re not married and do not have any children- there is little reason for you to purchase life insurance. If you do need life insurance, I strongly encourage you to purchase term. Term is much cheaper and does what it’s supposed to do- insure you if you die.
If you like paying an extra premium for no reason just to invest your money, you can purchase a whole life policy. These are expensive and laden with commissions and fees which are a conflict of interest to the salespeople who will try to talk you into purchasing these.
An umbrella policy bridges the gap between your standard home and auto coverages and catastrophic costs. If something goes terribly wrong that you are liable for, this policy will usually cover the difference between your policy maximum coverage limits and $1 million- and can cover even more if need be. These policies are typically $150-$300 per year for the $1million coverage. For anyone building or maintaining wealth this coverage is too cheap to pass up. There is a reason on the CFP® students are taught that when in doubt regarding an insurance policy, the answer is always “recommend an umbrella policy”.
Life insurance can be a confusing topic. There are many different flavors and choosing the right coverage for your needs and budget can be difficult. Throw in the fact that life insurance agents goal of collecting a commission check may be at odds with your goal of obtaining the best protection for the lowest price and you have a recipe for disaster.
Let’s start by getting to know some of the basic flavors of life insurance available to you. While this is not a complete guide to all the life insurance options available nor does this explain all the nuances of each policy type, it is useful as a primer to get you started.
Term Life Insurance
Term insurance is the most basic and the least expensive type of life insurance policy available. Term insurance is pure protection. You give the insurance company a premium and the commit to paying your beneficiaries a death benefit if you die during the policy’s term. Once the term has expired you no longer have life insurance protection and the insurance company no longer has an obligation to pay. One-year non-renewable term insurance is the absolute cheapest type of policy you can buy, but that is rarely the type of policy you will need.
Usually you need protection for longer than a year, so insurance companies came up with multi year guaranteed renewable term policies to meet that need. You can often find 5 year to 20 year guaranteed renewable coverage that can be used to customize coverage for just about any situation. Because the policies cover multiple years and have guaranteed renewability, premiums are a bit higher. You can also add level premium guarantees to the coverage, so you know what your premiums will be for the entire term of the contract. Level premiums mean there is a bit more risk for the insurance company which gets passed along to you the consumer in the form of higher premiums.
Many young families can use term insurance to protect against premature death and until they have accumulated enough capital to no longer need as much protection. For instance, new parents might purchase enough coverage to protect against the loss of wages if one spouse dies and provide funds for childcare and education until their children graduate from college with a fifteen or twenty-year level premium term policy. After that term expires their need for insurance may well be much lower and they can follow it up with a ten-year level premium policy to provide protection until retirement when they will likely not need any life insurance coverage.
Whole Life Insurance
Whole life coverage as the name implies will last your entire life. The insurance company issues you a policy with a premium based on your age when the policy is issued. The premium you pay is calculated to cover the cost of term coverage for you, pay the agent, and have some money left over to go into a savings account inside the policy. Usually there is a stated interest rate that your excess premiums earn inside the insurance policy. As you continue to make premium payments, you gradually build up enough money inside the policy to either increase the policy’s death benefit or to stop making premium payments altogether.
Whole life coverage is usually the most expensive flavor of life insurance you can buy. There was an old adage that said buy term and invest the savings yourself for a better long-term outcome but having worked with many clients who are terrible savers, I do recognize the place for whole life insurance policies in many family’s insurance portfolio. Perhaps it is used as a foundation that you build term coverage on to meet all your needs for all your life.
Universal Life Insurance
Universal insurance works like whole life but rather than earning a guaranteed rate, the excess premiums are credited with an interest rate that floats with market rates. These policies were popular when interest rates were high. As interest rates came down over the past two decades many of these policies collapsed as the interest rate assumptions made when they were issued failed to materialize leaving the owners with much higher than anticipated premiums or reduced or even eliminated death benefits.
Variable Universal Life
Okay, take a universal insurance policy and make the savings account inside the policy a high priced mutual fund and what you end up with is variable universal life. If the mutual funds you own inside the policy earn enough net of fees, your premiums vanish or your death benefit increases. If you can find a variable universal policy with low expenses this is a good idea, but determining all the fees being charges to your account can be very challenging.
In the end life insurance is often a must for building a solid foundation for your family's financial plan. Life insurance is the one product that can create wealth where none existed before. Life insurance provides the cash your family will need to replace the earnings or human capital of a loved one. Life insurance is a valuable tool for providing protection for your family, but it is almost never a good tool for investing. If your agent talks about the investment properties of a life insurance product you should see this as a red flag and seek out a second opinion.