It is an unfortunate fact of life that roughly 70% of those over age 65 will eventually require some type of long-term care as determined by the U.S. Department of Health and Human Services. This type of care is anything but inexpensive.
According to the latest Genworth Cost of Care study, the median cost for a private room in a nursing home tops more than $116,000 annually. That number is more than $64,000 per year for an assisted living facility and almost $76,000 for home care.
Medicare, Medicaid, and the Challenge of Long-Term Care
In general, however, Medicare does not include long-term care expenses. Medicaid will cover such care, but one generally must be close to the poverty level to be eligible. Thus, an older person ineligible for Medicaid who wishes to plan for at least some of their potential long-term care expenses must use their own funds or purchase a long-term care insurance policy.
According to the American Association for Long-Term Care Insurance, an annual premium of roughly $5,000 would buy combined $800,000 of long-term care coverage for a 55-year-old couple that could be used at age 85. The premiums really escalate if the policy is bought in one’s 60s.
As Brian Gordon, president of long-term care insurance brokerage Gordon Associates in Bannockburn, Illinois, points out, if the figure proves too onerous, one could finance the premiums with a tax-free rollover from an IRA.
Enter the SECURE 2.0 Act
Previously, if you passed away and your kids inherited your IRA, they could pull the cash out over their lifetime. With the SECURE 2.0 Act, the account has to be drained within a decade of your death.
To avoid having your heirs empty the entire IRA within a decade of your death, Gordon says, spend some of that money while you’re alive to buy an annuity that will pay out for a decade of premiums on a modest whole-life insurance policy with long-term care rider.
This, known as a hybrid policy, makes any long-term care benefits tax free, and your heirs will get a death benefit too.
“A couple wanting a long-term care policy with $6,000 monthly benefits could shift about $164,000 from their IRA into an annuity that funds the whole life policy,” Gordon says.
In fact, according to personal finance columnist and author, Terry Savage, this means the long-term care insurance premiums are guaranteed to be paid for 10 years. After that time, the hybrid long-term care/life insurance policy is completely paid up.
Hybrid Long-Term Care Policies: An Affordable Alternative
For those who are leery of removing a large sum from an IRA to buy a hybrid policy, an alternative is to take a lesser amount each year for 10 years to pay for it.
“Many are finding the concept of a hybrid long-term care/life insurance policy more appealing than a standalone long-term care policy, reasoning that ‘if I don’t use it, at least my family receives something upon my death,'” Savage says.
But here is the drawback: such withdrawals subject the holder to a 10% tax penalty if processed prior to reaching the age of 59.5. If you wait to be in your 60s before purchasing a long-term care insurance policy, it becomes very expensive to own.
The older you are as a person when purchasing a policy, the bigger the risk that health problems could disqualify you from still being given coverage.
“If you’re between 60 and 64, there’s about a 30% chance of not being approved for a policy,” Gordon warns. “For those 65 and older, the odds are roughly 50-50.”
It should not be forgotten that an IRA rollover to pay long-term care insurance premiums may not exactly fit all possible long-term care expenses.
“Most people are going to have to still figure out how to come up with another $6,000 a month to pay that high-end long-term care facility,” said Pam Krueger, founder and CEO of WealthRamp, which rates financial advisors.
This article was originally published on flatlandkc. Read the original article.
Frequently Asked Questions
1. What is the most cost-effective way to pay for long-term care?
Although this will vary from person to person, life insurance with long-term care riders or HSAs should be most cost-effective.
2. Can I combine various ways to finance long-term care?
Yes, by linking several means, such as hybrid insurance, annuities combined with government benefits, you will be well covered.
3. How do I know if a hybrid policy is right for me?
A hybrid policy would be right if you like the flexibility with benefits and the value found in the premiums, whether or not you will need long-term care.
4. What are the risks associated with using a reverse mortgage or long-term care?
In implication, these risks are articulated through home equity reduction, possible loan balance growth, and the chance to lose the home if loan terms are not met.
5. When should I start planning for long-term care?
The best time to plan is as soon as possible. If you can, begin in your 50s or early 60s while premiums are more affordable and options abound.