The cost of health care is skyrocketing — the median yearly cost of a private nursing room home was nearly $84,000.
Some decisions can be put off until just before retirement, when you’re in your mid-60s. How you pay for long-term care is not one them.
Even if you’re running marathons at 55, you should have The Talk with your family and your lawyer before it’s too late. Here are five reasons you should start planning for 30 years from now, today.
1. Premiums are lower and payouts are higher when you enroll in your 50s
The most obvious financial reason to consider long-term care insurance today is that purchasing a policy now is much cheaper, and provides better payouts, than purchasing when you’re in your late 60s or early 70s. At face value, this isn’t intuitive: your monthly premiums may be lower when you’re younger, that’s because you’ll pay in longer before you receive benefits.
However, over the course of your life, the total amount you pay in is lower if you start when you’re 55 than when you’re 70. Consider this examplefrom the Connecticut Partnership Policy, which assumes that you begin drawing benefits at age 85.
If you buy the policy when you’re 55, you pay in just over $75,000 in premiums and receive over $800,000 in benefits. If you buy at age 75, you’d pay nearly $100,000 in premiums over just 10 years, and receive just $310,000 in benefits. You pay 25% more in premiums for less than half of the compensation.
2. Some alternative payment options have tax implications
If you decide to forgo insurance, you’ll still need to have a plan for financing your care as you age. Some of those options, such as charitable remainder trusts, are best purchased when you are in a high tax bracket because they reduce your taxable income.
Charitable remainder trusts function like annuities: You make a lump-sum payment upfront, and then receive regular payouts from the charity either for a fixed term, or for as long as you live. Those payouts are then used to fund long-term care.
Since it’s a charitable donation, your initial payment is tax-deductible. The periodic payouts may be taxed, but presumably your postretirement income will place you in a lower tax bracket, thus lowering your tax liability.
3. You can’t wait for a diagnosis
Unlike with health insurance, long-term care insurers can deny you coverage based on pre-existing conditions or poor health. If you already have a diagnosis of a chronic disease, you’ll struggle to find an insurer willing to accept you, and if you do get coverage, you’ll pay through the nose for it.
Dementia typically begins to set in after age 65, while the average age of onset for Parkinson’s disease is just 60. The time to at least consider long-term care insurance is now, while you’re hale and hearty, before age-related diseases render you ineligible.
4. Combined life insurance policies
If you’ve thought about taking out a life insurance policy to care for your family if the worst happens, you might also consider a combined life and long-term care policy. Such policies allow you to get an advance on your life insurance benefits, or sell the policy at face value, to fund long-term care. If you eschew long-term care insurance, you might consider a bundled life insurance policy as a hedge against expensive care.
5. ‘Self-insurance’ starts now
If you decide you don’t want long-term care insurance, combined life insurance or another payment vehicle, you will need a plan for paying for your care. The cost of health care is skyrocketing — the median yearly cost of a private nursing room home was nearly $84,000 in 2012, up nearly 8% in just five years.
And as an aging workforce and increasing life span put pressure on programs like Social Security, Medicare and Medicaid, it’s increasingly clear that you can’t rely on government help to cover the cost of ongoing care.
If you’re going to “self-insure” against the cost of care by putting money in an investment vehicle, you need to start saving now. That such investments might not receive the same preferential tax treatment as 401(k)s and IRAs is just one more reason you need to contribute. If you’ve made the conscious decision to forgo insurance, you need to sit down with a financial adviser and map out a plan while you’re still in the workforce; you and your spouse might even need to take on work-from-home jobs to meet this ambitious goal.
The thought of needing, let alone paying for, ongoing personal care is not exactly a rosy one. Yet if you delay planning for long-term care until you’re out of the workforce and facing declining health, you might find your options severely circumscribed.
Texas State Health Insurance
1250 N.E. Loop 410, Suite 330
San Antonio, TX, 78209