Save and invest for the care you’ll need
Creating a portfolio of conservative, liquid assets for the specific purpose of funding the needs of long-term-care is one choice to consider. Those assets could be placed in a revocable trust designated for your future care, says Murray. Or, if you are covered under a high deductible health plan, they could be invested in a health savings account (HSA) to pay for qualified medical expenses on a tax-free basis. But relying on self-funding as the exclusive means of covering the costs of long-term-care has its risks. “Your expenses may exceed the amount you’ve set aside and then deplete the assets you’ve designated for other goals or for heirs,” he says. “Then, again, if you set aside enough funds for a worst-case medical or disability scenario, you may be tying up assets that could otherwise be invested and growing.” Murray suggests bolstering that safety net with some sort of insurance.
Transfer some of the risk to an insurer
“You’ve got several approaches to consider here,” he says. Insurance policies for long-term care provide the most robust benefits, but insurers have had poor experience with these products, which has resulted in significant premium increases, even on existing policies. Generally premiums for long-term care insurance can, however, be treated as qualified medical expenses and paid for with money drawn from an HSA, which you can fund with pretax dollars, notes Murray. The premiums for long-term care insurance that you can treat as qualified medical expenses are subject to certain limits.
But what if you purchase a policy for long-term care and end up not needing care? In that case, you’d forfeit the money you paid out in premiums. For that reason, you might consider hybrid life insurance with a benefits rider for long-term care. If you use only a portion or none of the long-term-care benefits, your beneficiaries will receive a death benefit without income tax from the balance of the policy. Or you might explore permanent life insurance with a benefits rider for long-term care or chronic illness. This option could be a good fit if your primary goal is to provide a death benefit for your beneficiaries, but you also want the option of tapping into the policy’s death benefit early if you need it to supplement your health care costs.
“Your financial advisor can help you decide how to put together a long-term-care funding strategy that’s right for you — one that’s based on your age, your family’s medical history and the resources you have available to you,” says Murray. “Whatever option you choose, you’ll feel better that you’ve done something to prepare.”