A market crash might not be the biggest threat to a wealthy investor’s nest egg. In fact, future medical costs can potentially eat up more of your savings. And if you require long-term nursing care at some point, you can expect it to come with a high price tag. According to a study from Genworth, the median annual cost of a private room in a nursing home is just over $108,000 in 2021.
A financial advisor can help you create a financial plan to pay for your long-term care needs.
3 Questions to Ask Before Buying Long-Term Care
Purchasing long-term care insurance can act as a financial safety net if you require extended medical care, but it’s not right for everyone. If you’re a wealthy investor, here are the most important questions to consider when deciding whether to buy a long-term care policy:
1. How affordable are the premiums? Premiums for long-term care insurance can vary widely based on your age, gender and marital status. For instance, the American Association for Long-Term Care Insurance puts the average annual cost of long-term care coverage for a single 55-year-old female at $2,675 compared to the $1,700 that her male counterpart would pay. For married couples, the yearly premiums, on average, rise to $3,050 for 55-year-old adults.
Other factors that affect the cost of your premiums include the size of the benefits you want the policy to cover and how long you want the benefits to last. Long-term care policies are structured to pay out a certain dollar amount on a daily basis, typically for a period of two to five years. Generally, the higher the daily benefit and the longer the duration of the policy, the more you’ll pay for premiums.
2. Will I be able to deduct the cost? Long-term care insurance premiums are usually deductible as a medical expense, but not every investor who buys one of these policies will be able to write off the cost. For the 2023 tax year, you can deduct the amount of your medical expenses that exceeds 10% of your adjusted gross income. If you’re 65 or older, the threshold is lowered to 7.5% through December 31, 2022.
Whether or not you’ll see any real value from writing off your long-term care insurance premiums will ultimately depend on how high your adjusted gross income is for the year. If you earned a substantial amount, either through working or investing and you’re under 65, the 10% threshold might be difficult to hit.
3. How much interest are your investments generating? If you’ve invested a substantial amount of money, taking a look at how those investments are growing can help you decide whether a long-term care policy is appropriate.
For instance, if your investments are bringing in enough earnings to cover the annual cost of an extended nursing home stay, a long-term care policy might not be necessary. On the other hand, if you haven’t accumulated enough assets to effectively self-insure against future medical costs, a long-term care policy might look a little more appealing.
Consider Long-Term Care Insurance Alternatives
Long-term care insurance is designed to cover medical expenses. But if your primary concern is leaving something behind for your loved ones, purchasing a life insurance policy instead might make more sense.
A whole or universal life policy would stay in effect as long as the premiums are paid, and would allow you to build some cash value. The premiums are higher than the premiums of term life policies, but there’s no limit on the duration of your coverage.
Many insurance companies now offer hybrid policies that combine life insurance with long-term care coverage. These policies often require you to pay a large premium up front in a lump sum. But they offer an advantage over traditional insurance policies.
Policy benefits can be used to pay for long-term care if you need it but if you don’t, your heirs can receive the benefits as life insurance proceeds when you die. The cost of a hybrid policy is typically much higher than standard long-term care insurance, however.
Find out now: How much life insurance do I need?
Bottom Line
Tips for Paying Long-Term Care Expenses
- A financial advisor can also help you create a financial plan for medical needs in retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you have a health savings account (HSA), you may want to start socking away more money in it for long-term care. Also called health IRAs, these plans allow your money to grow tax deferred. (But you have to have a high-deductible health plan to open an HSA). To find out more, check out our report on the best HSAs.
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