With the oldest Baby Boomers turning 71 this year, the U.S. is experiencing a retiree tidal wave. About one in four people now age 65 will live to be at least 90 years old, according to the Social Security Administration, making it challenging for those Americans to afford long-term care.
There is good news for people when they turn 65. Most will qualify for Medicare, making medical insurance less costly compared to private insurance plans. But even with Medicare, many people may still need to be prepared to spend hundreds of dollars each month to cover all health insurance expenses.
Medicare requires participants to pay a monthly premium for doctor visits, with the amount tied to household income. In addition, a supplemental policy may be required to cover the cost of prescription drugs. Because Medicare doesn’t provide dental or vision insurance for most people, retirees will need to pay for these services too.
Medicare doesn’t cover most long-term care services, which range from in-home health care to assisted living facilities. It’s estimated that 70 percent of people over age 65 will require some form of long-term care for an average of three years. Medicare only covers skilled health care services and rehabilitative care, raising the specter that long-term care could cost tens, or possibly hundreds of thousands of dollars per person.
To make certain you don’t exhaust your life savings to pay for long-term care, it’s imperative to develop a plan that will protect your assets. Here are several options to cover those costs:
• Save now for future expenses. People who are still working could establish a Health Savings Account (HSA), which is available with high deductible health insurance plans. HSAs are funded with pre-tax contributions and can be invested to provide potential tax-free growth. Withdrawals are tax-free if used to pay for qualified medical expenses, including long-term care costs or insurance premiums. For 2017, the contribution limit is $6,750 for a family and $7,750 if the contributor is age 55 or older. Contributions to an HSA once enrolled in Medicare are not allowed.
• Purchase a long term care policy. These policies can help pay for home health care, assisted living facilities and other long-term health care costs. Pricing and products vary widely depending upon a person’s age, health history and level of coverage. However, unless a policy offers a paid-up feature, annual premiums may increase as a person gets closer to possibly needing the coverage. Some policies have a life insurance feature that pays out at death based on unused benefits.
• Utilize life insurance policies. Those with a life insurance policy that contains an accelerated death benefit clause may be able to use it tax-free if they are terminally ill or require extended long-term care. Alternately, the policy’s benefits can be used to reimburse family members who paid for a person’s long-term care by naming them as beneficiaries. Evaluate life insurance policies with a high cash value to see if it makes sense to use those funds for care.
• Talk with your family about staying in your home. The cost of long-term care facilities is often the largest piece of out-of-pocket health care spending, comprising almost 20 percent of average total medical expenditures for retirees. According to LongTermCare.gov, the average cost for a private room in a nursing home in 2010 was nearly $7,000 per month. If family and friends are willing to share caregiver responsibilities, costs can be reduced significantly.
• Home equity can cover some costs. If a person needs to moves to an assisted living facility, a home can be sold with the equity used to pay expenses. For those over 62 years old, a reverse mortgage can help cover long-term care costs. However, understand that reverse mortgages deplete home equity and that the home must be sold or the mortgage paid by heirs. Fees for a reverse mortgage may also be expensive.
The potential for extended long term health care costs is daunting, but with proper preparation you can be ready to address them if they arise.
Melanie Stewart is the Supervisor of Financial Planning for Brightworth, an Atlanta wealth management firm.