Income for Life Series #11: Planning for Health Care Expenses

We all know that healthcare costs are outrageous, no matter what your age it. However, the average couple can expect to spend close to $300,000 on out-of-pocket medical expenses, such as such as deductibles and Medicare premiums, during retirement. Sadly that is not factoring long-term care costs into the equation. When coupled with that, medical expenses can be a major budget buster, and you can see why planning for health care expenses is essential or better yet critical to maintaining an income for life.

Health Savings Accounts

There are a number of alternatives to help cover these potential medical bills. One tax-friendly account that I am always harping for people to get, if they are eligible—you need a high deductible health insurance and not be receiving Medicare, is a Health Savings Accounts (HSA). An HSA provides a triple tax-advantage. The money you contribute to the account is pre-tax dollars. Once in there it grows tax-deferred. AND as long as the money is used for qualifying medical expenses both now and in retirement, the withdrawals are tax-free!! It’s the only account that I know of that you can put money in without paying taxes and take money out without paying taxes! How sweet is that!

One minor caveat—if you use the money for other purposes you will have to pay taxes and be charged a 20% penalty. However, that penalty disappears when you hit 65.

To take advantage of an HSA, contribute as much as possible to the account to cover current medical bills out of pocket. In doing so, you allow the account time to grow. Additionally, when you are in your retirement years, you can use the HSA funds to reimburse yourself for the medical bills you already paid out.

For 2017, $3,400 was the maximum you could contribute for yourself and $6,750 for households. As an added bonus, those that are 55 or older can contribute an additional $1,000. (Talk with your CPA or CFP^® if you need to get caught up before tax time—you can still make contributions up until tax time for the prior year.)

Now in this coming year, those limits increased slightly. For 2018, those contributing for only themselves can deposit $3450. However, family contributions are a little more, topping out at $6,900. There is still the same rule for those 55 and older allowing that $1,000 catch up.

Check with your employer to see if it’s an option they offer to you if you have a high-deductible plan. It is becoming increasingly popular due to the lower premiums for high-deductible plans as compared to traditional insurance.

If you’re searching for an HSA by yourself, compare prices and investment choices. Morningstar recently reviewed plans at the ten most notable providers and discovered that just one—provided by The HSA Authority—did a fantastic job for the two current spending and future investment.

Keep in mind that HSA funds can cover long-term-care premiums—but given the exorbitant cost of long-term-care policies might not make this your best option. You would want to purchase long-term-care coverage to cover at least three decades or more of long-term care and protect you from inflation. And you may not have enough to do that, so another choice is to purchase enough coverage to cover the gap between the price of care and exactly what you can afford to based on your savings and other income sources.

A Hybrid Insurance Policy

Another alternative for long-term care: a hybrid policy. That is where you utilize both your life insurance death benefit—spending it down to pay for your long-term-care benefits if you require it. You can also purchase a rider to help cover long-term care above your death benefit. That’s an option that allows you to leave money for your heirs should not need long-term care or if you don’t end up entirely consuming the death benefit.

Lincoln National, as an instance, provides a hybrid coverage named MoneyGuard which you buy with an upfront lump sum or in installments over ten decades. In this case, a 60-year-old guy paying $10,000 annually for ten years could get $7,983 in monthly long-term-care benefits by age 80 for six years, and annual growth of 3%. The death benefit at the point would be $106,400. He could also cash in the policy and receive 80% of the premiums returned. The numbers differ slightly for a woman, coming out to $7,076 a month for long-term care or a $113,600 death benefit.

The trade-off when utilizing a hybrid is two-fold. You are going to find a lower long-term-care benefit than if you bought a standalone policy. Plus they are helping to protect your death benefit for your heirs.

When paying long-term care is your main goal, and you do not need or want more life insurance, purchase a standalone policy as opposed to a hybrid. Long-term-care policies today are priced more accurately than those in the past, meaning there is a smaller chance you of an abrupt premium jump later on. Additionally, a portion of your premiums could provide you a deduction on your tax return—however, that is not typical of a hybrid policy so take with your planner.

If you need help deciphering what is best for your future healthcare needs, contact me.