How to Fit Long-Term Care Insurance Into Your Retirement Budget

By: Kimberly Lankford

You need to consider the potential cost of long-term care when planning for retirement — the average cost of a private room in a nursing home is now more than $100,000 per year, and the average cost of assisted living or home care is about $50,000 per year. A long-term-care insurance policy can help you cover those potentially large expenses, but the policies are becoming more expensive, too.

The following steps can help you manage the cost of long-term-care insurance and still provide some valuable coverage to protect your retirement savings.

— Buy only what you need. You don’t need to buy enough insurance to cover the entire cost of care — you may be able to afford to pay some of the expenses from your monthly cash flow and savings. Start by estimating the cost of care in your area by visiting the Saturday Insurance Long-Term Care Assessment. The assessment will also help you calculate how much you could afford to pay from income coming in (such as from Social Security and any pension) and how much you can afford to withdraw from your savings. Consider getting enough coverage just to fill in the gap.

— Buy over time. The younger you are when you buy a long-term-care insurance policy, the lower your annual premiums. Also, you’re less likely to have medical conditions that could make it difficult to get coverage. But you may have a lot of competing expenses when you’re younger, especially if you’re still supporting children or paying college tuition. Since long-term-care insurance coverage is more readily available and cheaper when you’re younger, but your budget may be tight, consider buying a smaller policy so you know you have some coverage, then you can purchase more insurance over time as your budget opens up — for example, after you pay off your mortgage or finish paying for college — as long as you’re still healthy.

— Take advantage of couples’ discounts. You may get a significant discount — as much as 30% — if both spouses buy long-term-care insurance at the same time. Some insurers give you a discount just for being married (up to 15%), even if only one spouse is buying insurance. If your budget is tight, consider buying at least some coverage for both spouses so you can maximize your discounts.

— Consider a shared-benefit policy. Nobody knows how long you may need care, but buying a shared-benefit policy between two spouses helps you hedge your bets. This feature lets couples share some of their benefits if one spouse exhausts their policy. Having a shared-benefit option will increase your premium, but it is cheaper than simply increasing the coverage on both policies. The downside is if one spouse uses up all of the shared-care benefits, the remaining spouse could be left under-insured so make sure to consider this scenario in your planning.

— Save money with inflation protection. Since you may not end up needing care until more than 20 years in the future, it’s important to make sure that the value of your coverage keeps up with rising long-term care costs. In the past, most people purchased policies that increased their daily or monthly benefits by 5% compounded each year. But those policies have become very expensive for new buyers, and policies with 3% compound inflation protection have become much more common and cost-effective. The 3% inflation protection is also more in line with the average increase in care costs over the past several years. Some companies give you the option to buy less-expensive inflation protection that lasts for just 20 years, which still increases the benefits substantially during that time period. If money is tight, you can reduce your premiums significantly by foregoing inflation protection, but you need to be prepared to cover a larger portion of rising care costs with your other savings or add more coverage later on.

Make the most of tax breaks for long-term-care insurance premiums. If you have a health savings account, you can withdraw money tax-free to pay a portion of your long-term-care insurance premiums based on your age — up to $430 in 2020 if you’re 40 or younger, $810 if you’re 41 to 50, up to $1,630 if you’re 51 to 60, up to $4,350 if you’re 61 to 70, and up to $5,430 if you’re older than 70. Those limits are per person — your spouse can take tax-free withdrawals based on his or her age, too. Traditional long-term care insurance policies are generally eligible; hybrid life insurance/long-term care policies usually are not. If you don’t pay with tax-free money from a health savings account, your premiums may be deductible as a medical expense, up to the same amount based on your age, if you itemize your deductions (medical expenses are only deductible after they exceed 7.5% of your adjusted gross income in 2020). For more information, see IRS Publication 502, Medical and Dental Expenses

— Make a tax-free rollover from another insurance policy. As you get older and your kids are grown up, you may discover that you no longer need the life insurance policy you purchased years ago to protect your family if you died when they were young. If you have a permanent life insurance policy, you may have amassed cash value, like a savings account, through the years. Instead of dropping the policy and having to pay income taxes on the cash value you receive above your premium payments, you can make a tax-free transfer (called a 1035 exchange) from the life insurance policy’s cash value to pay long-term care insurance premiums. Or you can use it to buy a hybrid, linked-benefit policy that provides life insurance and long-term care — with these policies, if you don’t end up needing long-term care, your heirs will receive a death benefit that returns your premium. Work with a knowledgeable agent if you are considering a 1035 exchange to ensure it is processed properly and so you don’t end up jeopardizing tax benefits.

— Consider a hybrid policy with limited premiums. Policies that combine life insurance and long-term care benefits often have several payment options for premiums. You may pay a lump sum or you could pay premiums over a fixed period (such as 10 years). It’s a bigger upfront investment than a traditional policy, but you know when you’ll finish paying off the premiums and then never have to worry about it again.

Have more questions?

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Saturday Insurance Services, LLC (“Saturday” or “Saturday Insurance”) is a licensed, digital insurance advisor. All tools, quotes, and information provided by Saturday are for educational purposes only and based on the limited information, if any, provided by you. We urge you to consult with your financial and tax advisors before making any purchase decisions. All quotes and estimates are non-binding and are not to be construed as a guarantee you will be able to purchase insurance. Availability of insurance and final pricing is determined solely by our insurer partners and subject to their review and acceptance of a completed application. All product guarantees are subject to the claims-paying ability of your insurer.