Long-Term Care - What About Paying Your Own Long-Term Care Expenses?

Today we'll be taking a brief look at some aspects of long-term care. For more detailed information, it’s best to consult with a qualified legal advisor. So think of this as an introduction.

There are many complexities to long-term care planning, it’s important to understand that there are options, and programs intended to help families like yours. Long-term care planning is the best way to ensure you protect as much of your hard-earned assets as the law allows, and to receive the care you need.

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What About Paying Your Own Long-Term Care Expenses?

A. Self – Insuring

“Self-insuring,” or paying your own way, may be an option.  However, you can expect to pay approximately $88,000 per year for base nursing home care, and more for better facilities (in Southeast Michigan, generally closer to $100,000/year). Home care can be even more expensive, with 24/7 care costing in excess of $150,000 - $200,000 per year. If a person has sufficient fixed income, and income generating assets, which together produce total income of $150,000 or more, this may be the way to go.  But even then, what about the future well-being of the spouse, children, and families of those who need long-term care?

B. Financial and Tax Planning for Long-Term Care

Planning to “self-insure” for long-term care expenses requires a collaboration of financial planning, and estate and tax planning, to ensure that sufficient income can be generated to prevent the depletion of assets.  Use of a thorough fact-finding questionnaire is highly recommended, to assemble all the necessary information regarding assets, income, expenses and other factors, such as where care will be provided and what support can be expected from family caregivers.  This information provides a foundation for the planning required to maximize the value of Social Security income, fixed pensions, dividend and interest income and other income streams, along with maximizing deductions for things such as medical expenses and other deductible items.  Investment strategies to produce growth and income sufficient to fund projected expenses are a key ingredient for successful retirement, and a qualified financial planner or investment advisor should be consulted.  Once investment strategies are in place, and projections for income and expenses are done, the plan to “self-insure” can be implemented.

C. Wealth Replacement Using Life Insurance

Creative tax and financial planning can further maximize the value of existing assets and income, and provide tax savings should long-term care become necessary.  One example is the targeting of retirement funds (IRA’s, 401(k)’s, and other retirement vehicles) to pay long-term care expenses.  Qualified long-term care expenses are fully income tax deductible as a medical expense, subject to a floor of 7.5% of adjusted gross income. 

For example, if an individual has $50,000 of adjusted gross income, medical expenses above $3,750 are fully deductible.  If the need for long-term care should arise, accessing assets such as retirement funds, tax deferred annuities and U.S. savings bonds may provide an excellent opportunity to utilize the medical expense deduction to offset income tax consequences created by liquidation of those assets.  Should you have an IRA, 401(k), tax deferred annuity or other asset that you do not intend to rely upon for retirement income, you may target that asset to pay long-term care expenses should it become necessary, and purchase life insurance in an amount sufficient to replace the asset should it be depleted by long-term care costs.  In this way, a securely invested otherwise taxable asset can be used to pay long-term care expenses, while the life insurance policy is used to replace the value for your family, free of estate taxes if certain conditions are met.  Should you never need long-term care, the family would receive both the targeted asset, and the life insurance proceeds, enhancing the legacy that you leave to your heirs.

Next: What About Private Long-Term Care Insurance?

Previous: What About Medicare?

Planning Ahead Can Make a Serious Difference in the Quality of Life You or Your Spouse May Have. Know Your Options.

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The information in this blog is not intended to be, nor should it be, construed as legal advice. It is for informational purposes only. For advice, specific to your situation, consult with a qualified attorney.