Every day until 2030, 10,000 Baby Boomers will turn 65, and seven out of ten people will require long-term care in their lifetime. The costs associated with long-term care are substantial, with assisted living community costs increasing by 10% to an annual national median of $70,800 per year, according to Genworth’s latest study. Private room nursing home costs are even higher at $127,750 annually.
Breaking down these costs to monthly expenses, a semi-private room at a nursing home averages $9,277, while a private room costs $10,646. Adult day health care averages $2,167 monthly, and care in an assisted living facility costs around $5,900 per month. Long-term care insurance can help ease these financial burdens, but it comes with its own expenses.
Understanding Long-Term Care Costs and Insurance
It’s crucial to note that regular health insurance typically doesn’t cover long-term care costs since it’s not considered medical care. Medicaid may also not cover these costs until you’ve depleted your assets. Fortunately, there are tax-advantaged ways to help manage long-term care expenses.
Four Tax-Friendly Strategies for Long-Term Care
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Tax-Free Withdrawals from an HSA: If you have a Health Savings Account (HSA), you can withdraw money tax-free to pay for eligible long-term care insurance premiums. The withdrawal amount is age-based, with limits set by the IRS.
- Age 40 or younger: $480 per year
- Ages 41 to 50: $900 per year
- Ages 51 to 60: $1,800 per year
- Ages 61 to 70: $4,820 per year
- Age 71 and older: $6,020 per year
For more information, see IRS Publication 969.
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Deducting Long-Term Care Premiums as a Medical Expense: You can deduct a portion of your long-term care premiums as a medical expense, subject to age-based limits. These deductions are allowed if your total medical expenses exceed 7.5% of your adjusted gross income. Refer to IRS Publication 502 for details.
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Tax-Free Transfer from an Annuity: You can make a tax-free transfer (1035 exchange) from an annuity to pay premiums for a traditional long-term care policy or another annuity that provides long-term care benefits. This transfer must be made directly to the insurance company to avoid income taxes on the gains.
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Tax-Free Transfer from Permanent Life Insurance: Similarly, you can make a tax-free 1035 exchange from a cash-value life insurance policy to pay for long-term care premiums. This can be particularly useful as your needs shift from life insurance to long-term care.
Weighing the Pros and Cons of Long-Term Care Insurance
Long-term care insurance offers several benefits, including protecting your savings and ensuring you can afford care in your preferred setting. However, it can be expensive, and premiums may increase over time. It’s essential to carefully consider your options and potentially consult with a financial advisor.
Key Takeaways
- Long-term care costs are rising significantly
- Insurance can be expensive but provides financial protection
- Tax-advantaged strategies can help manage costs
- Planning ahead is crucial for maintaining independence
Planning for Long-Term Care
You can receive long-term care in various settings, including at home, in community facilities, assisted living facilities, or nursing homes. Medicare and most health insurance plans don’t cover long-term care, making planning essential. Consider your options carefully and explore tax-friendly strategies to help manage these costs.
