Can you afford $100k/year healthcare?
There’s a scene in 2007’s The Bucket List in which Jack Nicholson’s character, an older man with terminal lung cancer, returns to his hospital room weak and nauseated after a rough chemo treatment.
“Somewhere,” he tells his reflection in the mirror, “some lucky guy’s having a heart attack.”
Thanks to a far-fetched script, Nicholson’s character is a billionaire who actually owns the hospital. For those of us not quite as fortunate, let’s discuss how to insulate our nest eggs from the possibility of disease or diminished capacity.
And for pilots who hoped to squeeze in two more years of paychecks and other perks before retiring, the recent Federal Aviation Administration reauthorization eliminated that hope until at least 2028. So, this issue of healthcare costs will just need to simmer awhile.
Not just about the money
Before we talk about financial strategy, though, we need to put first things first. If you’re thinking about this topic of healthcare costs, you should already have a living will. It’s great that you’re planning how you’re going to pass your wealth to your survivors, and even thought through how you’ll continue receiving disbursements after you can no longer care for yourself, but what if you don’t have as many healthy years left as you thought you would?
A living will or a durable power of attorney for health care provides a road map for future health care decisions in the event you can’t make them for yourself. You should have at least one of these legal documents, often called “advance directives”. It’s important to know the difference between the two.
A living will tells the doctors how you want to be treated if you can’t make your own decisions. This typically comes into play in an emergency. You might be in great shape, but so is the oncoming Dodge Ram 3500. This, then, is the kind of thing you might want to attend to soon.
In a living will, you can say which common medical treatments or care you would want, which ones you would decline, and under which conditions each of your choices applies. According to the National Institute on Aging, living wills govern when and when not to provide you with:
- CPR,
- ventilators,
- pacemakers and implantable cardioverter-defibrillators or
- artificial nutrition and hydration.
In your living will, you may also choose to document such other preferences as organ and tissue donation and brain donation.
A durable power of attorney, alternatively, names a health care proxy who can make decisions for you if you can’t communicate these yourself. You can choose a proxy in addition to or instead of a living will.
A health care proxy must be at least age 18 in most states and of sound mind. Picking an alternate proxy is always a good idea, but there are also some bad ideas out there. The American Bar Association recommends against choosing:
- your doctor or anyone associated with your doctor,
- anyone running your residential care facility or working for a government agency financially responsible for your care,
- a professional evaluating your ability to make decisions,
- your court-appointed guardian or conservator or
- anyone who serves as health care proxy for 10 or more people.
Advanced directives are governed by state law, and you can generally find blank forms at your state’s website. They can, and should, be updated periodically as your situation – professional, personal or financial as well as medical – changes.
A reasonable question to ask at this point is, “What if I don’t have an advance directive in place?” In that instance, state law determines who can make medical decisions on your behalf, typically your spouse or your adult children.
Advance directives have their enforceability limits. They may be legally recognized, but not legally binding. Your health care provider and proxy will do their best to respect your wishes but might not be able to follow them exactly.
“[Enforceability] is another key reason why having conversations about your preferences is so important,” according to the National Institute on Aging. “Talking with your loved ones ahead of time may help them better navigate unanticipated issues.”
It’s a very personal decision how long you want to live versus how well. Take some time. Think it through. Make your choices and talk them over with your doctor.
Paying for long-term care
We’d all rather talk about saving for a trip to Fiji or a vacation home in the Gallatin Range. Even so, you might want to plan for a much less postcard-perfect destination at some point. Seven out of 10 seniors will need some kind of long-term care, according to the U.S. Department of Health and Human Services.
The first thing you need to know is: Medicare doesn’t cover cost of long-term care for most people. Medicaid does, but you’d have to be indigent. (Keep reading for tips on making yourself indigent on paper.)
If you are a veteran, though, you should see what the Department of Veteran Affairs can offer you. The VA not only runs its own nursing homes, it also provides for a lot of stay-at-home care options.
Getting old is expensive. A private nursing home room costs about $100,000 per year. Assisted living might run only about half that, but that’s still pricey. So, where’s the money going to come from?
The obvious answer is private insurance. Long-term care policies’ prices and coverage vary widely, but most require you to be incapable of performing at least two tasks of daily living before you can receive disbursements.
“The older you are when you buy the policy, the higher the premium,” according to MoneyGeek, which notes that premiums might be tax-deductible. “If your health is poor, you may not qualify for insurance at all, or you could face much higher premiums.”
Other insurance-based options include a life insurance policy with long-term care riders and hybrid annuities with long-term care coverage. One of those might be better for your particular circumstance, because they address the “use-it-or-lose-it” issue of paying premiums on something you might never need. Still, they have pros and cons and we don’t have room to cover those here. If you want to read up on these, you can start with this Forbes Advisor piece.
A more straightforward approach would be a health savings account. Before you can tap these funds, though, a doctor needs to certify that you’ve either lost the ability to perform at least two tasks of daily living or have a cognitive impairment that poses a health or safety risk.
And that brings us to the end of the palatable options. From there, things become harder for a financial advisor to recommend. Burn through your savings? Take out a home equity loan? A reverse mortgage? Sell a kidney?
This is why we’re suggesting you make a plan now.
Protecting the estate
Paying for your cost of long-term care, though, is only half the battle. The next challenge is to ensure that your estate is not unduly depleted. That is, how do you shield your investments so that Medicaid picks up the tab?
One workaround is the Medicaid-compliant annuity, which takes away the assets which disqualify you for Medicaid, converting the cash into a monthly income stream. According to the Florida-based Elder Needs Law firm, “Very few companies offer this because the interest rate is so low and structured over a short period of time (so not a lot of money is made by the insurance company compared to other annuities).”
Another option is the irrevocable trust. This reduces the value of your estate by transferring the assets to a beneficiary, typically a spouse or adult child. That way, you can qualify for Medicaid and still pass wealth along to your family. Medicaid has caught up to this tactic, though, and requires an irrevocable trust to be in place for five years before the transfer takes place. So, if this is the approach you want to take, you need to plan ahead for healthcare costs.
A similar concept is the life estate deed, which applies the logic of an irrevocable trust to your real estate holdings. In effect, someone else – usually a spouse – owns the property. You would no longer be a joint tenant, but rather a “life tenant”. But why should anyone be troubled by that? Your house – which you would still have the right to live in if you’re fortunate enough to return home from long-term care – stays in the family, even though you’ve just shed six or seven digits worth of assets from your estate.
Both the irrevocable trust and the life estate deed are variations on a more familiar theme: giving gifts to your loved ones while you’re still hale and hearty. You can bestow annual gifts of up to $18,000 to as many individuals as you’re willing and able to make provisions for. As with the irrevocable trust, though, be mindful of Medicaid’s five-year lookback period.
You might wonder why the tax code tolerates all these perfectly legal but somehow – unsporting? – tactics to get Medicaid, a resource for the poor, to pay for the long-term care of the relatively well-off. It’s simply because, given the cost of such care, most people wouldn’t stay well-off for long. That’s why the Spousal Impoverishment Act has been in place since 1990. It provides help for the spouse who is still living at home in the community with little or no income or resources. Under its provisions, a certain amount of the couple’s combined resources is protected for the spouse living in the community. Depending on how much of his or her own income the community spouse actually receives, some of the income belonging to the spouse in the institution can also be set aside for the community spouse’s use. This is yet another way to protect your estate from the high price of long-term care.
That was a lot to pack into one article, but we hope you agree it was worth it. If you take nothing else away, please bear in mind that clarifying your medical decisions, paying for the cost of long-term care, and protecting your assets from the high cost of prolonged care is one, big, complicated maze. Fortunately, your advisor is always just a phone call away.