Long-term care insurance
The average duration of long-term care for a retiree is estimated to be about three years. While long-term care costs vary widely by region and type of facility, the national median cost of one month in an assisted living care facility was $4,300 in 2020 – or $51,600 per year. A private room in a nursing home costs about $8,821 a month, or $105,850 per year4.
This adds up to $317,550 for three years of long-term care — a significant expense which is expected to rise in the future. It's also important to note that Medicare and Medigap policies offer limited, if any, coverage for long-term care.
One way to plan for these costs is to purchase long-term care benefit insurance or a hybrid policy. Hybrid policies combine life insurance with long-term care benefits that may help you pay for the costs of in-home care, assisted living, a nursing home or other related expenses that Medicare may not cover. Long-term or chronic care riders, available at an additional cost, may also be added to life insurance policies, allowing you to access a portion of your policy’s benefit early for care expenses.
Premiums for long-term care coverage vary by company but are generally based on your age, health status and the level of benefit you are purchasing. Make sure that the benefit on your long-term care insurance policy will be enough to cover the average cost of care in your region in the future.
High-deductible health plans (HDHP) and Health savings accounts (HSA)
A High-Deductible Health Plan (HDHP) may offer a practical way for retirees under age 65 (and therefore not yet eligible for Medicare) to deal with their medical costs. HDHP differs from other health insurance plans because its high deductible allows the policy to be offered at relatively low cost.
If an HDHP meets certain requirements, the policyholder may also open a health savings account (HSA) to pay for HDHP deductibles and other qualified out-of-pocket costs. Money withdrawn from the HSA to pay for qualified expenses is tax-free as long as the expenses were incurred after the HSA was established and funded.
For 2022, the maximum annual contribution rates to an HSA are $3,650 for an individual and $7,300 for family coverage. Those who have reached age 55 but are not yet age 65 may contribute an additional $1,000 for 2022.
You can use an HSA account to pay for medical expenses as they occur, or you can accumulate funds in the account to pay for future health care expenses. Note that any distributions taken prior to age 65 that are not used for eligible medical expenses are subject to income tax and a 20 percent penalty.
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