Health insurance and health care spending are popular topics of conversation among Americans. Most households are eager to maintain the quality of the coverage they enjoy well into their retirement years. But preparing for extended care requires consideration and thoughtful preparation.
An Approach for Every Person
Whether you are just beginning your retirement strategy or are nearing retirement, it’s vital to incorporate health care into the equation. You may want to consider obtaining a particular insurance policy that specifically covers you in the event that you need extra care. Pre-existing conditions may disqualify you from purchasing such coverage, so it’s wise to think about it early. It’s not necessarily a fun topic, but the advantages are clear: an extended-care policy can help protect your nest egg, while also giving you more choices about where and how you receive the care you may need in the future.
What Is Extended Care?
Extended care is the need for specialized care outside the parameters covered by ordinary health insurance. While sometimes it just means a longer hospital stay, extended care encompasses a wide array of scenarios that may arise. For example, an Extended Care Facility (ECF) is a health care establishment with a more specialized focus. A residency at an ECF may be necessary for patients who are rehabilitating from a severe injury, fighting a chronic illness, or otherwise in need of care that an ordinary hospital may not provide.
Consider Your Options
Many “self-insure” by default, simply because they haven’t made other arrangements. Those who self-insure may depend on their personal savings and investments to fund any needs. Another approach is to consider purchasing extended-care insurance, which can cover all levels of assistance from custodial care to in-home helpers.
Often, family and friends provide extended care for a season. However, this can be a burden on loved ones over time, and the need for assistance tends to increase with age. Choosing to purchase extended-care insurance can be a way of protecting your loved ones while also making sure you’ll receive the level of care you require.
Extended Care, Extended Coverage
The good news is that there are ways to prepare for the event that you or your loved ones require extended care. These include purchasing a specific insurance policy and establishing a Health Savings Account (HSA), which we’ll discuss later in this article.
In addition to ECF care, the scope of extended-care coverage can include home care and other specialized services such as visits with health care professionals, emergency alert devices, transportation, housekeeping, meals, and more.
It’s essential to determine whether the insurance you receive through your employer (or the coverage you’ve purchased) is designed to cover extended care. In most cases, Medicare does not, as it falls outside their definition of “medical care.”
Crucial Questions to Consider
What is the daily, weekly, and/or monthly benefit amount? Policies often pay benefits by the day, week, or month. You may want to evaluate what extended-care facilities in your area of the country are charging before committing to a policy.
What is the maximum benefit amount? Many policies limit the total benefit they’ll pay over the life of the contract. Some state the limit in years; others, in total dollar amount. This is an important question to consider.
What types of facilities are covered? Extended-care policies can cover an array of options, including:
- Nursing home care
- Home health care
- Respite care
- Hospice care
- Assisted living facilities
- Other community facilities
Many extended-care policies cover some combination of these. Be sure to look into what facilities are available to you when you’re considering a policy.
What is the elimination period? Benefits don’t necessarily start upon entering extended care. Most have an elimination period, a kind of “blackout date” period during which the insured is responsible for the cost of care. In many policies, elimination periods can range from zero to 100 days after nursing home entry or disability.
Does the policy offer inflation protection? Adding inflation protection to a policy may increase its cost, but it could be important if extended care services could potentially increase in price over time.
HSA: A Special Way to Pay
HSAs have emerged as another solution to extended-care needs. An HSA isn’t insurance, but it does provide a tax-advantaged savings account, to which you, and potentially, your employer, can make contributions over time. You can use these funds to pay for most medical expenses, including prescription drugs, dental care, and vision care. You can look into this choice right away, to take advantage of savings over time.
An HSA works a bit like your workplace retirement account. Your employer can make contributions alongside you. However, the money that you contribute comes from your pre-tax income and can be invested for you over time, so it may grow as your contributions accumulate.
Note, not everyone is eligible for an HSA. For example, you “must be covered under a qualified high-deductible health plan (HDHP) on the first day of a certain month.” Other restrictions may also apply.
Once you reach age 65, you may be required to stop making contributions to an HSA. Remember, if you withdraw money from your HSA for a non-medical reason, that money becomes taxable income, and you face an additional 20% penalty. After age 65, you should be able to take money out without the 20% penalty, but it still becomes taxable income.
HSA Limits to Consider
There are some HSA rules and limitations to take into consideration. You’re limited to a $3,500 contribution for 2019, if you are single; $7,000 if you have a spouse or family. Those limits jump by a $1,000 catch-up limit for each person in the household over age 55. Your employer can contribute, but the ceiling is cumulative between your contributions and theirs. For example, let’s say you’re lucky enough to have your employer put a hypothetical $1,000 into your account in 2019; you may only contribute as much as the rest of your limit. If you go over that limit, you’ll incur a 6% tax penalty, so it’s smart to keep an eye on how much you’re putting in.
We Are Here to Help
The sooner you begin to prepare for extended-care considerations, the better off you may be in the long run. Remember, you don’t have to prepare on your own. If you have any questions, reach out and let’s talk. As a fee-only financial planning firm, we do not sell any products, but we do discuss these needs with our clients to make sure their financial plan addresses covering these events and we make introductions to professionals who handles these needs when necessary. Together, we can build a strategy to help you face your future with confidence.
Sources Available Upon Request