Dear Valued Clients and Friends,
As part of our holistic financial planning process, we help clients evaluate and resolve risks that may take their plans off course. Risks come in all shapes and sizes and may include property damage, liability, identity theft, health, disability, death and long-term care. In this issue, we focus on healthcare and offer some perspectives and strategies to help clients manage risk.
- Eight Benefits of Health Savings Accounts
- Seven Ideas For Life Insurance
- Six Considerations About Long Term Care Insurance
According to the Internal Revenue Code, a Health Savings Account (HSA) is a medical savings account used for the payment of qualified medical expenses not covered by insurance or other benefit plans. While HSAs are only available to individuals covered by high deductible health plans (HDHP), they offer many benefits. Here are eight benefits of HSAs:
- Triple Tax Advantage – Contributions are tax-deductible, contributions grow tax-free, and withdrawals for qualified medical expenses are tax-free. For 2018, the maximum HSA contribution for individual coverage is $3,450, and $6,900 for family coverage. (Note: For 2018, your high deductible health plan (HDHP) plan must have a deductible of at least $1,350 for individual and $2,700 for family coverage, and the HDHP’s maximum out-of-pocket amounts cannot exceed $6,650 and $13,300, respectively.) For 2019, the maximum HSA contribution for individual coverage is $3,500, and $7,000 for family coverage. (Note: For 2019, your (high deductible health plan) HDHP plan must have a deductible of at least $1,350 for individual and $2,700 for family coverage, and the HDHP’s maximum out-of-pocket amounts cannot exceed $6,750 and $13,500, respectively.) There is also a catch-up limit of $1,000 for participants who are 55 or older on December 31. Furthermore, there is no income phase-out, so HSAs are available to everyone and you don’t have to itemize to deduct it.
- Multiple Contribution Sources – You, your employer or anyone can contribute to your HSA.
- Age 65 Withdrawal Benefit – At age 65 and over, non-medical withdrawals avoid a 20% penalty and are taxed at your current tax rate. Medical expense withdrawals remain tax-free.
- Can Pay for Retiree Health Insurance – HSAs can be used to pay for your Medicare, COBRA, and long-term care premiums.
- Lifetime Carryforward – HSAs can be carried forward for your lifetime and upon death, transferred to your spouse tax-free. Unused assets named to a non-spouse beneficiary are taxed as ordinary income.
- Some HSAs Allow Investing – Some HSAs have simple savings plans with minimal interest while others allow self-directed investing for greater potential growth. This is an area where we can help you decide how to allocate and diversify your investment fund choices.
- HSAs are Portable – Once you have an HSA, it stays with you even if you retire, become unemployed or change jobs.
- No Required Minimum Distributions – You are not required to take Required Minimum Distributions at age 70 1/2 on HSA accounts unlike your 401(k) and IRA accounts. This makes HSAs a more tax-efficient way for you to pay for medical expenses in retirement, especially if the alternative is taking a taxable 401(k) or IRA distribution.
Life insurance can be a valuable risk management strategy within your financial plan to ensure income replacement, business continuity, and liquidity in estate planning. Here are seven ideas to consider about life insurance.
- Insurance Portfolio Assessment – Insurance portfolios should constantly be monitored to ensure your insurance is cost-effective, performing as planned, and in alignment with your current needs and risk management goals. Often, there are less expensive solutions, gaps in insurance, needs that no longer exist, or policies that are underperforming and headed toward lapsing or requiring higher premiums. Also, as part of our insurance portfolio review, we assess other insurance areas such as property and casualty, liability, identity theft, health, disability, long-term care, errors and omissions (E&O) and directors and officers (D&O).
- Income Replacement – If someone depends on your income to live, you should consider life insurance. The least expensive life insurance is called term life – you pay premiums for a stated term – typically 10, 20 or 30 years. The amount of coverage depends on your circumstances, but one rule of thumb is multiplying your annual income by 15 and making sure you have coverage through retirement. For example, if you are 45 and make $100,000 annually, you would consider a $1.5 million policy for 20 years.
- Business Continuity – If you have a business, you can use life insurance as part of a buy-sell agreement to buyout partners upon death and keep the business moving forward. There are two major strategies for buy-sell agreements – a cross-purchase agreement whereby you and your co-owners buy insurance on each other and agree to buy each other’s business interests upon death, or an entity purchase agreement whereby the business entity buys insurance and buys the interest upon death. Depending on a number of different circumstances, one or a combination of both strategies may be appropriate for you and your business.
- Estate Liquidity – Generally, assets you own at death are subject to federal estate tax, and some states impose an additional estate and/or inheritance tax. From 2018-2025, estates in excess of $11,200,000 per person may have to pay federal estate tax at rates as high as 40 percent. One method to create liquidity for estate taxes, debt, and other expenses is an irrevocable life insurance trust (ILIT). An ILIT is a trust that is funded, at least in part, by life insurance policies or proceeds. If properly implemented, an ILIT can help minimize estate taxes and provide a source of liquid funds to your estate. While an ILIT can hold almost any type of life insurance, a properly designed policy such as a second-to-die (survivorship) policy can be less expensive and easier to underwrite.
- Selling Unneeded Insurance – If you are insured but don’t need life insurance anymore, instead of terminating it, it may be worth selling it to a third party. Sellers in life settlements are generally over 65, but younger people may qualify if they have certain medical conditions, according to the Life Insurance Settlement Association.
- Using Cash Values to Increase Benefits – If you have a whole life policy with a cash value that you will never touch, it may be worthwhile to leverage that cash value into a new policy with a higher death benefit.
- Buying Long-Term Care – If you want long-term care insurance, you may be able to exchange your existing life insurance policy for a new policy with a long-term care rider. This can be done through a tax-free exchange, provided you qualify for the new insurance policy. Long-term care payments are available until the total death benefit amount is exhausted, and whatever isn’t used for long-term care will go to your beneficiaries as a tax-free death benefit.
As a nation, we are living longer, but with that comes more demand on our retirement savings. According to the Center for Disease Control, life expectancy in the U.S. continues to improve. During 1975–2015, life expectancy in the U.S. increased from 68.8 to 76.3 years for males, and from 76.6 to 81.2 years for females. At the same time, the cost of long-term care also increased dramatically as people are living longer with more care. Also, according to the Department of Health and Human Services, about 70 percent of people currently aged 65 can expect to need some sort of long-term care services. One solution to help mitigate the cost of long-term care (LTC) services are buying insurance. Here are six considerations for buying LTC insurance:
- Long-Term Care Defined – LTC is not necessarily medical care, but rather “custodial care.” Custodial care involves assisting with activities of daily living or the supervision of someone who is cognitively impaired. One way to think of activities of daily living is to think of activities you do on a daily basis – you get out of bed, walk to the bathroom, use the toilet, take a shower, get dressed, and make breakfast. Most people need long-term care in their later years, but you may also need long-term care because of an accident or illness. Remember, Medicare doesn’t cover most long-term care, but it does cover care in a long-term care hospital, skilled nursing care in a skilled nursing facility, certain eligible home health services, and hospice & respite care.
- LTC Timeframe – While everyone’s circumstances are different, in looking at information from the National Center for Assisted Living, National Care Planning Council, and the American Association for LTC Insurance, a person can receive care at home, at adult day care, in an assisted living facility, and then go to a nursing home for one to two years. All combined, this is a total of approximately 4-5 years of long-term care.
- LTC Cost – According to the 2017 Genworth Cost of Care Survey, the U.S. median annual cost for home aid services was about $48,000 (range $18,000-$114,000), adult day care was about $18,000 (Range $1,300-$127,000), assisted living facility private room was about $45,000 (range $7,000-255,000), and a semi-private room at a nursing home was about $86,000 (range $19,000-$550,000). In this scenario, the average total cost of care could easily exceed $350,000.
- Self-Funding – While each family and situation is different, the decision to self-fund for LTC should consider premium cost, cash flow, net worth and legacy planning. From a pure net worth basis, we think a client should have at least $5 million before they consider self-insuring.
- Tax benefits – Qualified LTC insurance premiums can be tax deductible if you have enough medical related deductions, you are self-employed, or own an LLC, S-Corporation or C-Corporation. C-Corporations can deduct 100% of the premium. You can also use your Health Savings Accounts (HSA) to pay for premiums. Plus, some states offer additional tax deductions or credits. LTC reimbursements are tax-free in most situations, even if you deduct the premium from your taxes.
- Traditional vs. Hybrid LTC – As an alternative to traditional LTC insurance, it may be worth considering a “hybrid” life insurance product that combines death benefits with long-term care benefits. The advantage of a hybrid policy is that if you don’t use your long-term care benefits, you will still have a death benefit and cash value. Hybrid policies are also easier to qualify for, premiums are fixed, and your death benefit, cash value and amount of long-term care coverage is guaranteed. Traditional LTC policies do not have these guarantees. A disadvantage of a hybrid LTC policy is that premiums are paid upfront or over a shorter time period which can make premiums expensive. Another disadvantage is that hybrid LTC premiums are not usually tax-deductible because they are not considered tax-qualified policies.
We hope you enjoyed some of our healthcare planning insights and encourage you to reach out with any questions or if there is anything we can do for you. We consider it a privilege to serve you and always look for ways to improve our trust, value, and communications.
Cheers to your health, wealth and wisdom!
Don B. Saulic, CFP® CPA
Partner, Private Wealth Management
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