Lisa’s Story

Lisa, a vibrant 55-year-old woman, came to me a few years after her divorce. She managed her household and finances independently for the first time in decades. Unfortunately, Lisa was diagnosed with a chronic illness that required ongoing medical care and had the potential to significantly impact her financial plans. 

She was unnerved by the amount of money she was now having to spend on traditional and non-traditional health providers, and the uncertainty about her prognosis and its potential impact on her financial future was increasing her anxiety. 

This blog will outline the four financial strategies used to help Lisa manage the impacts of her health and chronic disease based on her financial plans.

1. Maximizing Retirement Accounts

The “problem” with chronic illness is that we don’t know if it will impact longevity.  Many people live into their 90s with chronic diseases that are well-managed. With that in mind, it’s important to manage expenses for today but also in the future, preserving one’s financial flexibility and options.  

Clients who are experiencing increased expenses often look to stop “spending” in other parts of their lives. But cutting back on retirement savings should be a last resort. For Lisa, this meant making the most of her 401(k) and IRA contributions. Despite her medical expenses, it was crucial for Lisa to continue contributing to these accounts to ensure long-term financial stability.

One frequently overlooked advantage to having a tax-deferred account is that in the future, should you need to spend significant money on health care, those expenses may create deductions that might help offset the tax liability owed when drawing off retirement accounts to meet the expenses. 

401(k)s and IRAs

Employer retirement accounts like 401(k)s, 403(b)s, 457 plan, etc. offer tax advantages that can be beneficial now and potential later. Contributions to a 401(k) are made pre-tax, reducing your taxable income for the year, thereby reducing incomes taxes to be paid. Paying less in taxes means having more money for medical treatments.

Options for Self-Employed Individuals

For those who are self-employed or own a small business, a SEP-IRA or a solo 401(k) are excellent options. Those allow for higher contribution limits compared to traditional IRAs, enabling you to save more aggressively for retirement. If Lisa had been self-employed, we would have considered this option to maximize her retirement savings. 

2. Utilizing Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) are another powerful tool for managing medical expenses while securing tax benefits. For Lisa, who had a high-deductible health plan, opening an HSA was a game-changer.

Tax Advantages

Contributions to an HSA are tax-deductible, and the funds can be used tax-free for qualified medical expenses. This dual tax advantage helped Lisa manage her out-of-pocket medical costs more effectively. Moreover, the unused funds in an HSA roll over from year to year, and the account can even be used as an additional retirement savings vehicle after age 65.

Investment Opportunities

HSAs also offer investment opportunities. By investing the funds in her HSA, Lisa could grow her savings over time, providing a financial cushion for future medical expenses. This approach not only helped her manage her current medical costs but also ensured that she had resources available for any future health-related expenses.  If you are using this HSA money in real-time, be mindful about the risk you take with those investments.

3. Explore obtaining a long-term care policy

Not all chronic conditions will keep clients from qualifying for a product that might help with medical payments in the future.  In fact, some products do not do any health underwriting at all.

While Lisa was still relatively healthy, we were able to explore long-term care products that would provide some additional money should she need additional help with her care. 

You will want to “run the numbers” on these options and make a conscious decision about whether they make financial sense.  Often clients will choose to obtain the product even when the numbers are about even because having a solution reduces their anxiety.

4. Leveraging Life Insurance with Living Benefits

Life insurance is often overlooked as a financial tool for managing health-related financial burdens. However, policies with living benefits can provide critical financial support during serious health events. These tend to be employed when diseases go from chronic to acute or when insurance will not pay for treatment.

Understanding Living Benefits

Living benefits, also known as accelerated death benefits, allow policyholders to access a portion of their life insurance benefits while still alive in the case of a terminal or chronic illness. For Lisa, having a life insurance policy with living benefits provided her with a lump sum payment that she could use to cover her medical bills and other expenses.

Types of Policies

There are various types of life insurance policies that offer living benefits, including term life, whole life, and universal life insurance. Depending on your needs and financial situation, one of these policies may be more suitable. In Lisa’s case, we reviewed her existing policies and made adjustments to ensure she had adequate coverage with living benefits.

This is also a good time to review one’s life insurance benefits.  If you are leaving behind a spouse/partner or children, knowing how that insurance will impact your estate and your loved ones also is anxiety-reducing.

The Importance of Proactive Financial Planning

Managing the financial impacts of health and chronic disease requires careful planning and the right financial tools. By maximizing retirement accounts, utilizing Health Savings Accounts, exploring long-term care product options, and leveraging life insurance with living benefits, you can effectively manage these burdens and secure your financial future.

Lisa’s story is a testament to the importance of proactive financial planning. Despite the challenges she faced, we were able to create a strategy that not only addressed her immediate needs but also ensured her long-term financial stability. For more detailed insights on managing financial burdens related to health issues, you can refer to this comprehensive study: Managing Financial Burdens from Health and Chronic Disease.

Secure Your Financial Future

If you find yourself in a similar situation as Lisa, or if you want to ensure that you are prepared for any future health-related financial burdens, I am here to support you. My goal is to help you navigate these challenges and achieve your financial goals. After all, who doesn’t enjoy a bit of financial security along with their morning coffee?

Feel free to reach out to schedule a consultation at Lanning Financial. Together, we can ensure that your financial future remains secure, no matter what health challenges you may face. Because, let’s be honest, stress about finances is the last thing anyone needs.

Lanning Financial Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

The decisions are emotional and financial…and not easy

The purpose of long-term care insurance (LTCI) is to provide insurance to pay for your care when you are unable to take care of your basic needs – like eating, toileting, transferring from a bed to chair, etc. – which generally accompanies a debilitating illness that is not life-threatening or at least takes a long time to kill you.  With your basic LTC policy, you pay premiums for life or for 10 years and then receive payments for claims you make to the policy when you need it. If you die without using it, you lose all your premiums. In this way, LTCI is more like your homeowner’s or auto policy.

The first conundrum is that you don’t know whether you’ll ever make a claim on the policy, and these things are getting expensive.  First of all, most people want to believe they’ll be healthy until one night they die in their sleep. No one wants to use the policy benefits.  Once they concede that they might need care, some people believe that this is what their spouse or children are for – to take care of them in old age. Others don’t want to be a burden to their kids, so they want a policy to cover these expenses, which are predicted to be astronomical in the coming decades.  Others want to self-insure, but their kids are worried about losing the family vacation home and want Mom and Dad to have the coverage to the point that the kids will pay for it.  Once you’ve gotten past this decision – to get it or not – now you have to decide what and how much.

The number of insurers remaining in the LTC market continues to decline, so your options are limited. LTCI came on the market and was heralded as this terrific, must-have product, but it has had little history.  There are not many insureds and they’re only starting now to make claims, so there’s little claims history.  What that means is that there is not a lot of statistical data available to create and price the product accurately so that there is enough money available to pay claims. Life insurance is over 200 years old and auto insurance and disability insurance are over 100 years old. Companies selling those products have lots of history and statistics upon which to create and price products. LTCI is about 35 years old at the most – not a lot of history.  As a result, big-name players are getting out (MetLife, John Hancock, Berkshire, etc.).  The questions become: Which company do I use and will it be around?  And if so, is it going to hike the premium on my policy such that I can’t afford it or have to cut back on coverage in the years to come?  As a consumer, it’s hard to tell if what you’re paying for you’re actually going to get. That’s a hard sell.

Then, to make it even more complicated, there are “hybrid” products that are actually life insurance products that provide a LTC benefit rider. If you need to access the death benefit to provide long-term care, you can.  If you don’t use that rider and die, the death benefit pays out to your beneficiary.  This all sounds great until you look at the premiums. Because the over premiums you’ll pay will be bigger, ideally you want the premiums and corresponding death benefit to serve multiple purposes if you can (like estate tax planning or funding a trust). That has its own complications because if you do use the LTC rider and leave little death benefit, that secondary purpose may be thwarted.

The good news, I guess, if there is any is that business owners can get LTCI and get the premiums as a deductible expense. Be sure to ask your accountant about this. It’ll be the easiest question of the bunch.

Good Tidbits to Know About LTC Insurance

Long-term care insurance is not my specialty, and while I might be able to sell it, I don’t.  I do recommend that clients integrate it into their financial plans when it makes sense (and it almost always does).  Some good tidbits for you:

1. LTC insurance is designed to protect your assets (your nest egg).  It can help cover the cost of care you receive at home from nurses’ aides, home health aides, and therapists, and can help cover the cost of assisted living facilities and nursing home expenses.
    
2. In CA in 2010, the median annual care cost for a private room in a nursing home was $87,000.  For a semi-private room, about $73,000.  The increase in cost outpaces the inflation rate.
    
3. At least 70% of people over age 65 will require some long-term care services at some point and 40% will need care in a nursing home.
    
4. Elderly women are most likely to utilize the service because they live longer, healthier lives.
    
5. Health insurance and Medicare cover almost none of the cost of nursing homes, assisted-living facilities or in-home care.
    
6. To qualify for Medicaid, people have to pay out of pocket until they are practically destitute (particularly if proper planning hasn’t happened ahead of time).
    
7. Better to obtain insurance when you’re younger and healthier and it’s cheaper.  Not to mention that you’re in a healthier state of mind (not in crisis) and can plan.
    
8. Long-term care insurance can be used to cover the care of someone with Alzheimer’s, an affliction that can last for many years and deplete a family financially.
    
9. LTC premiums can be paid with Heath Savings Account (HSA) monies.
    
10. If you’re self-employed, a portion of your premium may be deductible as health insurance.
     
11. Anyone can pay the premiums on the policy.  Children can pay for LTC insurance to protect against the family vacation home (or any other asset) being sold to meet long-term care costs.
     
12. Remember, your children might be picking your nursing home.  How many choices do you want them to have?

If you need a referral to a long-term care specialist, please let me know.  I can help you figure out whether LTC insurance makes sense in your overall plan.  A specialist can tell you what to look features to look for, what to consider when buying a policy, what riders are worth it, which company to choose, and how much to pay.