Nearly everyone will need some form of Long-Term Care in their life. Determine if using a Health Savings Account to self-insure could work for you.

Nearly Everyone will Need Long-Term Care

The US Department of Health and Human Services estimates that “someone turning 65 today has almost a 70% chance of needing some type of long-term care services… in their remaining years.”

The average stay in a facility is currently 3 years. But, about 20% of seniors require assistance for 5 years or longer.

Long-Term Care is Expensive

Skilled care has always been costly. Plus, with over 10,000 people turning 65 every day and longer life expectancies, the demand for these services is higher than it has ever been.

It is no surprise that the cost of long-term care services is increasing. Currently, the nationwide average for a stay in an assisted living facility is approaching $50,000 per year.

Nursing homes provide a higher level of care, and average over $80,000 per year. However, the average stay in a nursing home is generally shorter than in an assisted living facility.

The Married Middle Class is the Most at Risk

There are programs (both public and private) to help low income seniors access care. I know, these programs are not ideal, but they offer a way for people to find help.

The uber wealthy can find their own ways to fund their long-term care needs and probably don’t need my advice.

But, what about those in the middle? Here’s a scenario that has played out too many times:

A senior, married couple has a moderate nest egg, maybe $100k. They mostly rely on social security and the dividends from their retirement accounts. Then, one of them gets sick (statistically, it’s usually the man) and requires care. After just 2 years in an assisted living or 15 months in a nursing home, the nest egg is vaporized. The nice, modest retirement they built is wiped out and she is on a fixed income with no safety net for the rest of her life.

Long-Term Care Insurance is an Option

One option for avoiding this scenario is Long-Term Care Insurance. Most reputable advisors recommend at around age 65 you should shop a bit and see if coverage is right for you.

If you are unable to cashflow $50k to $80k per year during retirement without significantly harming your nest egg, then this is something I would recommend looking into.

Generally these policies have a per-day maximum pay out, a waiting period at the beginning of the stay that you pay for (like a deductible), and a maximum lifetime benefit. Higher benefits and shorter waiting periods result in higher premiums.

An HSA is a Better Option (for Some)

If you are under 65 and are actively saving for retirement, there is an alternative that may be right for you.

A Health Savings Account is a tax-advantaged account that allows you to save up for medical expenses… including long-term care.

Triple Tax Advantage

There are three tax advantages to using an HSA to self-insure for long-term care:

  1. HSA contributions are tax deductible.
  2. Withdrawals are tax free if they are used for medical expenses.
  3. You can invest your HSA, which means any growth is also tax free.

And, as long as you follow the rules, those tax advantages apply whether you use the HSA for long-term care or any other medical bills.

Keep Unused Funds

But wait, there’s more! If you end up not needing the money for medical expenses and you are over 65, then you can access the money without penalty!

Yes, you will have to pay income tax on the withdrawals, just like an IRA. But, after age 65 the penalty disappears. So, basically, at 65 an HSA converts to a special kind of IRA where you can withdraw from it for any reason and deduct any medical bills from your income when you file your taxes.

And, any funds that remain in your HSA go to your estate when you die. So, if you are lucky enough to not need long-term care, you can leave your HSA to your spouse or your children.

This is a massive advantage over Long-Term Care Insurance. With insurance, you pay premiums, then if you don’t need care the insurance company keeps your money. But, with an HSA, you keep every dollar!

When to use an HSA to Self Insure for Long-Term Care

There is a strict limit on how much you can contribute to an HSA annually. In 2020 most individuals can contribute $3,550. Just like IRAs there is a catch-up provision which allows people over the age of 55 to add another $1,000. So a married couple, both under 55, could contribute $7,100. If they’re both over 55, the maximum increases to $9,100.

Based on the averages, the standard life-time cost of long-term care is between $150,000 and $250,000 per person. If you invested the maximum and got a reasonable 8% long-term rate of return, how early would you have to start to be fully funded?

  • If you start at age 50, you should be able to grow your HSA to $150k by age 65. You will have put in about $70k of your own money and have about $80k of growth. Double all of that for married couples.
  • If you start at age 43, you should be able to grow your HSA to $250k by age 65. You will have put in $93k of your own money, and have about $150k of growth. Double all of that for married couples.

So, if you are in your 40s or early 50s, an HSA may be a great way to self insure for Long-Term Care. You only have to put in $70k to $100k of your own money and growth will take care of the rest. If you need long-term care, you’re set. If not, no biggie, you still have the money!

HSAs are Not For Everyone

But, HSAs are not for everyone. Before funding an HSA as self-insurance for Long-Term Care, I would want a few things to be true.

First, you should be living the Four Pillars of Personal Finance.

  1. Spend less than you make
  2. Have emergency savings
  3. Have diverse investments
  4. Rebalance

If you don’t have an emergency fund, then it makes no sense to be putting money into accounts that can only be accessed for certain emergencies or after decades have passed.

After your emergency fund is complete, you still have some work to do before going all in on an HSA. If you have a retirement plan at work with a match, I would max that out first. Free money is always better than simple tax-advantaged money.

Then, I would max out a Roth for both spouses. Roth IRAs offer tax free growth for absolutely anything, not just health care, so they are superior to HSAs for retirement planning. Done right, a fully funded Roth IRA can help you retire a millionaire.

Then, if you still have the ability to save more, I would look into an HSA.

Major Caveat

There is one major caveat which may complicate things for you.

In order to qualify to have an HSA, you must have a High Deductible Health Plan (HDHP). Also called Catastrophic Coverage, these plans require you to cover a big chunk of your own healthcare expenses every year before the insurance kicks in and starts paying your bills. Most Catastrophic Coverage plans have deductibles around $6,000 per person, $12,000 for a married couple.

If you have ongoing health conditions that require expensive treatment, this may make your current healthcare too expensive. Which, would make the HSA as a Long-Term Care insurance tool prohibitively expensive.

Also, if you have kids on your insurance, this may be risky. A couple trips to the emergency room with this kind of coverage can really set you back.

But, if you are in good health, have few medical bills, and can use your emergency fund to pay a high deductible if something happens, then this may be worth a look.

Final Thoughts

Every day, more and more Americans reach 65. More and more of us are spending longer in our retirement years. As a result, demand for Long-Term Care is growing.

An extended stay in a Long-Term Care Facility (either an Assisted Living or a Nursing Home) can devastate a couple’s finances. A relatively comfortable retirement can be wiped out for the surviving spouse in just a few short years.

If you’re already 65 and your family’s nest egg is at risk, you should investigate Long-Term Care Insurance.

But, if you are in your 40s or 50s, have an emergency fund, and are already saving for retirement, there may be an alternative solution.

An HSA offers a triple-tax advantage, and could allow you to self-insure against the cost of Long-Term Care.

But, HSAs are not for everyone, so be sure to do your research.

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