Alternative Strategy to Long-Term Care Insurance

Healthcare costs can be devastating for a couple in their later years and Long Term Care (LTC) expenses can be especially so. For this reason many people purchase LTC insurance as a way of protecting their assets. Nursing home costs can run over $10,000 per month (Genworth LTC cost study) but to insure for this would cost many thousands of dollars per year and is out of reach for most people. So if people purchase LTC insurance at all it often times is for partial coverage. But in the end, it could be at least as much as a car payment each month and this will continue forever even if the insurance is never needed or used.   

The alternative is to do nothing and cross the LTC bridge if and when the time comes. One of the strategies, in this case, is to do whatever is necessary to qualify the nursing home individual for Medicaid. Without going into too many details this would involve transferring almost all of the assets from the individual heading into a nursing home into the stay at home spouse’s name and then purchasing an immediate annuity. Since income in the name of the stay at home spouse is not counted in the Medicaid application it is possible then to protect those assets. But getting the assets into the stay at home spouse’s name can be financially painful. If the spouse needing care has a large Traditional IRA the only way to get these assets into the stay at home spouse’s name is to do a withdrawal. This is a taxable event and can force the couple into a very high tax bracket. However, if the IRA is a Roth rather than a Traditional then the assets can be withdrawn and transferred to the stay at home spouse with no tax consequences if it has been held for 5 years.

The strategy to have this accomplished is to convert the Traditional IRA to a Roth IRA slowly over time rather than all at once. Roth Conversions will create a tax consequence the year the conversion is completed. So for example, let’s say a couple is faced with an LTC insurance bill of $6,000 per year. Instead of paying the premium they can use the money to pay the tax bill on a partial IRA conversion. This positions asset more favorably in case a Medicaid application becomes necessary. At a marginal tax rate of 28% at the federal level and 5.1% for the state of Massachusetts this could cover a conversion of approximately $18,000. This may not seem like a lot but doing this early and on a yearly basis can make a difference. An added benefit to converting also allows the assets to grow in a tax free environment rather than a taxable one.

This is yet another reason to consider contributing to a Roth IRA or Roth 401k in the first place.  

 

This material has been provided for general informational purposes only and does not constitute individual advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult your tax, financial, or legal advisor regarding your specific circumstances