Self-Insuring Long Term Care in Retirement: How to Offset Premiums

Many pre-retirees are familiar with traditional methods of saving for retirement such as contributing pre-tax dollars to a workplace 401(k) or 403(b). However, few of them know that contributing to an HSA or investing in an earmarked account intended for health care costs throughout retirement can help them to offset premiums of otherwise expensive long-term care insurance.

Let’s talk about what “self-insuring” means, and how retirees can leverage this strategy to their advantage.

What is Self-Insuring In Retirement?

When people talk about “self-insuring” in retirement, they’re usually referring to leveraging their savings and assets to offset healthcare premiums – specifically for long-term care. 

Retirees save up enough money to effectively cover any emergencies – including long-term care expenses, protecting their spouse and loved ones in the event that they pass away, or even just offsetting the cost of a hefty and unexpected medical expense. 

Why Do People Self-Insure?

The truth is that many long-term care insurance policies are incredibly expensive to maintain coverage throughout retirement. In some cases, coverage is not available. Self-insuring allows you to build up a nest egg that offsets these potential costs. However, there’s another key reason for self-insuring: 

If you don’t end up needing to use the funds for their earmarked costs, you have extra wiggle room in your nest egg to use as you please or contribute to your estate plan. 

This can help retirees feel confident that they’re using their funds in the most efficient ways possible, and not “throwing away” money on insurance premiums. Of course, not everyone has this mindset, and it isn’t the right strategy for every retiree! It’s critical to carefully evaluate your insurance needs with a professional before making any decisions about self-insuring, or dropping your policy. 

One Way To Self-Insure: Contributing to Tax-Efficient Accounts

Many people are aware that they can contribute to workplace accounts, like a 401(k) or 403(b). These are excellent vehicles for growing your nest egg, and potentially saving enough to offset future emergency expenses. The contribution limit for 2022 is $20,500 and if you are 50 or older, you can contribute up to $27,000. Maximizing that benefit is a great start, but there is another account that is geared toward health care costs specifically, a Health Savings Account (HSA). 

An HSA is a health savings vehicle that accompanies high-deductible healthcare plans. Be sure to check if your plan supports an HSA. With this account you can contribute pre-tax dollars, all interest and contributions grow tax-free and if the distributions are made for a medical purpose, they remain tax-free. Another benefit of an HSA is that the funds roll over each year, so as long as the account remains active, you won’t lose the funds. The 2022 contribution limits are $3,650 for individuals and $7,300 for families, an increase from 2021. Once you reach age 65 and qualify for Medicare you can no longer contribute to an HSA unless you are covered under a spouse’s plan through their employer.

Retirement savings are important to support the lifestyle you want. Factoring in health expenses, specifically the cost of long-term care, into your retirement budget while you are younger will help you work toward the goal of having enough money to support yourself in retirement. 

Is Self-Insuring Right For You?

Self-insuring is a path that many retirees explore, but that doesn’t mean it’s right for everyone. Talking through your family health history and personal health and care experiences with a fee-only financial planner can help you to clarify your options. 

Need help? We’d love to speak with you. Get in touch with us today by clicking here.

Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education, and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.

"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.

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