we should all enjoy a blissful second act in our lives and express our right to define our own life. to express yourself on your own terms, you should not worry about uninsured healthcare expenses and outliving income. easier said than done, right?
holistically managing current and future cash flows remains the focus. this concept dials down asset-focused strategies that your risk hungry advisors serve up. we as a society should devote significant energy to managing future liabilities not merely chasing yield.
you can use the following tactics, in isolation but preferably in combination, to finance your future uninsured healthcare expenses:
a) pay out of pocket dollar for dollar
at some point, you may have to cover uninsured healthcare expenses dollar for dollar from your legacy and/or pension funds. we should remain realistic knowing that we may not 100% immunize your legacy and pension from some monetary reduction; however, the fewer dollars allocated towards this tactic the better.
b) invest in a premium based extended care policy
why not share uninsured healthcare expense risk with a financial counterparty, such as a life insurance company? instead of paying dollar for dollar, you can utilize cents to cover that dollar. this concept has served consumers well and will continue to do so, but stay alert.
many extended care carriers have left the market due to overly aggressive pricing practices in the past. remaining players have increased rates across cohorts as well. few clients favor uncertainty, but avoid letting this short-term shakeout spook you.
as an example, one client with significant cash flow, a strong pension, and productive mineral right interests purchased a lifetime pay policy. we chose this plan because his current and future cash flow matched future rate increases. he did not want to allocate other funds to funding a policy and wanted to pay out of cash annually.
when the time comes for a rate adjustment, we will make preparations using saved funds and/or adjust the policy benefits. reducing policy benefits has an opportunity cost, so it would remain wise to save more as a precautionary element; moreover, we can offset future rate increases when he turns on different pension cash flows.
the client could have chosen a limited pay, paid-up policy but did not due to current cash flow considerations; however, limited pay, paid-up policy structure immunize rate uncertainty more effectively than lifetime pay. this tactic requires significant upfront investment but can payoff handsomely if you want to not think about rate increases.
c) invest in a life insurance or annuity combination policy
this tactic generally involves funding extended care policies with prepaid investment proceeds totaling over 50,000. most consumers fund policies through pension funds, brokerage accounts, or personal savings; however, using pension fund sources may necessitate professional tax counsel.
short of having 50,000 around, you can save your current i.r.a. funding limit per year into a non-qualified account. non-qualified accounts include annuities and non-retirement stocks, bonds, and cash. saving 5,000 per year alone would yield 50,000 over a decade even without a return.
with cash in hand, you can purchase a life insurance or an annuity policy with extended care benefits. the prepaid cash generally will purchase a multiple of benefits based on age and health; plus, health examinations are rather limited since you essentially reserve money against your future uninsured healthcare expenses.
a 60 year old husband and wife client household lacked sufficient life insurance and extended care coverage on the wife. she recently retired from the school district and had begun drawing her state pension. when she annuitized her pension, she chose the option to allow a partial lump sum transfer totaling 100,000.
using that money and after consulting her c.p.a., she purchased a universal life insurance policy with extended care benefits. the benefits covered not only her but also her husband. it made sense to use the life route since her husband would need the funds in her absence.
d) conduct a 1035 exchange on inforce life insurance and/or annuity policies
owning permanent life insurance with annuities has its benefits. you can exchange your inforce life insurance and annuity policies within the i.r.s. 1035 section and purchase a combination plan.
the client that chose the premium based extended care policy had an option to use his universal life insurance policy's net cash value. we could have exchanged part or all of the proceeds to purchase a combination plan; however, we avoided that tactic since he still needed the life insurance protection.
he also did not want to use part of the policy's net cash value. exchanging part of the proceeds can cause properly funded universal policies to lapse if not refunded back to the original level. hitting the target cash value again did not appear appealing to him.
a bonus example: grandparent life insurance gifting not only provides core coverage but serves as an extended care funding source. imagine the intergenerational wealth transfer benefits! your grandchildren could purchase an extended care policy and manage uninsured healthcare expenses with a couple hundred thousand in cash.
...thank you grandma and grandpa for the paid up policy you purchased for me sixty years ago...
know that consulting with your financial professional or your team and saving aggressively will pay off. addressing uninsured healthcare expenses does not sound sexy, but living a long life free from worry surely does. you deserve nothing less!
you can count on my professional judgment, my resource access, and my practical counsel.
blake mendez
www.menco-finco.com
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