Even wealthy individuals need to protect against staggering healthcare costs. These three commonly neglected strategies can help.
Healthcare costs can be among the most difficult to forecast given the unpredictable nature of accidents and unexpected diagnoses. And while even routine care can be pricey, the costs associated with unexpected health issues can be staggering. Accidents ranging from a slip and fall in a home to a broken limb during a ski vacation can result in enormous out-of-pocket costs for emergency care, hospital services and rehabilitation.
That is why it is vital to comprehensively incorporate healthcare into your wealth plan. And with health expenses continuing to rise, there are many important factors to consider, such as how your budget would be impacted if the main income provider for your family was to be injured or fall ill and how to plan for healthcare costs into old age. Below we offer three suggestions on how to go beyond primary insurance coverage to mitigate losses from these types of situations.
Among the ripple effects of an unexpected health event is the cost of human capital – the loss of earnings and potential future inflows experienced when a member of your household is injured or falls ill and is unable to work. The problem can be further compounded if a partner, spouse or child must take time off work to serve as a caregiver, resulting in additional lost household earnings. Consider the following example…
The wife of a working married couple with combined annual earnings (salary and bonus) of $1.2 million suffers an injury to her Achilles tendon requiring surgery and subsequent rehabilitation. As a partner in a law firm, she was the predominant wage earner with income of $850k annually. As a result of her injury she will miss approximately six months from work. The husband, a full-time IT consultant, will need to cut his hours in order to become a part-time caregiver for his wife. This one incident can potentially reduce their household income by 50%, and could cause them to have to dip into their savings to help offset their recurring lifestyle expenses.
Talk to your advisors about how to model and account for these type of medical events in your wealth plan. Also, discuss whether short- and long-term disability insurance might make sense for your situation. Below is an overview of coverage options and restrictions:
- Short-Term Disability – A typical short-term disability policy has a 10-day waiting period during which an employee will likely use sick and vacation time to cover work absences. Short-term disability generally covers a percentage of base salary – not incentive compensation. Base salary, for many, may not always be adequate to support a family’s lifestyle. The benefit eligibility period typically lasts from three to six months.
- Long-Term Disability – Long-term disability can be used following the expiration of short-term disability coverage, or on its own. Long-term disability also generally provides a percentage of base salary – excluding stock, bonus and other incentive compensation. In addition, long-term disability generally comes with caps. Most plans include a waiting period of anywhere from 3-26 weeks, which coincides with the length of time you can be paid for short-term disability.1
Beyond insurance, savings are another way to help offset medical-related costs. Healthcare Savings Accounts (HSAs) can help reduce your income tax liability. Benefits of HSAs include:
- Triple tax savings: contributions are pre-tax; earnings are tax-free; and withdrawals for qualified medical expenses are tax-free. The list of eligible expenses is long and includes many common expenditures, including health plan copayments and prescription drug purchases.
- You can claim a tax deduction for contributions you, or someone other than your employer, makes to your HSA even if you do not itemize your deductions
- Contributions to your HSA made by your employer may be excluded from your gross income
- Contributions remain in your account until you use them
- HSAs are “portable” and stay with you even if you change employers or leave the workforce
Eligibility requirements for HSAs include being covered under a high deductible health plan (HDHP), which are plans with higher deductibles but lower monthly premiums. Also, you cannot currently be enrolled in Medicare or be claimed as a dependent on someone else’s tax return.
Many people do not budget enough for healthcare expenses in old age. This is particularly true for high net worth investors who tend to spend more on preventative care and have longer life expectancies. Even for wealthy individuals, major medical conditions such as cancer or dementia could put a sizeable dent in your portfolio.
When modelling your lifestyle and cash flow, it is important to forecast spending needs and health care costs to age 100 so you don’t risk outspending or outliving your assets. Long-term care (LTC) insurance can be an important part of this equation. The cost for a private nursing home room in the U.S. can add as much as $300-$400K per year in higher cost regions.2 Multiply that number by the average two-to-three year stay (double for couples), and the cost could potentially be in the millions.
LTC insurance is intended to cover services and support an individual may require, including assistance with activities of daily living, such as bathing and eating, either in a home or other facility. Long-term care insurance can be considered as one way to help protect your financial assets and as an additional revenue stream to help cover long-term care costs.
Long-term care insurance policies provide policyholders with a multitude of options at varying benefit levels, including hybrid policies that can combine life insurance and long-term care insurance benefits. Long-term care policies can also be very complicated and difficult to navigate on your own, so you’ll want to consult with an advisor when considering which options are right for you.
The Intersection of Health & Wealth
Considering health as part of your wealth planning will not prevent a health event; however, it can help you protect yourself and those you love. It is important to weigh not only how health can affect your lifestyle, but also your future aspirations, including philanthropic endeavors, discretionary spending and wealth transfer goals. Being proactive now as it relates to your health and your wealth can give you added peace of mind about the future.
- Patient Advocate Foundation, Long Term Disability and Its Benefits: https://www.patientadvocate.org/explore-our-resources/maintaining-employment-employment-benefits/long-term-disability-and-its-benefits/
- Genworth: 2017 Cost of Care, retrieved from https://www.genworth.com/dam/Americas/US/PDFs/Consumer/corporate/cost-of-care/1797032017CofCAnnual_091317.pdf.