Strategies to afford assisted living

According

to Genworth’s annual Cost of Care Survey, the average cost of assisted living in Illinois in 2020 was $4,170 monthly, with costs in Northeast Illinois, including metro Chicago, ranging from about $4,500 to $4,800 per month. On the high end, assisted living in Chicagoland could run $10,000 monthly.

“That’s a lot of money,” says Tammy L. Butts, regional executive vice president and branch manager with Equitable Advisors in Deerfield, Illinois, who adds many older people and their families aren’t prepared for that expense. Many did not save enough. Others retired early during the COVID-19 pandemic, further constraining savings.

“We already had a retirement savings gap. Now you have people living longer and have a cash flow shortage,” she says. “You have this kind of perfect storm.”

Though assisted living’s cost is high, financial experts report there are ways for families to cover costs if they start saving early — and possibly even if they didn’t.

Separate expense

Butts is among those urging getting an early start by saving for retirement and — as a separate expense item — assisted living. One way is to purchase long-term care insurance, which can be used for assisted living if the insured needs help with two or more Activities of Daily Living (ADLs) or has a diagnosis of a cognitive impairment.

Families should aim to fund part of the cost of assisted living with long-term care insurance, and part with savings. If too large a policy is purchased and the insured passes away before using it, the excess cannot be recovered.

“It’s use it or lose it,” Butts says. Before purchasing long-term care insurance, understand these policies have changed in recent years, says Christopher N. Ruedi, financial advisor with Savant Wealth Management in Bloomington, Illinois.

“There are fewer provider options today than in the past,” he adds. “Costs have increased exponentially for new policies and even existing policyholders have been subject to increased premiums. If you plan to purchase a long-term care policy, be sure to anticipate costs could more than double over your lifetime, and it may be at an advanced age before a triggering event allows you to collect on the policy.”

Contributing to a Health Savings Account (HSA) can also help fund assisted living over time, says Eric Rosenbloom, vice president, wealth management at GCG Financial, LLC in Deerfield, Illinois. Essentially bank or investment accounts, HSAs are triple tax advantaged, offering a tax deduction at time of contribution, tax-free growth, and tax-free withdrawals when used for qualified expenses.

Adds Tom Torre, CEO at Boston, Massachusetts-based Bend Financial Inc.: “What makes investing through an HSA so advantageous is that even when someone is focused on using their HSA for long-term saving and reaping the rewards of tax-free investment account growth, they can always access their HSA funds whenever they need them. If they’re faced with an unexpected health care expense, they can take advantage of their tax-free HSA funds at any point now or in the future.”

HSA’s drawback: Low maximum contribution amount limits, Rosenbloom says. For 2022, the maximum contribution amounts are $3,650 for individuals and $7,300 for family coverage. Those 55 years old and older can contribute up to an additional $1,000 yearly as a catch-up contribution. While those contributions will grow over time, they can only be counted on paying for fractions of assisted living’s cost.

Likely more impactful is to wait until age 70 to draw Social Security, ensuring the largest-possible monthly payment. Sadly, many claim Social Security at the earliest age possible, 62, and wait to tap their retirement accounts, says Patrick Simasko, elder law attorney and financial advisor for Simasko Law in Mount Clemens, Michigan.

“They should be living off their retirement accounts now, and waiting on that Social Security claim, but they do the opposite,” he says. If you wait and at 70 collect, for instance, $2,500 monthly in after-tax Social Security income and your assisted living costs are $4,500, you must tap just $2,000 in savings monthly, he says.

Immediate need

A comparatively recent development in funding assisted living is the LTC-life settlement, say Chris Orestis, president of Retirement Genius in Portland, Maine.

“Medically qualified (life insurance) policyowners who use an LTC-life settlement are able to immediately direct tax-exempt payments to cover their senior housing and long-term care costs,” Orestis says. “Seniors on an annual basis own more than $200 billion worth of life insurance policies. There’s a very high abandonment of life insurance policies. You stop paying premiums and the policy lapses.

“So, there is a secondary market for life insurance policies called a life settlement. Instead of dropping those policies, they can sell them off and gain a percentage of the death benefit. Someone with immediate need for care could easily get between 30 and 50% of the policy; someone whose health has not declined could readily gain 20% of the policy. To gain tax-free benefits, they’d need two ADLs or more or other deteriorating conditions.”

The downside of LTC life settlements is that because the policy is being sold, its original beneficiaries will not gain proceeds, he says.

Veterans are eligible for a benefit paying for assisted living, Orestis says. The VA Aid and Attendance benefit is a monetary benefit helping eligible veterans and their surviving spouses pay for assistance needed in everyday functioning, such as eating, bathing, dressing and medication management. To be eligible, veterans must have served on active duty at least 90 days, with one of those days during an active period of war, have reached 65 and meet income and asset limits.

The wisest approach is to plan ahead for when assisted living may be necessary. “Often, there is or will be a point in time when our children step in and start to make decisions for us,” Rosenbloom says. “It is important to make it a little easier on them. Consider getting a plan in place and look to transfer some of the risk to insurance, to relive a great deal of anxiety and bring comfort to your family.”

“We already had a retirement savings gap. Now you have people living longer and have a cash flow shortage. You have this kind of perfect storm.” Tammy L. Butts, regional executive vice president and branch manager with Equitable Advisors in Deerfield, Illinois