No Way! You can do what with an HSA?

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This week:

There are few savings or protection vehicles that offer:

1.     Tax deductible contributions

2.     Tax-free growth

3.     And withdrawals received tax-free

In this Newsletter, No Way! You Can Do What With An HSA?, we highlight one of these unique strategies, which uses a health savings account (HSA) to fund long term care insurance plan.

The importance of this funding approach hit home recently. I was having brunch with a good friend, Steve. He is a very successful 62-year-old business executive. As a life-long bachelor, he is winding down his career and contemplating his travel plans in retirement. We got to talking about my LTC business. I told him everyone needs a long term care plan whether or not insurance is used as the solution.

Marc - “What’s your LTC plan?”

Steve – “I’ll self-insure. I’m really healthy and can’t picture needing it. The insurance companies are trying to make money off of me, and if they don’t, they’ll just raise my rates.”

Did I mention that Steve is not a fan of insurance?

Marc – “You might consider buying a really small policy. There are core high-end features built into even small plans, and when you consider the costs involved, the insurance company won’t be making much money. There are plans today where you can prepay the premiums and limit the risk of rate increases.”

Steve – “Tell me more.”

Steve’s an analytical type, so I drew up a plan to demonstrate the LTCi value proposition. We discussed both traditional and Hybrid alternatives. The plan he preferred most looked like this:

The plan cost only $1,822 per year and would be paid up in 10 years! At that point, no more premiums would be due, and the insurance company couldn’t raise his rates or reduce his benefits.

At age 85, this plan could provide just under $200,000 of benefits paid out at about $100/day should he need LTC services for several years. Not a high-end plan, but he could self-fund the rest as he planned to do anyway. This is a good foundational plan for the care he might need in the future.

The value proposition is that the insurance plan might provide a maximum of 10.5 times tax-free benefits compared to the total premiums paid, which significantly exceeded the multiple he could get from self-funding over the same horizon.

I could see the wheels turning as Steve began to assess the financial tradeoffs.

The Triple Tax Advantage of HSAs for LTCi

Steve spent most of his career as one of the country’s foremost tax experts in his field. So, we began to dig a little deeper.

Marc – “Let’s discuss some funding options for this plan. Do you own an HSA?”

Many tax experts aren’t aware that you can fund LTCi premiums using an HSA up to an annual limit. HSAs have soared in popularity because of the ACA and growth of high deductible health care plans. HSAs have grown 10-fold since 2008 with about $51 Billion of assets as of 2018.

Steve – “In fact I do have an HSA that is accumulating a lot of money.”

It can make a lot of sense to fund LTCi from an HSA. HSAs can be left to a spouse at death but otherwise generally get taxed if the remaining amount is left to the estate.

Steve was able to take his original tax-deductible contribution into the HSA, which had grown tax free, and then withdraw the money, tax free, to pay for his LTCi premiums. This so called “triple tax advantage” could be parlayed into significantly more LTCi benefits that would also be received tax free.

We discussed the cost of care in his area today and the potential cost of care in the future. For home health care, the average cost might be three times higher than this plan, and facility care costs are even higher.

This is the plan that Steve finalized:

Steve decided to more than double the LTCi premium initially quoted to maximize his HSA withdrawals. He will most likely continue to fund the premiums out of his HSA over the next 9 years and have a greater amount of protection than his self-funded plan alone.

If you have married clients, not only can they benefit from joint policies and spousal discounts, but they may also be able to use one spouse’s HSA to fund both of their LTCi plans!

Please consult a qualified tax advisor before implementing any tax strategies.

Want to Learn More?

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