Long-Term Care Options and How to Plan for the Costs

Think for a minute about all the things you did when you woke up this morning. You probably got out of bed, walked to the bathroom, cleaned yourself up, brushed your teeth, got dressed, made yourself some breakfast, and headed out the door to go to work. These activities of daily living are so routine, you likely did them without even thinking about it.

Now imagine that you couldn’t do these things on your own. It could be because you’ve had an accident, you’re recovering from an operation, or you have an illness that limits your mobility. Whatever the reason, you now need help from another person to do many or even most of your basic daily activities — and you’ll continue to need it for weeks, months, or even years.

This kind of help is called long-term care, and there’s a good chance you or a close loved one will need it at some point in your life. According to the U.S. Department of Health and Human Services (HHS), a person who turned 65 today has almost a 70% chance of needing some form of long-term care in the future.

Needing long-term care isn’t just a physical burden; it’s a financial one too. According to the 2020 Cost of Care Survey by Genworth Financial, professional long-term care can cost anywhere from $1,603 to $8,821 per month. Most employer-sponsored health insurance plans don’t cover these costs, and even Medicare provides only limited coverage.

If you don’t want to risk being bankrupted by long-term care costs in the future, you need to do some planning now. Even if you don’t think you’ll need long-term care for many years to come — or at all — it’s better to think about it ahead of time than to take a chance on having to deal with both a health crisis and a financial crisis at once.

Options for Long-Term Care

When many people hear “long-term care,” they immediately picture a nursing home. However, it’s possible to receive long-term care in a variety of settings, which differ widely in terms of both comfort and cost.

The main forms of long-term care are:

1. In-Home Care From Relatives

Dealing with a long-term injury or illness can be a lot less stressful in your own home with familiar things and people around you. Thus, one common type of long-term care is to have a relative or friend tend to your needs at home.

While unpaid in-home care is easiest on the person receiving care, it can be difficult for the caregiver, both emotionally and financially. A 2018 Genworth study found that more than half of family caregivers had high levels of stress, and roughly one-third said their careers had suffered on account of their caregiving duties.

2. Home Health Aides

If you want to receive care at home without putting a burden on your relatives, you can hire someone to help you. A home health aide doesn’t provide medical care but can help with such daily tasks as bathing, dressing, and eating. The 2020 Genworth survey found that the median cost of a home health aide in 2020 was $24 per hour, or $4,756 per month.

3. Homemaker Services

Some people don’t need help with bathing or dressing, but they still need someone to handle daily chores they can’t manage on their own, such as cooking, cleaning, and running errands. For this, you can hire a homemaker service, which costs a bit less than a home health aide. Genworth put the median cost of homemaker services for 2020 at $23.50 per hour, or $4,481 per month.

4. Adult Day Care

Some older people can still get up and about, but they can’t be on their own for long periods of time. An adult day care program is a place where adults can go during the day and spend time with others, with a caregiver there to keep an eye on them. Adult day care programs can offer structured activities, meals, transportation, and sometimes health services. They’re cheaper than most long-term care options, at around $74 per day or $1,603 per month, according to Genworth.

5. Assisted Living

Home health aides can help with daily activities, but they can’t provide actual medical care. People who need regular medical supervision are better off moving to an assisted living facility. This is a place where people can live on their own in private apartments and have access to both personal care and medical care on site. The median cost for an assisted living facility was $4,300 per month in 2020, according to Genworth.

6. Nursing Home

Nursing homes provide the highest level of supervision and care. These all-inclusive facilities offer room and board, personal care, supervision, activities, medication, rehabilitation, and full-time nursing care. This level of care comes with a high price tag, however. Genworth found that in 2020, a semi-private room in a nursing home cost $7,756 per month, and a private room cost $8,821 per month.


Government Programs

Most Americans can’t afford to pay for professional long-term care out of their own pockets. A 2020 survey by The Ascent found that over half of Americans have less than $5,000 in savings. Roughly one-third have less than $1,000 — not enough to pay for even a single month of long-term care.

Government programs, including Medicare and Medicaid, can help you meet some of the costs. However, these programs offer only limited aid. Each one has specific rules about who qualifies for benefits, what services it covers, how long you can receive aid, and how much you must pay for on your own. If you need long-term care, it’s certainly a good idea to look at these programs first to see what they cover, but it’s a mistake to rely on them to pick up the whole tab.

Medicare

In most cases, Medicare does not include any long-term care benefits. However, there are several specific exceptions:

  • Skilled Nursing Facility (SNF) Care. If you come out of the hospital after a stay of at least three days, Medicare provides partial coverage for up to 100 days’ worth of medically necessary care while you recover. To receive this coverage, you must enter a Medicare-certified SNF or nursing home within 30 days after you leave the hospital. Medicare covers all of your treatment there for the first 20 days of your stay. Beginning on day 21, you must pay a daily copayment, which is set at $185.50 in 2021. Medicare covers any cost beyond this copayment up through day 100. If you still need care after that, you’re on your own.
  • Rehabilitation. If you have a condition that requires ongoing medical care to help you recover, Medicare provides partial coverage for a stay in an inpatient rehabilitation facility. It covers the cost of treatments such as physical therapy, meals, drugs, nursing services, and a semi-private room. However, you must pay an out-of-pocket cost for this care that depends on the length of your stay. For the first 60 days, you pay a $1,364 deductible. This cost is waived if you’ve already paid for a hospital stay for the same condition. For days 61 through 90, you pay $341 per day. After day 90, you start using up your “lifetime reserve days.” You have only 60 of these days over your lifetime, and each one costs you $682. If you still need care after your 60 days are used up, you must pay the full cost. Also, any extra costs during your stay — such as a private room, private duty nursing, or a phone or television in your room — are your own responsibility.
  • Home Health Services. You can also use Medicare to pay for in-home care for a specific illness or injury. This includes part-time or intermittent skilled nursing care, physical or occupational therapy, and speech-language pathology. To qualify as part-time, your care must cover less than eight hours per day, or less than seven days per week, over a total of three weeks or less. If you are receiving this type of in-home care, Medicare also pays for additional, basic care from a home health aide. Medicare does not cover care from a home health aide if that’s the only care you need, and it does not cover homemaker services under any circumstances.
  • Hospice Care. People who are terminally ill sometimes choose to spend their last days in hospice care. Hospice treatment focuses on relieving the patient’s pain, rather than trying to cure them. Medicare covers hospice care for patients who are terminally ill, are not seeking a cure, and do not expect to live more than six months. Patients can receive this kind of care in their own homes, a hospital, or another inpatient care facility.

For more details about what Medicare covers, see the Medicare website.

Medicaid

Unlike Medicare, Medicaid covers all types of long-term care. This includes both in-home care — such as a visiting nurse or a home health aide — and care in facilities such as nursing homes. You can get home health aide services from Medicaid even if you don’t need skilled care as well, and you can get care in a facility even if you aren’t recovering from a hospital visit.

However, Medicaid has strict limits on eligibility. You can’t receive Medicaid benefits if your income is above a certain level, which varies from state to state. Also, in some states, you cannot qualify unless you have dependent children. You can find the limits for your state through your state’s Medicaid website.

Veterans’ Benefits

The Department of Veterans Affairs (VA) covers the full cost of long-term care for veterans who have disabilities resulting from their military service. It also covers costs for veterans who can’t afford to pay for their own care. Other veterans receive some coverage, but they must pay a copayment. According to the VA site, the current copayments for long-term care are:

  • $97 per day for inpatient care, such as nursing home care
  • $15 per day for outpatient care, such as home health care or adult day care
  • $5 per day for domiciliary care in a special facility for homeless veterans

The VA site has more information about the health benefits available to veterans and how to qualify for them.

OAA Programs

Some states have their own separate programs to help provide care for adults over age 60. These programs get funding from the federal government under the OIder Americans Act (OAA). The OAA supports a wide network of state, local, and tribal agencies called the Aging Network. It works with tens of thousands of service providers and volunteers to deliver various types of care, including:

  • Meal delivery
  • Transportation
  • Home health services
  • Home health aide and homemaker services
  • Adult day care
  • “Respite care,” which gives family caregivers some time off from taking care of an older relative
  • Help using other government benefits

You can find programs in your area through Eldercare.gov.


Products to Help You Pay for Long-Term Care

Government programs don’t cover everybody, and the coverage they offer isn’t always enough to pay for the full cost of long-term care. To make up the difference, some people carry long-term care insurance, which provides coverage for this specific type of care. Others rely on other financial products designed for senior citizens, such as annuities and reverse mortgages, to cover their costs.

Long-Term Care Insurance

Long-term care insurance, or LTC insurance, works like other types of insurance. You pay a premium each month to the insurer, and if you ever need long-term care, it covers the cost. However, one big difference between this and most other types of insurance is that you have to qualify to buy a policy. If you’re already in poor health, there’s a chance you won’t be able to get a policy — and if you do, you’ll have to pay a steep price for it.

There are several ways to buy a long-term care insurance policy. The most common sources for policies are:

  • Insurance Specialists. You can buy LTC insurance through financial professionals such as insurance agents, brokers, and financial planners. To find insurance companies that offer LTC insurance, visit your state insurance department or do an Internet search for “long-term care insurance” plus the name of your state.
  • Employers. Although standard employer-sponsored health care plans don’t cover long-term care, many employers — including the federal government, many state governments, and some private companies — offer LTC insurance as an add-on that employees can purchase separately. To find out whether your employer offers this coverage, check with your pensions or benefits office.
  • Organizations. Some labor unions and other professional or trade organizations, such as the National Education Association, offer LTC insurance as a benefit to their workers. Membership organizations such as alumni associations or service clubs like the Lions and Elks can also take part in group plans.
  • State Partnerships. In some states, you can purchase LTC coverage through a State Partnership Program. These programs provide benefits partly through private long-term care insurers and partly through Medicaid. You can learn more details about these programs from the Department of Health and Human Services (HHS).

Although long-term care coverage can protect you from devastating long-term care costs, most Americans don’t carry it because of its high cost. According to the American Association for Long-Term Care Insurance (AALTCI), the typical annual premium for an LTC policy ranges from $1,400 to $3,100. This annual cost varies based on factors such as age, health, gender, location, and amount of coverage.

Financial planner David Demming, speaking with Policygenius, says LTC insurance is most likely to be a good deal for people aged 50 to 55 with a net worth between $1 million and $3 million. That’s enough money to afford the premiums, but not enough to cover the full cost of long-term care. To get a clearer idea of what LTC policy pricing could be for you, check out online calculators like this one from Genworth.

Annuities

Some people choose to fund their long-term care through an annuity, a financial product that pays out a fixed sum every year over a specific period. There are three kinds of annuities you can use for this purpose:

  • Immediate Annuities. With an immediate annuity, you pay a one-time premium, and in exchange the company pays you a fixed monthly benefit. This benefit can last for a specific period of time or the rest of your life. One advantage of an immediate annuity is that anyone can buy one, regardless of health status. This makes it a good option for people who no longer qualify for LTC insurance due to poor health. However, the fixed monthly sum you get might not be enough to meet your long-term care costs, and inflation can eat into its value.
  • Deferred Annuities. You can buy a deferred annuity with either a one-time payment, like an immediate annuity, or a series of regular payments. The money you pay into the annuity earns interest and grows tax-free. It doesn’t start paying out a monthly benefit until a specific date, such as your 65th birthday.
  • Long-Term Care Annuities. A long-term care annuity is a deferred annuity with a long-term care rider. This type of annuity doesn’t pay out until you need the money for long-term care costs. To collect the monthly payment, you must be diagnosed with a medical condition that requires long-term care, such as Alzheimer’s disease. According to HHS, this type of annuity is usually available only to people age 85 or younger who meet certain health requirements. However, according to SmartAsset, it’s sometimes easier to get approved for a long-term care annuity than for LTC insurance.

Depending on your situation, an annuity can be a cheaper way to cover long-term care costs than LTC insurance. However, it typically requires a large up-front payment, which is even higher if you already have health issues. Also, annuities can have a complicated effect on your taxes — HHS recommends consulting a tax professional before you buy one.

Reverse Mortgages

Another way to pay for long-term care services is with a reverse mortgage through LendingTree. This is a special type of home equity loan available only to homeowners age 62 and up, which allows you to get cash out of your home without giving up your title to it.

The house remains your property until you die. At that time, it goes to the bank unless your heirs choose to pay off the amount you’ve borrowed and keep the house. Otherwise, the bank sells the house and keeps the amount you owed at the time of your death. Any cash beyond that balance goes to your heirs.

There are several ways to get cash from a reverse mortgage. You can get one large lump-sum payment, a regular monthly payment, or a line of credit you can draw on as needed. The second two options are most useful for paying long-term care expenses. As long as you spend the payments in the same month you receive them, the money is not taxable income and doesn’t affect any government benefits, such as Social Security, Medicare, or Medicaid.


Long-Term Care Planning

Dealing with long-term care can be an emotional and financial burden, both for you and for your family. The best way to lighten that load is to plan ahead. By making your plans early, you’ll have plenty of time to do research, make decisions, and buy traditional long-term care insurance or any other products you need to cover the costs.

1. Research Your Options

Start by looking into the options for advanced care in your area. Check the phone book or do an online search to find out what choices you’re likely to have for assisted living and nursing homes, as well as home health aide and homemaking services. The Genworth Cost of Care Survey tool can help you estimate what these services cost now and what they’re likely to cost in the future. You can also check the costs for services in other areas to figure out whether relocating would save you money.

2. Talk to Your Family

Once you have some idea of available options, talk to your family members and get their input. Set aside a time when you can talk everything over in person without having to rush. Here are some points to discuss:

  • Your Lifestyle. Discuss the way you live now and how you expect to live in the future. For instance, if it’s important to you to stay at home and live independently, let your family know that. Tell them about your priorities, and find out what’s important to them, as well.
  • Your Care Options. Show your family the research you’ve done on care options in your area. Tell them how you’d prefer to receive care and whether you have a specific provider in mind. Also, find out how much of your care your loved ones are able and willing to take on themselves. If you have several relatives who could help you, talk about which specific responsibilities each of them could handle.
  • Your Finances. Once you’ve considered what kind of care you want, talk about what it’s likely to cost. Let your family know how much money you can set aside now toward your future care needs, and find out if any of them are willing to contribute.
  • Medical Care. Make sure your family knows your health history in detail so they can supply it to a doctor if they need to. Also, make sure they know how to contact all of your current medical providers.
  • Legal Issues. Decide who should be responsible for making medical decisions for you if you can’t make them yourself. Use this information to set up a durable power of attorney for the future. Also, talk to your loved ones about your wishes for end-of-life care. If you already have a living will, tell them what it says and where to find it; if you don’t have one, make plans to set one up.

3. Calculate the Cost

Now that you have some idea who will provide care for you when you need it, the next step is to figure out how much it will cost. Even if your family has offered to provide unpaid care for you when you need it, there could still be some cost involved. For instance, you could choose to hire a house cleaning service so your loved ones won’t be responsible for all the housekeeping chores in addition to your care.

If you’re planning to pay for professional long-term care services, think about how long you’re likely to need them. According to the HHS, people who require long-term care use it for an average of three years. This includes an average of two years of in-home care and one year in a long-term care facility. About one in five people need care for more than five years.

To figure out the total amount you’ll need for long-term care costs, multiply the cost by the expected length of care. For instance, suppose a home health aide costs $60,000 per year and assisted living costs $90,000 per year. If you expect to need two years of home health care and one year in assisted living, you must save up a total of $250,000.

If the total cost looks like more than you can possibly afford, look for ways to save on long-term care. This could include relying on family care, negotiating prices, getting help from government programs, or relocating to a cheaper area.

4. Make a Plan to Cover the Costs

Once you have an idea of how much money you’ll need for long-term care, you can start figuring out how to pay for it. If your income and assets are low enough, you can look to Medicaid for help when you need care. State government programs could also provide some help.

By contrast, if you have a lot of liquid assets — that is, cash, retirement savings, and other assets you can easily convert to cash — you might be able to pay for your care out of pocket. Financial planners interviewed by Policygenius say this is most practical for people with a net worth of at least $3 million.

If you’re somewhere in between those two extremes, you’ll need some other way to meet the costs of long-term care. That could mean buying long-term care insurance, investing in an annuity, or taking out a reverse mortgage. A financial planner can help you compare these options and decide which one is best for you.

5. Put Your Plan in Writing

After you’ve come up with a plan to meet your long-term care needs, the final step is to put it in writing. Having a written plan gives your family something to consult if there’s ever any confusion or uncertainty about your wishes.

If you’ve decided to make a living will or set up a durable power of attorney, these documents should be part of your written care plan. Consult a lawyer to help you set these up. Give a copy of the entire plan, including the legal documents, to any relatives it could affect.

Putting your plan in writing doesn’t mean it’s set in stone. If your health or financial situation changes in the future, your long-term plans might need to change too. Update your plan as needed, and make sure your relatives always have the latest version.


Final Word

If you’re young and healthy, you may feel like it’s too soon to start thinking about long-term care. Since you probably won’t need it for many years, you figure you can just wait and deal with it when the time comes.

However, there are several good reasons why now is exactly the right time to think about it. First of all, the future is unpredictable. Even young people can suffer injuries or develop illnesses that keep them off their feet for months.

Also, LTC insurance gets more expensive and harder to obtain as you age. If you decide to wait until you’re 65 before buying a policy, it could already be too late to qualify. And even if you can get one, you’ll pay a much steeper rate for it than you would if you’d bought it 10 years earlier. So it makes sense to start thinking about this type of insurance and decide whether it’s for you before you hit age 55.

Finally, if you put off thinking about long-term care until you actually need it, you’ll have to make a whole lot of important decisions in a hurry. You could end up making choices that aren’t best for you because you don’t have time to weigh the options. By avoiding procrastination and thinking it through now, you can ensure that when — or if — you finally need long-term care, it will be as easy as possible for you and your family.

Source: moneycrashers.com

Should I Get a Life Insurance Policy As a Young Adult in My 20s?

“I don’t need it because I’m young and healthy” is one of the most common myths about life insurance. Life insurance is absolutely appropriate for many young people, even those without dependents to provide for or significant debts to their name.

With relatively low premiums, flexible coverage amounts, and the option to save even more by laddering coverage, term life insurance is particularly attractive to would-be policyholders in their 20s. Twenty-somethings who cross this important item off their to-do lists reap some notable benefits, including lower life insurance premiums on average than older applicants, longer terms at lower cost — again, on average — and protecting surviving relatives from the financial burden of funeral expenses.

Getting life insurance — and getting on with life — is even easier with low-friction digital life insurance agencies like Haven Life, which blends the security of doing business with a financially rock-solid life insurer like MassMutual and the convenience we’ve all come to expect from financial technology.

Why You Need Life Insurance in Your 20s: Pros of Getting a Policy As a Young Adult

If you’re putting off your life insurance application because you’re not sure you’re old enough to need it, it’s time to reconsider. Consider applying before your 30th birthday and enjoy the likelihood of lower monthly premiums, the flexibility to design a multi-policy ladder that works for you, and the peace of mind that comes with ensuring your loved ones are protected should the unexpected occur — among other benefits.

1. Locking in a Relatively Low Premium

Life insurance premiums vary for a variety of reasons: policyholder age, tobacco use, term length, coverage amount, family health history, and life insurance company underwriting standards. You won’t know your premium for sure until you apply for coverage and complete the underwriting process.

However, it’s no great secret that age is among the most important determinants of life insurance premiums. Imagine two similar applicants: both male non-tobacco users in great health with similar family health histories, applying for the same amount of coverage. The only real difference between the two is their age: one is 25 and the other is 35. The 25-year-old will almost certainly qualify for a lower premium per unit of coverage than his senior.

In other words, it pays to apply for life insurance coverage at a younger age.

2. Lower Risk of Medical Underwriting Issues

Most life insurers require medical underwriting for higher-value policies. That is, applicants must consent to a basic medical exam as a condition of coverage. These exams are thorough but not invasive, and although they sometimes uncover abnormalities that could correlate with underlying health conditions, many applicants pass them with flying colors.

Because health conditions that may reduce life expectancy are less common among younger adults, medical underwriting is less likely to adversely impact 20-something life insurance applicants’ premiums or chances of approval than older applicants’. This is another potent argument in favor of applying early, when you’re least likely to have any major health concerns.

And if you’re not comfortable with medical underwriting for whatever reason? You can skip that part of the process with a no-exam policy. Because they’re riskier for insurers, no-exam policies tend to have lower maximum coverage limits and higher premiums than traditional policies. But they’re not skimpy — Haven Life’s Haven Simple1 no-exam term life policy provides coverage up to $500,000, for example. And applying for no-exam coverage2 is even easier than applying for traditional coverage — Haven Simple’s application process is 100% digital.

3. Getting a Longer Term Without Paying More

The likelihood of death is actually quite low for policyholders in the 25- or 30-year-old age band. The difference in life insurance premiums available to these applicants reflects what could happen to them later in life, when their policies remain in effect and their risk of death is much higher.

A term life insurance policy’s term — the timespan during which it remains effective at a fixed premium — is a function of its length. The same policyholder who applies at the same point in time for the same amount of coverage will always pay more for a 30-year term than a 10-year term because they’re much more likely to die while the former policy remains in effect.

This is basic math, but it’s not the whole story. When you apply for longer-term coverage also determines the cost of that coverage. A 30-year policy that begins when you’re age 25 ends when you’re age 55; a 30-year policy that begins at age 35 ends at age 65. Because your risk of death is higher between age 55 and age 65 than between age 45 and age 55, you’ll pay more for the same coverage duration if you wait to apply.

Applying for coverage early also preserves your flexibility to create a multi-policy “ladder” that maximizes coverage when you need it without undue financial burden. A ladder allows you to step down coverage as you accumulate wealth and reduce existing and expected debt obligations.

If you expect your 60th birthday to find you owning your home outright, planning your youngest child’s college graduation, and readying to retire in a few years, you expect to need little if any life insurance coverage in your 61st year. If that’s the year your relatively modest, low-premium, life insurance policy’s 30-year term expires — a decade after a larger 20-year policy and two decades after an even larger 10-year policy — then good on you.

4. Getting More Coverage at a Lower Cost

You might not know for sure at age 22 or 25 how much life insurance you’ll need at age 42 or 45. But you already know that the earlier you apply, the more coverage you’ll get for the same cost. This is important if you expect your future life insurance needs to be substantial.

Getting life insurance early on helps keep your options open too. Many online options can’t match Haven Term’s3 high coverage limits — up to $3 million for those ages 18-59.

5. Covering Debts That Might Survive You

Most debts don’t pass to survivors when you die. That is, if you die before your spouse, they probably won’t be personally obligated to settle your outstanding credit card bills or student loans. (The rules are different for joint accounts, for co-signed debts, and for residents of community property states, so be sure to check with an estate planning expert or financial advisor before making sweeping assumptions.)

This doesn’t mean most of your debts will be forgiven in death. Generally, debts that don’t directly transfer to a surviving heir or co-signer become the responsibility of the deceased person’s estate. They’re settled using the estate’s assets: the contents of checking, savings, and investment accounts, along with cash raised by liquidating other assets like cars or real estate. The greater the value of the debts settled by the estate, the less the estate has left to pass on to heirs.

Adequate life insurance short-circuits this process. That’s because life insurance death benefits, by law, don’t pass through the policyholder’s estate. Those benefits go directly to the life insurance beneficiary — typically a surviving spouse or children.

6. Ensuring Your Survivors Aren’t on the Hook for Final Expenses

If you die without enough in the bank to cover the cost of your funeral and related “final expenses,” your survivors will have to foot the bill. Even a small life insurance policy — one worth perhaps $100,000 — should be more than adequate to keep this from happening. Think of your policy as one last gesture of fiscal respect to those you leave behind.

7. Building Cash Value in a Permanent Life Insurance Policy

For a whole host of reasons, including lower cost and greater flexibility as policyholders move into middle age, term life insurance may be a better fit for 20-something applicants than other types of life insurance.

Young adults shouldn’t completely close the door on permanent life insurance, however. Before applying for coverage, you’ll want to be sure you’re choosing the right life insurance policy for your needs.

That means understanding the differences between term and permanent or whole life insurance — especially the cash value component of a permanent policy, which can grow to considerable size over time and provide a crucial source of low-cost borrowing power for policyholders who don’t own their own homes or who need more borrowing power than a home equity loan or line of credit can provide.


Should You Hold Off on Getting a Life Insurance Policy As a Young Adult?

Life insurance isn’t an absolute necessity for every 20-something. Although the case for getting covered early in your adult life is quite strong, there are two persuasive reasons to wait. Both boil down to: “I’ll know more in a few years.”

Your Future Financial Needs Might Not Yet Be Clear

Many people in their 20s aren’t sure what they’ll be doing in a year, let alone 10 or 20. For many, homeownership remains a financial impossibility, putting yet-to-be-born kids through college an abstraction, and retirement a distant dream. With so much yet to be decided, estimating one’s future life insurance needs is all but impossible.

Under these circumstances, it’s tempting to put the search for life insurance on hold until things come into focus. But that strategy might not be the best most, even for would-be policyholders who genuinely have no idea where they’ll be five years down the road.

A better move: getting a toehold in the life insurance market with a modest 30-year policy that sets you up for whatever lies ahead without breaking the bank. If you’re too busy for a medical exam, remember Haven Simple — at age 22 or 25 or 28, a no-exam policy won’t be exorbitant.

You May Still Need Life Insurance After Your Term Ends

You’ll probably be wealthier and less debt-burdened in 30 years, but there’s a decent chance you’ll still have obligations ahead: college tuition, an outstanding mortgage balance, dependents who don’t yet support themselves financially. You might have new obligations you can’t imagine right now, like a spouse who’s unable to work due to a debilitating medical condition.

The bottom line is, you might still need life insurance after the initial term ends on the policy or policies you took out in your 20s. Does that mean you should wait five or 10 years to apply for your first policy? Not necessarily.

Financially speaking, you may be better served by establishing the first rung on your life insurance ladder now with a low-value, low-premium, 30-year policy, and then adding more coverage when you’re a bit older but still relatively young.


Final Word

The case for getting life insurance in your 20s is stronger than you might think. Locking in low rates early, maximizing the flexibility of your multi-policy ladders, ensuring that your current and future heirs and survivors are protected before life gets in the way — these are just some of the many reasons to apply sooner rather than later.

Term life insurance isn’t the only financial product you’ll need to get a head start on building and sustaining lifelong wealth, of course. Even before applying for your first life insurance policy, make it a top priority to lay out a comprehensive financial plan and begin building an emergency savings fund capable of sustaining you through at least six months of financial hardship.

As every life insurance policyholder knows, the unexpected can happen at any time. But fortune, as they say, favors the prepared.

Sponsored by Haven Life Insurance Agency
1 Haven Simple is a Simplified Issue Term Life Insurance Policy (ICC20 HAVEN SIMPLE in certain states, including NC) issued by C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.
2 Issuing the policy or paying its benefits depends on the applicant’s insurability, based on their answers to the health questions in the application, and their truthfulness.
3 Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. Policy and rider form numbers and features may vary by state and may not be available in all states. In NY, Haven Term is DTC-NY. In CA, Haven Term is DTC-CA. Our Agency license number in California is 71922 and in Arkansas, 100139527

Source: moneycrashers.com

3 Tax Penalties That Can Ding Your Retirement Accounts

Surprised older woman in shock
Photo by Rob Bayer / Shutterstock.com

Building and living off a nest egg is tough — but you can make the situation even more difficult if you run afoul of some key laws governing retirement accounts.

Make one wrong move, and the long arm of Uncle Sam may soon tap you on the shoulder, demanding a few explanations.

Following are penalties to avoid at all costs when contributing to or withdrawing from retirement accounts.

Excess IRA contribution penalty

Building a large amount of retirement savings is an admirable goal. But contributing too much to an individual retirement account (IRA) can cost you, according to the IRS.

It’s possible to commit this offense by:

  • Contributing an amount of money that exceeds the applicable annual contribution limit for your IRA
  • Improperly rolling over money into an IRA

What happens if you get a little too eager to build a nest egg and make one of these mistakes? The IRS explains:

“Excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year.”

The IRS offers a remedy to fix your mistake before any penalties will be applied. The agency says you must withdraw the excess contributions — and any income earned on those contributions — by the due date of your federal income tax return for that year.

For example, if you contributed too much to an IRA for 2020, you have until April 15, 2021, to withdraw the excess and thus avoid a penalty.

Early withdrawal penalty

Taking money out too soon from a retirement account is another potentially costly mistake.

If you pull money from your IRA before the age of 59½, you might be subject to paying income taxes on the money, plus an additional 10% penalty, the IRS says.

The agency notes, though, that there are several circumstances in which you are allowed to take early IRA withdrawals without penalties. For example, if you lose a job, you are allowed to tap your IRA early to pay for health insurance premiums.

The same penalties apply to early withdrawals from retirement plans like 401(k)s, although again, there are exceptions to the rule that allow you to make early withdrawals without penalty.

It’s crucial to note that the exceptions that allow you to make early retirement plan withdrawals without penalty sometimes differ from the exceptions that allow you to make early IRA withdrawals without penalty.

Note: The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act of 2020 created a one-time exception to the early-withdrawal penalty for both retirement plans and IRAs due to the coronavirus pandemic: Generally, coronavirus-related distributions of up to a total of $100,000 that were made in 2020 are exempt.

Missed RMD penalty

Retirement plans are great because they generally allow you to defer paying taxes on your contributions and income gains for decades. Alas, eventually, Uncle Sam is going to demand his share of that cash.

Previously, taxpayers were obligated to take required minimum distributions — also known as RMDs — from most types of retirement accounts beginning the year they turn 70½. But the Secure Act of 2019 bumped up that age to 72.

The consequences of failing to make these mandatory withdrawals still apply, though. Fail to take your RMDs starting the year you turn 72, and you face harsh penalties, says the IRS:

“If you do not take any distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required.”

It’s important to note that the RMD rules do not apply to Roth IRAs. You can leave money in your Roth IRA indefinitely — although another provision of the Secure Act means your heirs have to be careful if they inherit your Roth IRA. For more, check out “Why Roth Retirement Accounts Are Now Even Better.”

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

Why You May Not Want to Be an Executor

Being asked to be an executor is an honor you might want to pass up.

Settling an estate typically involves tracking down and appraising assets, paying bills and creditors, filing final tax returns and distributing whatever’s left to the heirs. At best, the process is time-consuming. At worst, it takes hundreds of hours, exposes you to lawsuits and thrusts you into the middle of family fights.

Robert Braglia of New York, a certified financial planner, was executor of an estate where the woman disowned three of her four children and left most of her money to just one of her many grandchildren. That could have caused an uproar even if the family got along, which it didn’t: Two of the woman’s children were fighting over the woman’s ashes before she actually died.

“Even without conflicts — which there always are — it is an enormous job,” Braglia says.

Before you agree to take on this role, be clear on what’s involved.

You could be doing it for many months

The time involved in settling an estate varies enormously. A small estate with few debts might be distributed within six to 12 months. It may take years to finalize a large estate with contentious heirs, lots of creditors or assets that are difficult to value, such as a business or rare collectibles.

A survey by EstateExec, an online tool for executors, found the typical estate took about 16 months to settle and required 570 hours of effort. The largest estates, worth $5 million or more, took 42 months and 1,167 hours to complete.

That doesn’t necessarily mean the executor has to put in that many hours, says CFP Russ Weiss of Doylestown, Pennsylvania. An executor can use some of the estate’s funds to hire an attorney and other help that could be more efficient than trying to figure everything out on their own.

“If you have other professionals involved — an attorney, a CPA, an investment person or wealth advisor — they’re doing most of the heavy lifting,” Weiss says. “Executors are like the quarterback in the administration of the estate.”

Executors may also collect a fee, with the amount depending on state law or what’s specified in the estate documents.

You might have a tough time finding assets

Even with help, executors should expect to spend many hours finding documents, inventorying assets and debts, arranging appraisals, communicating with financial institutions and government agencies, managing property and keeping careful records. If the estate includes a home, the house may have to be emptied of possessions and readied for sale.

The less organized the estate, the more time it may take to track down assets. EstateExec CEO Dan Stickel said his father, who died at 69, rented multiple storage sheds without telling his children where they were. Finding the various backyard sheds was challenging enough, but then they had to sort through the dusty contents. Those included piles of newspapers, battered furniture and several bars of silver bullion hidden under a dirty tarp.

Even then, they missed something. The auction company Stickel hired to dispose of the rest of the sheds’ contents found a box containing $30,000 in savings bonds. Fortunately, the company returned the bonds to the family.

You could be sued

Executors have a fiduciary duty to the beneficiaries, which means the executor is required to put the beneficiaries’ interests first. People are typically advised to choose executors who are responsible, honest, diligent and impartial.

“It’s an honor. If somebody asks you, it’s to say, ‘I trust you, and I trust you implicitly that you will handle my affairs in a way that’s fair,’” Weiss says.

But the fiduciary duty comes with potential legal and financial consequences. Executors can be held personally responsible for mistakes and other problems. For example, one child may remove items from a parent’s home that are bequeathed to another child. The heir whose items were taken could sue the executor for failing to secure the home.

Executors also may have to make judgment calls, such as whether to spend the estate’s money to fix up a house for sale and if so, how much. Unhappy heirs can sue over those decisions, as well.

Given everything that can go wrong and the time commitment, people should think carefully about whether they really want the job before agreeing to be an executor, says CFP Kate Gregory of Huntington Beach, California, who has settled both her mother’s and her husband’s estates.

Gregory says she would agree to serve again only if a family member asked, and only if there wasn’t likely to be a lot of conflict among the beneficiaries. Even then, she would want to see the will or trust documents to ensure there aren’t any unpleasant surprises that could cause discord. She also would insist that the documents name alternates in case she can’t or won’t serve. No one can be forced to be an executor, but Gregory says she would feel better about saying “yes” if she knew there was a plan should she later say “no.”

“I want to make sure that I could resign,” she says.

This article was written by NerdWallet and was originally published by The Associated Press.

Source: nerdwallet.com

What’s the Difference Between a Traditional and Roth 401(k)?

If you work for a company that offers a retirement plan you might be confused about making traditional or Roth contributions. Laura reviews the critical differences to consider and how they affect your current taxes and future retirement.

By

Laura Adams, MBA
February 17, 2021

retirement plan, such as a 401(k) or 403(b), you probably have the option of making “traditional” or “Roth” contributions to your account. While having more investment options is a good thing, it might leave you feeling overwhelmed or confused about the benefits of each. 

Today, I’ll review critical points about the differences between a traditional and Roth retirement plan at work. You’ll learn who qualifies to participate, how much you can contribute, and how they affect your retirement and taxes.

What is a 401(k) retirement plan?

Only employers can offer a traditional or Roth 401(k) or 403(b) to eligible workers. You may have to reach a certain age, such as 21, or be employed for a period, such as one or six months, to qualify. 

Employers can customize certain features of their retirement plans; however, they must comply with the Employee Retirement Income Security Act of 1974 (ERISA). It’s a federal law that sets minimum standards for most workplace retirement plans, which protects participants. Your employer should provide a Summary Plan Description every year, which explains your retirement plan’s features and your rights.

There aren’t many ways to save for retirement that guarantee a 100% return before you even factor in investment returns!

When you enroll in a 401(k), you authorize your employer to automatically deduct elected contributions from your paycheck and send them to your retirement account. If your company offers matching funds, they contribute additional money for free. 

An example of a typical 401(k) match is 2% or 3% of your compensation. For instance, if your salary is $40,000 a year, 2% is $800. If you contribute that much, so will your employer, giving you a total contribution of $1,600 ($800 from your paycheck plus $800 from your company). And if you can only contribute $500, your employer contributes $500, for a total contribution of $1,000 for the year. There aren’t many ways to save for retirement that guarantee a 100% return before you even factor in investment returns! So always be sure to participate in a workplace plan and max out matching funds when offered.

Some retirement plans come with a vesting schedule. It’s a period you must remain employed to fully own your matching contributions or other employer-provided funds, such as profit sharing. However, your contributions are always 100% vested. You never forfeit your own money that you put in a retirement account (unless your chosen investments lose money).

The annual 401(k) and 403(b) contribution limits have been slowly increasing every few years, based on IRS rules. For 2021, you can contribute up to $19,500, or $26,000 if you’re over age 50. The high contribution limits, automatic payroll deductions, and free matching make workplace retirement plans popular and useful for growing wealth to spend in retirement.

Differences between traditional and Roth retirement accounts

Now that you understand retirement account basics let’s cover the differences between traditional and Roth accounts.

traditional retirement account permits pre-tax contributions, which gives you a tax benefit in the year you make them. You don’t pay any income tax on the money you invest. Instead, you pay income tax on your contributions and their investment earnings when you take withdrawals in retirement. 

Roth retirement account requires you to make after-tax contributions, which don’t give you an upfront tax benefit. However, the massive upside is that you take withdrawals of both contributions and earnings that are entirely tax-free in retirement (as long as you’ve owned the account for at least five years).

The downside of any retirement account is that you get penalized for tapping amounts that weren’t previously taxed before reaching the official retirement age of 59.5.

So, the main difference between traditional and Roth accounts is when you pay taxes. A traditional retirement account helps cut your current income tax bill. And a Roth allows you to avoid income tax when you tap the account in the future.

With a Roth, you’re allowed to withdraw your contributions at any time. That’s because you already paid tax on them. However, if you take out earnings before age 59.5, you must pay a 10% penalty, plus income tax, on the untaxed portion.

The downside of any retirement account is that you get penalized for tapping amounts that weren’t previously taxed before reaching the official retirement age of 59.5.

5 ways a workplace Roth is different from a Roth IRA

Many people mistakenly assume that a Roth is a Roth. It’s important to understand five main differences between a Roth 401(k) and a Roth IRA.

1.  Limits on annual income apply to a Roth IRA but not a Roth at work. When your income exceeds yearly limits, you can’t make new contributions to a Roth IRA. For 2021, single taxpayers with income exceeding $140,000 and joint filers with household income over $208,000 get locked out. However, with a Roth 401(k) or 403(b), you can contribute no matter how much you earn.   

2. Annual contribution limits for a Roth IRA are much lower than a workplace Roth. For 2021, you can contribute up to $6,000, or $7,000 if you’re over age 50, to all your IRAs. As I previously mentioned, you can contribute a total of up to $19,500, or $26,000 if you’re over 50, to your workplace retirement accounts.

3. Required minimum distributions (RMDs) don’t apply to a Roth IRA. You can keep money in the account indefinitely and pass it along to your heirs. But you must take RMDs from a Roth at work no later than age 72 (unless you’re still employed there). As long as you’ve owned the account for five years, your distributions will be tax-free.

4. Early withdrawals of Roth IRA contributions can be made at any time without triggering income taxes or a penalty. However, taking withdrawals from a Roth at work typically come with conditions, such as experiencing a financial hardship like unpaid medical bills or funeral expenses.

5. Loans are typically permitted for a Roth at work. You must pay your account back with interest on a five-year schedule. However, taking a loan from a Roth IRA isn’t allowed.

So, you can see that a Roth 401(k) and a Roth IRA have similar advantages and have differences in how participants can use them.

RELATED: What Is a Backdoor Roth IRA?

Should you choose a traditional or Roth retirement account?

A significant factor in choosing a traditional or a Roth retirement account is the income tax rates in the future and how much you’ll make during retirement. None of us can predict the future, so we have to guess what will be best.

If you prefer a “bird in the hand” to cut taxes sooner rather than later, then a traditional account may appeal to you. But if you don’t mind paying taxes in the current year, then a Roth has more long-term advantages.

If you prefer a “bird in the hand” to cut taxes sooner rather than later, then a traditional account may appeal to you. But if you don’t mind paying taxes in the current year, then a Roth has more long-term advantages. 

When you’re not sure which type to choose, or you want benefits of both types of accounts, you can split contributions between both a Roth and a traditional 401(k) or 403(b) in the same year. You can choose any proportion, such as 50/50 or 20/80, as long as your total doesn’t exceed the allowable annual limit set by the IRS.

If your income is too high for a Roth IRA, having a Roth at work is a terrific benefit. As I mentioned, there are no income limits on a workplace Roth. That means high earners can use one and enjoy tax-free withdrawals in the future.

Having both taxable and non-taxable income in retirement is a good idea. So, instead of deliberating between a traditional or a Roth at work, consider the benefits of using both. If you have employer matching, those contributions are always traditional or pre-tax. So, choosing a Roth 401(k) or 403(b) is an excellent way to diversify your future income and choices.