Life insurance is an incredible investment. It allows you to get the insurance protection needed for your family, especially if an unfortunate event occurred. But, what if you end up with a chronic condition that drains your bank account?
For anyone with a terminal illness, an accelerated death benefit can be savior.
An accelerated death benefit is an insurance benefit that pays out while the insured is still alive.
Usually, only people who are suffering from terminal illnesses are eligible for accelerated death benefits.
This is also called a living benefit.
What Is A Living Benefit?
A living benefit can be added to an insurance policy before or after purchase. With this benefit, patients who have a terminal illness can access part of their benefits before their death. Initially, when this benefit was first created, it was offered only to people with HIV/AIDS.
Overtime, it was offered to people who suffered from kidney failure, cancer, and other terminal illnesses. Medical expenses for a terminal illness can be very expensive, and there are also living expenses that the terminally ill have to pay as well. A living benefit can aid with all of these expenses and can be of a great help to those who have terminal illnesses.
Many insurance companies offer a living benefit as a rider in some of their life insurance policies. It is commonly included in permanent life insurance policies. So many different packages and payment options are available for living death benefit. You can receive the death benefit if you already have a terminal disease or if you contract one in the future.
Not everyone wants to think of the possibility of contracting a terminal disease, but for some, a living benefit may be something they wish to add to their policy. You will receive a percentage of the death benefits depending on the insurance company. This company usually ranges from 25-95%. After death, the remainder of the benefit is paid out to your beneficiaries. If you should recover from your illness, then you will not have to repay the benefits you received.
How Do You Qualify For An Accelerated Death Benefit?
You qualify for a living benefit if you have contracted a terminal illness and are expected to die in two years, if you have been diagnosed with an illness that will reduce your life span, if you have an illness that requires an organ transplant, if you are in long-term care in a hospice, or if you need assistance with every day activities, like bathing or using the toilet.
The cost of a living benefit will vary depending on the company. Sometimes your policy might have the rider grouped in with your premium which would be ideal. Otherwise, you will owe a percentage of the benefit.
How Are You Taxed On Accelerated Death Benefits?
These benefits are not taxable. Normally if you were to pass within 2 years it would be exempt. Use the rider to supplement any costs that aren’t covered by your insurance company. If you believe you may be eligible for a death benefit, then talk with your insurance agent. Also, keep in mind that receiving a living benefit might change your chances of Medicaid or SSI in the future.
Accelerated Death Benefit Example
Here’s an example of how an accidental benefit rider might play out.
Client induces a qualifying chronic, critical, or terminal illness.
Client files a claim to accelerate all or a portion of the death benefit.
Our claims department and underwriters review the medical records and prognosis ratings and make a discounted offer, based on the change in life expectancy. The higher the change in life expectancy, the higher the percentage the client will be offered.
If the client accepts the offer, they receive the determined amount as a lump sum within two weeks. If the entire death benefit is accelerated, the remaining face is $0 and the policy terminates. If a portion of the death benefit remains, the client’s premium will reflect the new face amount. Below is an example:
Bill is 47 years old, preferred NT with a $2 million policy. He suffered a major heart attack and decides he wants to accelerate $1,000,000 of his face. The company reviews the claim and makes a lump offer of $500,000. Bob accepts and is mailed a $500,000 check in the next two weeks. His death benefit has now been decreased by the amount of face he accelerated ($1,000,000), so his remaining death benefit is $1,000,000. He will now pay premiums based on a $1,000,000 face amount, not the initial $2 million face.
Regarding the taxes: first and foremost, be aware of the fact that I or the insurance company can act in the capacity of a tax advisor or CPA. We always advise our clients to seek their own tax council. That being said, we have designed our ABRs to be within compliance with current IRS regulations. With regards to the terminal illness rider, the IRS has defined it to be an acceleration of the death benefits, and therefore it is not taxable.
What About Chronic Illness?
For chronic illness, they have proposed but not adopted the rider in the same light. The IRS has not provided any opinion on critical illness payments. With all of that in mind, I am not aware of any accelerated benefit that has been taxed by the IRS. This is, of course, under the assumption that the policy has not be turned into a modified endowment contract (MEC). Once a policy is MEC’d, it is always a MEC, and all benefits are taxable. But again, always involve a tax advisor or CPA when dealing with the IRS. They know the dark side of the force better than any of us.
Accelerated Death Riders and Life Insurance
Starting to look at the options associated with your life insurance policy can bring about tough conversations. It’s hard to talk about your death or the demise of someone close to you. But it is important because someone could be left with large debt and final expenses. Having to worry about those payments adds to a stressful situation.
It is common for people to putt off adding the accelerated rider is because they assume that it will be too expensive for their budget, but that is just false. In most cases, there are dozens of affordable options to give your family life insurance protection, and any additional riders that you need.
There are various ways of calculating premiums on their life insurance and riders and no company has the same value on these factors. To get the best rates, you’ll need to ask for many quotes until you find a perfect plan for your needs. Don’t waste your time calling all of those agents yourself. Let us do the searching for you. As independent agents we offer the best way to get the lowest insurance rates. Our appointments are with multiple carriers so we have expanded options which makes it easier to give you the best quote for your coverage.
Our years working in the industry have given us knowledge to answer any question you can think of. And if we don’t know it we will find the answer for you. Our main goal is to give your family the protection they deserve.
Many people hit a period of financial hardship at some point in their lives. Maybe there’s a medical emergency and big bills, a job layoff, or a family member in serious need: These and other scenarios can put your money management in a precarious position.
Approximately 70% of Americans report feeling stressed about money, according to a CNBC/Momentive survey. This can be centered on anything from living paycheck to paycheck to worrying about saving for one’s (and one’s family’s) future.
Here, you’ll learn more about what happens when financial hardship hits and how to take steps to improve the situation, from applying for assistance to negotiating with lenders to discovering new sources of income.
What is Financial Hardship?
Everyone probably has their own definition of “economic hardship” that’s based on their own needs and wants. And the federal government has its own criteria for what counts as a “hardship” when it comes to taking an IRA distribution, looking for tax relief, or requesting a student loan deferment.
But generally, a financial hardship is when an individual or family finds they can no longer keep up with their bills or pay for the basic things they need to get by, such as food, shelter, clothing and medical care.
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Warning Signs
Sometimes financial difficulties can sneak up on a person, and catch them completely off guard. And sometimes, the warning signs have been there for a while, but were missed or ignored.
Identifying the root cause of financial distress can help give you a head start on working through your money issues. Here are some red flags that might signal a person is headed for financial distress:
Having Credit Card Balances At or Above the Credit Limit
While using credit cards may seem like a good way to get around a short-term lack of funds, the practice could lead to extra fees and a lower credit score. The percentage of available credit someone is using — known as a credit utilization ratio — can indicate to lenders how heavily they’re depending on credit cards to get by. And because it’s one of the major factors in determining a person’s overall FICO score (a credit score lenders use to determine whether to extend credit to a borrower), financial advisors typically recommend keeping card balances at or below 30% of the limit.
Juggling Which Bills Get Paid Each Month
It may be tempting to skip a payment from time to time, hoping to catch up eventually — but there can be short- and long-term consequences for juggling bills. Insurance coverage may be lost. There may be a late fee, or a bill could be turned over to a collection agency.
Utilities can also be shut off, and a deposit might be required to restart the account. Making late payments on a credit card could lead to a higher interest rate on the account. And late payments and defaults can hurt credit scores.
Only Making Minimum Payments on Their Credit Cards
It may be necessary to make minimum payments if times are especially tight, and there likely won’t be any short-term harm. But even if the cardholder stops making purchases, just the interest charged will keep the account balance growing, possibly extending the amount of time it takes to pay down that debt by months or years.
Often Paying Late Fees or Overdraft Fees
A one-time mistake may serve as an annoying reminder to be more cautious with money management, but if late fees, overdraft and non-sufficient funds fees, and overdraft protection transfers become a regular thing, they can add another layer of worry to a person’s financial burden. (Using alerts, automatic payments, and apps from your financial institution may offer a more effective method to track bills as well as deposits and withdrawals.)
Having a High Debt-to-Income Ratio
Lenders often use a person’s debt-to-income ratio — a personal finance measure that compares the amount of debt you have to your income—to determine if a borrower might have trouble making payments. If a person’s debt-to-income ratio is high, it could make it more difficult to borrow money, or to get a good interest rate on a loan.
Tapping Retirement Savings to Pay Monthly Bills
In certain cases, the IRS will allow an account holder to withdraw funds from a 401(k) or IRA to cover an immediate and heavy financial need (such as medical expenses, payment to avoid eviction or repair home damage) without paying the 10% early withdrawal penalty. But taxes will still have to be paid on those distributions. And taking that money now, instead of letting it grow through the power of compound interest, could have serious repercussions for the future.
Dealing with Financial Hardship
For those who’ve been struggling for a while, or who’ve had a sudden but substantial financial loss, it might feel as though they’ll never recover. But there are several options those who are experiencing financial trouble might consider taking to get back on track. Some they can do for themselves, while others might require getting financial hardship help from others. And while some might be temporary, others take a longer view. Here are a few:
Reducing Monthly Spending
Creating a monthly budget can help individuals and families prioritize and guide their spending decisions. This may involve prioritizing your monthly expenses, starting with the essentials and going down to the “nice to haves.” Once you’ve established which expenses are the most important, you may then be able to look for places to cut back or cut out of your budget altogether. Cutkacks may not feel fun, but they can help jump-start your recovery.
For example, could you cut costs if you cooked meals yourself more often? Are you trying too hard to keep up with what friends and family are spending on clothes, vacations, and cars? Are there monthly bills that could be reduced (could you save money on streaming services, internet, and phone services; manicures and other beauty treatments; or even rent, insurance, or car payments)? It may help to start by tracking expenses for a month or so to get an idea of where money is going, and then sit down and map out a more realistic path for the future.
Creating a Debt Reduction Plan
Along with a budget, it also may be useful to come up with a plan for paying down credit card balances, student loans and other long-term debt. It’s important to always make the minimum payment on all these bills, if possible, but a personal debt reduction plan could help with prioritizing which bill any leftover money might go toward after all the household expenses are paid each month — or the money might come from a tax refund, bonus check from work, or a gift. Knocking down debts that include high amounts of interest can eventually free up more cash to put toward short- or long-term savings goals.
Looking for Ways to Earn Extra Income
Is there a way to turn a hobby, skill, or interest into some extra funds? Maybe a favorite local business could use some part-time help. Or, if a second job is out of the question, perhaps a side hustle with flexible hours is a possibility. Writers, artists, and designers, for example, may be able to turn their talents into a side business. Babysitting the neighbor’s kids or running errands for an older person are also options. And, of course, on-demand services like Uber and DoorDash are employing drivers, delivery persons, and other workers.
Considering a Loan to Consolidate Bills
Getting a personal loan for debt consolidation won’t make money problems go away completely—but it might make managing payments a little simpler. With just one monthly payment (instead of separate bills for every credit card or loan) it can be easier to keep tabs on how much is owed and when it’s due.
Because interest rates for personal loans are typically lower than the interest rates credit card companies offer (especially if a rate went up because of late payments), the payoff process for that debt could go faster and end up costing less. (Generally, lenders offer a lower interest rate to those who have a higher credit score, borrowers who are already behind on their bills may pay a higher interest rate or have more trouble getting a loan.)
Student loan borrowers also may want to look into consolidating and refinancing with a private lender to get one manageable payment and, possibly, save money on interest with a shorter term or a lower interest rate.
Refinancing may be a solution for working graduates who have high-interest, unsubsidized Direct Loans, Graduate PLUS loans, and/or private loans.
Federal loans carry some special benefits that private loans don’t offer, including public service forgiveness and economic hardship programs, so it’s important for borrowers to be clear on what they’re getting and what they might lose if they refinance.
Notifying and Negotiating
Ignoring credit card payments and other debts won’t make them disappear. Borrowers who can clearly see they’re headed for financial trouble may wish to notify their credit card company or lender and try to work out a more manageable payment arrangement. (There are debt settlement companies that will do the negotiating, but they charge a fee for their services.)
A credit card issuer may agree to a reduced, lump-sum payment or a repayment plan based on the borrower’s current income, or it may offer a hardship program with a lower interest rate, lower minimum payments, and/or reduced penalties and fees. The options available could depend on why a customer fell behind, or if they’ve had problems before.
Financial hardship assistance is sometimes offered by mortgage lenders. Because these lenders generally don’t want their borrowers to foreclose on their homes, it’s in their best interest to work with borrowers when they get in trouble. The lender may be willing to help the borrower get caught up by forgiving late payments, or they may change the interest rate of the loan or lower the payment.
If you have federal student loans and are experiencing financial hardship, you might qualify for a special repayment plan, such as pay-as-you-earn, or an income-based repayment plan.
It can also be helpful to reach out to service providers (such as water, electricity, internet) and let them know you are experiencing financial difficulties. Providers may be willing to work with you and you may be able to come to an agreement well before any shut-off actions go into effect. This can also save you from late fees, or going into collections.
Getting Financial Help
There are also a number of government programs designed specifically to help people overcome sudden financial hardships. Those who’ve lost a job may be entitled to unemployment benefits. If that job provided health insurance, you may want to look into COBRA to see if you can maintain affordable health insurance. Those who were injured at work may be entitled to workers’ compensation.
Also, some people facing financial hardship may qualify for state or federal benefits like Medicaid or Social Security Disability.
Though not free, a financial professional who specializes in planning, saving, and investing may be a worthwhile investment. He or she may be able to offer a fresh perspective and help create a path to financial freedom. There may also be free or low-cost debt counselors available via non-profit organizations.
Preparing for Current and Future Challenges
Once you’ve developed your personal plan for overcoming financial hardship, you can begin working on your goals of becoming more financially independent. If the cause of your hardship is temporary (you were out of work but quickly found a new job, for example), it may take just a few months to get back on your feet. If the problems are more difficult to overcome (you’ve lost income through a divorce, or you or a loved one has an ongoing medical condition that requires expensive treatment), the timeline could be much longer. Once you’ve put your plan in place, you may want to review it on a regular basis, and perhaps do some fine-tuning.
The Takeaway
Many people go through periods of financial hardship, and often for reasons that are beyond their control. But that doesn’t mean they are out of options. There are many simple and effective steps people can take. Cutting monthly expenses, consolidating debt, and getting outside assistance are moves that can help them get back on the right financial track.
Ready to get your finances organized? You also may find it easier to track expenses and stay on budget by separating your money into virtual buckets or “vaults.” SoFi Checking and Savings is an online account that features Vaults to allow members to set aside money for different financial goals, track their progress, as well as set up recurring monthly deposits. What’s more, a SoFi Checking and Savings account offers a competitive annual percentage yield (APY) and charges no account fees, plus you can spend and save in one convenient place.
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Medicare covers a lot of services, but only when they’re medically necessary.
Medically necessary services are “health care services or supplies needed to diagnose or treat an illness, injury, condition, disease or its symptoms and that meet accepted standards of medicine,” according to the Centers for Medicare & Medicaid Services, or CMS
.
You can look services up online or talk to your health care providers to find out whether and how Medicare covers them. If Medicare won’t cover a service that you or your doctor thinks is necessary, you can appeal that decision.
How do I know whether a service will be covered?
ABNs are provided only to people with Original Medicare (Part A and/or Part B). If you have Medicare Advantage, you might get a different notice or form.
What makes a service medically necessary?
Medicare’s decisions about medical necessity happen at three levels, from most general to most specific
:
Laws. Federal and state laws can set requirements for what’s covered.
National coverage determinations, or NCDs. Using a public, evidence-based process, Medicare decides whether and how a certain item or service is covered for the whole country.
Local coverage determinations, or LCDs. If a particular item or service isn’t included in relevant laws or NCDs, Medicare contracts with local companies that make coverage decisions. LCDs don’t apply nationally — they’re geographically limited to certain areas according to Medicare’s contracts.
What does ‘medically unreasonable and unnecessary’ mean?
Medicare doesn’t pay for “medically unreasonable and unnecessary services and supplies to diagnose and treat a Medicare patient’s condition,” according to CMS
.
Here are a few examples of what CMS considers medically unreasonable and unnecessary:
Tests or therapies that aren’t related to a patient’s symptoms or conditions.
Getting more or longer services than necessary, such as staying in the hospital or continuing therapy too long.
Services provided at a hospital when they could have been provided in lower-cost settings.
Can I appeal if I’m denied based on medical necessity?
If a service or item is denied because it’s not medically necessary, you can appeal that decision.
You’ll receive a written notice that explains what was denied, the reasons for denial and how you can appeal. You then need to submit the necessary information before any appeal deadlines
.
If your appeal is denied, it’s not necessarily the end of the road. You can escalate the appeal to a higher level. As with the original denial, the written notice you receive about a decision on your appeal will include instructions for your next steps.
If you have additional questions about Medicare, visit Medicare.gov or call 800-MEDICARE (800-633-4227, TTY 877-486-2048).
To qualify for Medicare under age 65, you generally need to have a disability that makes you unable to work for at least a year. Examples include certain cancers, respiratory illnesses and musculoskeletal disorders.
The Social Security Administration, or SSA, calls its definition of disability “strict.” But there still are some options if your condition doesn’t appear on the official list to qualify for SSDI.
🤓Nerdy Tip
The Social Security Administration administers two income assistance programs for people with disabilities: Social Security Disability Insurance, or SSDI, and Supplemental Security Income, or SSI.
While they have similar names and purposes, the two programs don’t work the same when it comes to Medicare. SSDI can qualify you for Medicare under age 65. In most states, SSI can qualify you for Medicaid, instead.
What medical conditions qualify for Social Security disability?
There’s no exhaustive list of conditions that do or don’t qualify for SSDI. For adults, the SSA has a list of impairments in 14 categories that might qualify for SSDI if they’re sufficiently severe.
Examples of individual impairments on the list include limb amputations, post-traumatic stress disorder, chronic heart failure, loss of speech and chronic liver disease. Meeting certain clinical and functional criteria on the list is one way to qualify for SSDI.
Not having a condition on the list doesn’t mean you can’t qualify. There’s also a process to determine whether other conditions are severe enough to meet the SSA’s requirements.
How to determine whether your condition qualifies
There’s a five-step process to determine whether your condition meets the required definition to qualify for the SSDI program. If you qualify for SSDI, you can later become eligible for Medicare based on disability.
Here are the five questions the SSA uses to evaluate the disability status for SSDI applicants
:
1. Are you working?
If you’re working, there’s an income cap to qualify for SSDI. In 2023, you generally can’t make more than $1,470 per month. If you’re blind, it’s $2,460 per month
.
2. Is your condition “severe?”
Your condition must significantly limit your ability to do “basic work activities” for at least 12 months because of changes to things like strength, mobility or memory.
3. Is your condition found in the list of disabling conditions?
If your condition is on the list and you satisfy the first two questions, you have a qualifying disability. The next questions don’t apply.
If your condition isn’t on the list, you’re not necessarily disqualified. The SSA has to determine whether your condition is as severe as those that are on the list. If so, you will continue through the process.
4. Can you do the work you did previously?
If your condition isn’t on the list, the SSA considers whether it prevents you from performing any of the work you’ve done in the past. If so, you continue through the process.
5. Can you do any other type of work?
If your condition prevents you from doing work you’ve done before, the SSA also considers whether there are other kinds of work you could still do.
Your medical condition isn’t the only factor here. The SSA also considers age, education, work experience and skills.
If there’s no other work you could do, then you have a qualifying disability.
Medicare disability work requirements
You must have a qualifying disability to receive SSDI benefits, which can make you eligible for Medicare based on disability. But having a qualifying disability isn’t enough on its own. SSDI also has requirements for your work history.
The SSA measures work history with the same Social Security work credits needed for Social Security retirement benefits.
Most people applying for SSDI need 40 work credits, or 10 years of work, to qualify. A work credit is a metric used by the federal government to measure time in the workforce; one credit is equal to a quarter of work, subject to certain income minimums. Half of that qualifying work — 20 credits’ worth, or five years — needs to have been within the 10 years before the year your disability began
.
You can earn a maximum of four credits per year. In 2023, you earn one credit for every $1,640 in wages or self-employment income. You would need to make $6,560 to earn all four credits in 2023.
The number of work credits you need depends on your age. If you’re under 60, you can qualify for SSDI with fewer than 40 work credits.
How long does it take to receive benefits?
For most applicants: 24 months after qualifying
After you become entitled to SSDI benefits, there’s generally a 24-month waiting period before you qualify for Medicare based on disability
.
There are special exceptions for people who receive SSDI benefits and have certain conditions.
For those with certain conditions: Sooner
Lou Gehrig’s disease, or amyotrophic lateral sclerosis
If you have amyotrophic lateral sclerosis, or ALS, you become eligible for Medicare the first month you receive SSDI benefits.
End-stage renal disease
If you have end-stage renal disease, or ESRD, you generally become eligible for Medicare on the first day of the fourth month of your dialysis treatments. It could be sooner if you undergo training for home dialysis.
Kidney transplant due to ESRD
If you have ESRD and you’re getting a kidney transplant, you become eligible for Medicare the month you’re admitted to a Medicare-certified hospital for the transplant. You’re covered for a maximum of two months before the transplant takes place, so your eligibility might change if the transplant is delayed or rescheduled.
A few short weeks are left for Congress — or, perhaps, President Joe Biden — to take action and lift the debt ceiling before tick, tick, tick … boom goes the economy.
The so-called “X-date” — when the federal government can no longer meet its legal obligations — could be as early as June 1, according to a May 1 letter from U.S. Treasury Secretary Janet Yellen to Congress. Yellen reiterated the same sentiments in another letter to Congress on May 15.
“If Congress fails to increase the debt limit, it would cause severe hardship to American families, harm our global leadership position, and raise questions about our ability to defend our national security interests,” Yellen wrote in the most recent letter. She warned of “catastrophe” in a May 11 news conference.
The Congressional Budget Office released its own projections on May 12, which left more wiggle room: somewhere in the first two weeks of June. The report also said the U.S. Treasury’s cash and extraordinary measures would be sufficient to fund the government until June 15.
While negotiations between the parties continue, we all wait to see if the federal government runs out of money to pay its bills and defaults. What comes next isn’t pretty.
A range of problems
If the default lasts for weeks or more, rather than days, it could trigger a fire-and-brimstone, Armageddon-level financial crisis for the U.S. and global economies.
A report from the White House Council of Economic Advisors in October 2021 warned of the possible effects of the U.S. defaulting, which include a worldwide recession, worldwide frozen credit markets, plunging stock markets and mass worldwide layoffs. The real gross domestic product, or GDP, could also fall to levels not seen since the Great Recession.
The U.S. has defaulted only once, in 1979, and it was an unintentional snafu — the result of a technical check-processing glitch that delayed payments to certain U.S. Treasury bondholders. The whole affair affected a few investors and was remedied within weeks.
But the 1979 default was not intentional. And from the point of view of the global markets, there’s a world of difference between a short-lived administrative snag and a full-blown default as a result of Congress failing to raise the debt limit.
A default could happen in two stages. First, payments to Social Security recipients and federal employees might be delayed. Next, the federal government would be unable to service its debt or pay interest to its bondholders. U.S. debt is sold as bonds and securities to private investors, corporations or other governments. Just the threat of default would cause market upheaval: A big drop in demand for U.S. debt as its credit rating is downgraded and sold, followed by a spike in interest rates. The U.S. would need to promise higher interest payments to justify the increased risk of buying and holding its debt.
Here’s what else you can expect if the U.S. defaults on its debt.
A sell-off of U.S. debt
A default could provoke a sell-off in debt issued by the U.S., considered among the safest and most stable securities in the world. Such a sell-off of U.S. Treasurys would have far-reaching repercussions.
Money market funds could see volatility
Money market funds are low-risk, liquid mutual funds that invest in short-term, high-credit quality debt, such as U.S. Treasury bills. Conservative investors use these funds as they typically shield against volatility and are less susceptible to changes in interest rates.
However, in the past, money market funds made up of U.S. Treasurys have seen increased volatility when the U.S. ran up against debt ceiling limits and signaled potential government default. Yields on shorter-term T-bills go up because they are impacted more compared with longer-term bonds, which gives investors more time for markets to calm down.
(Note that money market funds aren’t the same as money market deposit accounts, which are a type of federally insured savings account offered by financial institutions.)
Federal benefits would be suspended
In the event of a default, federal benefits would be delayed or suspended entirely. Those include: Social Security; Medicare and Medicaid; Supplemental Nutrition Assistance Program, or SNAP, benefits; housing assistance; and assistance for veterans.
Although a default wouldn’t affect Medicare and Medicaid recipients directly, delays in payments to providers could make them reluctant to treat Medicare and Medicaid patients.
Stock markets would roil
A default would likely trigger a downgrade of the U.S. credit rating — the S&P downgraded the nation’s credit rating only once before, in 2011, after a last-minute debt ceiling deal was reached. A credit downgrade happens when an international credit rating agency, like Standard & Poor’s, determines the country’s risk of defaulting on sovereign bonds has increased relative to other peer nations or an average, said Andrew Hanson, assistant professor of economics at the University of Tennessee, Knoxville, via email.
A default combined with the downgraded credit rating would in turn cause the markets to tank, the White House’s Council of Economic Advisors said in 2021.
If current debt ceiling talks continue for too long, the markets are likely to become more volatile. When markets are volatile, there is a risk of a run on banks — where deposit customers withdraw money because of fear their bank could collapse — in an already uncertain banking environment. If an institution isn’t able to meet the increased need for withdrawals, it could fail.
Interest rates would increase for loans
As debt ceiling negotiations linger, Americans could see rates increase on established lending products with variable loans, including personal and small-business lines of credit, credit cards and certain student loans. Issuers may also decrease existing credit lines.
Credit lenders may have less capital to lend or may tighten their standards, which would make it more difficult to get new credit.
Depending on the timing of a default and how long the effects are felt, rates could increase on new fixed auto loans, federal or private student loans and personal or small-business loans.
Credit card rates could rise
Americans could see rates increase on credit cards beyond what they’ve seen since the Fed began hiking rates in 2022. Credit cards already have higher interest rates than many other loans, so carrying a balance during these economic times is more expensive. Those with debt who are in a position to pay it off should start making moves to do so.
It’s also not uncommon for lenders to cut credit limits, close accounts or require higher credit scores for approval when the economy is in distress. Lenders took these actions during the Great Recession and early in the COVID-19 pandemic, according to a 2022 report by the Consumer Financial Protection Bureau.
Mortgage rates would likely increase
The real estate website Zillow projects that following the U.S. defaulting on its debts, mortgage rates could rise as much as two percentage points by September before declining. With that, we’d see a massive contraction of the housing market.
A debt ceiling crisis won’t impact those with fixed-rate mortgages or fixed-rate home equity loans. But adjustable-rate mortgage, or ARM, holders may feel these rising rates. Those in the fixed period of their ARM could see rates rise when reaching their first adjustment. Anyone struggling to keep up with payments is encouraged to reach out to their lender early to discuss their options. A HUD-certified housing counselor can help homeowners explore alternatives to delinquency and foreclosure.
If the prime rate (the baseline rate that lenders use to set interest rates for lines of credit) increases, borrowers with variable-rate home equity lines of credit, or HELOCs, will also see their rate climb.
Tax refunds could be delayed
If the debt ceiling isn’t raised, it could take more time for tax filers to receive their refunds — which usually come within 21 days of e-filing. If the government defaults, those who file late run a risk of a delayed refund.
Even the threat of a default can lead to a downgrade of the U.S. credit rating, but it won’t necessarily happen.
“Given the Treasury and FOMC’s commitment to honoring extant Treasuries, the chance of a U.S. credit downgrade has historically been very slim,” Hanson said.
Even if default is avoided, the uncertainty created by brinkmanship on the debt limit has “serious economic costs,” Yellen warned at a press conference in Japan on May 11.
“We could see a rise in interest rates drive up payments on mortgages, auto loans and credit cards,” Yellen said. “We are already seeing spikes in interest rates for debt due around the date that the debt limit may bind.”
Hanson said a default could make it more difficult to finance future spending with debt since fewer people would be willing to hold U.S. Treasuries rather than other sovereign bonds that have a higher credit rating. And also because yields on Treasury bonds would increase in an effort to incentivize investors to buy, at a cost to the Treasury.
NerdWallet writers Kate Ashford, Margarette Burnette, Taylor Getler, Jaime Hanson, Craig Joseph, Melissa Lambarena and Kurt Woock contributed to this article.
Understanding the average salary of a profession can help you make a variety of important decisions, from what field you want to enter to where you want to live and work. In California, the average physician makes more than $200,000 per year. Knowing that, medical students have a better idea of what they could make when they get out of school. Likewise, physicians looking to relocate to a new state have a better sense of how their salary can change based on where they decide to move.
Here’s a closer look at how much medical doctors make a year in California, regional differences in salary, and the top-paying medical specialities in the state.
What Is the Average Salary for a Medical Doctor in California?
The average salary of a physician in the state of California is $229,420 per year, according to data from the U.S. Bureau of Labor Statistics (BLS). This figure doesn’t account for a physician sign on bonus, which some doctors receive. Interestingly, California is squarely in the middle when it comes to average physicians’ salaries, along with Oregon, Texas, Maryland, and New York. The average salary in California lags more than half of states, including Arizona, Florida, Wyoming, Kentucky, and South Carolina.
Though many consider anything more than $100,000 a good salary, California’s relatively low pay may come as a surprise to some. However, there are some possible explanations. For one, California spends the most on Medicaid among U.S. states. Medicaid — and Medicare, for that matter — both reimburse physicians at rates lower than their usual fees. Doctors who are seeing a lot of elderly or low-income individuals may see their incomes reduced.
Note that early in your career as a doctor, while you’re in your residency or fellowship, you’ll likely make considerably less than you will later in your career. Explore ways to get by on a medical resident’s salary.
You may also want to consider using a spending app, which can help you set financial goals and a budget and track where your money goes.
Recommended: Budgeting as a New Doctor
How to Become a Doctor in California
Doctors are health care professionals who are charged with meeting with patients, diagnosing their conditions, and managing their care plans. They perform tests and prescribe medications. And they must coordinate with a range of other health care professionals, including other doctors, nurses, and emergency medical technicians. That’s a lot of responsibility, and as a result, it takes a lot of training to become a doctor.
First, you’ll need to complete a bachelor’s degree in a field that relates to medicine, such as pre medicine, biology, or biochemistry.
Next, you’ll need to go to medical school, where you will receive classroom and practical training to advance your knowledge in the medical field. Medical school is typically a four-year program. While in school, you’ll complete the first and second parts of the U.S. Medical Licensing Examination (USMLE). The average cost of medical school can be high, running more than $50,000 a year at private institutions.
When you graduate from medical school, you’ll enter a residency program that helps you choose a medical specialty. These programs usually last three years, and under the supervision of an experienced physician, you’ll work full time as a resident doctor. You’ll complete your residency by passing the third and final part of the USMLE.
After your residency, you can choose to complete a fellowship that gives you further training in the specialty you’ve chosen. Though fellows tend to make more than residents, their salary isn’t as high as new doctors. The good news is, there are ways to budget on a medical fellowship salary.
Finally, you’ll need to obtain a California medical license from the Medical Board of California. You can renew your license every two years, which requires 50 hours of continuing medical education.
Recommended: What Is the Average Medical School Debt?
Reasons to Become a Doctor
Becoming a doctor can involve a lot of challenges, but it can also be immensely rewarding work. Here are a few reasons you might become a doctor:
• To help others: Doctors diagnose and treat medical conditions, helping to save and improve patients’ lives. They are often involved in ongoing treatment, ushering patients down the path to recovery. Being a physician is a people-centric profession that involves working closely with patients and their families to explain medical conditions and treatment options.
• To work in the sciences: If you’re interested in a variety of scientific fields, from biology to chemistry to anatomy to pharmacology, being a doctor is a way to explore these subjects while also helping others.
• To find purpose: The responsibility toward patients and coworkers and the ability to better people’s health and well-being often provide doctors with a sense of satisfaction and meaning in their work.
• To become a teacher: Becoming a doctor requires a lot of schooling and ongoing training. Doctors may pass on this knowledge by educating patients on how to lead healthier lives, educating medical students in teaching hospitals, and supervising residents.
• To have job security: The job outlook for physicians is relatively low, with the field expected to grow 3% through 2031. That said, there are still 23,800 openings for physicians projected each year, according to BLS data.
• To make a good salary: The annual average wage for all workers in the United States is $58,260, according to the BLS — quite a bit lower than the $229,420 average annual pay for physicians in California.
Best-Paying Medical Doctor Jobs in California
The medical speciality you pursue in California will have a big impact on your salary. According to BLS data, here are some of the highest-paid physicians in California:
Psychiatrist
Psychiatrists help diagnose and treat mental disorders. Unlike psychologists, they are allowed to prescribe drugs for medical treatment.
Average salary: $305,290
Obstetricians and Gynecologists
OBGYNs provide medical care related to childbirth and diagnose and treat diseases of the female reproductive organs. They also specialize in women’s health issues like hormone problems, infertility, and menopause.
Average salary: $309,610
Anesthesiologist
Before, during, or after surgery, anesthesiologists administer anesthetics (which reduce sensitivity to pain) and analgesics (which act as pain relievers).
Average salary: $318,030
Cardiologists
Cardiologists diagnose and treat conditions of the cardiovascular system.
Average salary: $343,370
Radiologists
Radiologists use medical imaging techniques, such as x-rays, MRIs, and ultrasounds to diagnose and treat diseases and injuries.
Average salary: $345,100
Pathologists
A pathologist helps diagnose diseases by running tests on organs, tissue, and bodily fluids, such as blood.
Average salary: $350,980
Surgeons
Surgeons are medical doctors that may have to perform surgery, a procedure that physically changes a patient’s body.
Average salary: $351,580
Recommended: Starting (and Keeping) an Emergency Fund
The Takeaway
Being a doctor can be fulfilling, as it allows you to help people through work in the medical sciences. It can also be monetarily rewarding, and understanding average salaries can help you make decisions about where you want to live and what you want to specialize in. Though income varies by speciality, the average salary for physicians in California is $229,420 per year.
As you build your practice and earn a salary, a money tracker app can help you get your financial house in order. The SoFi Insights app connects all of your accounts in one convenient dashboard. From there, you can see all of your balances, spending breakdowns, and credit score monitoring, plus you can get other valuable financial insights.
Stay up to date on your finances by seeing exactly how your money comes and goes.
FAQ
What is a doctor’s yearly salary in California?
In California, a doctor can expect to make $229,420 per year on average, according to data from the U.S. Bureau of Labor Statistics.
What is the highest-paying medical specialty?
Among the highest-paid doctors in California are pathologists, surgeons, and radiologists.
Who earns more: a dentist or a doctor?
In California, doctors tend to make more than dentists, who earn $165,950 per year on average.
Photo credit: iStock/Drazen Zigic
SoFi’s Insights tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data. Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances. Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article. SORL0323016
Did you know that the average American has a nearly 70% chance of needing some form of long-term care upon reaching age 65? But did you also know that you may be able to prepare for the event by purchasing long-term care insurance? That’s why we’ve prepared this guide of the 7 best long-term care insurance of 2023.
Before getting into our reviews of the seven best long-term care insurance providers of 2023, scan the table below to see which company you think will work best for you:
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Our Picks for Best Long-Term Care Insurance
Dozens of insurance companies offer long-term care insurance, but below is our list of the top seven, and what each is best for:
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Best Long-Term Care Insurance – Company Reviews
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Maximum Benefits: Varies by provider
Benefit Period: Varies by provider
Waiting/Elimination Period: Varies by provider
GoldenCare, also known as National Independent Brokers, Inc, is a privately held long-term care insurance brokerage firm, and one of the leading such firms in the industry. They provide policies from the top-rated insurance companies in the industry. The company is based in Plymouth, Minnesota, and has been in business since 1976. Their plans are available in all 50 states.
The list of companies they work with includes the following:
GoldenCare also offers critical illness insurance, Medicare supplements and Medicare Advantage plans, prescription drug plans, life insurance, annuities and final expense policies.
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Maximum Benefits: Varies by provider
Benefit Period: Varies by provider
Waiting/Elimination Period: Varies by provider
Like GoldenCare, LTC Resource Centers is also an insurance brokerage specializing in long-term care insurance. Based in Cape Coral, Florida, the company has been in business for more than 40 years. They provide long-term care insurance, short-term care, linked or combination products, Medicare supplements, life insurance, critical illness, and annuities.
A specialization they offer is what is known as asset-based long-term care. It’s a strategy that uses a whole life insurance policy or annuity to provide long-term care coverage, which eliminates the need for an expensive, dedicated LTC policy. A pricing comparison is presented in the screenshot below:
As a broker, they work with multiple long-term care insurance providers. That means to get detailed information you’ll need to set an appointment with a long-term care insurance specialist and make the request. The company’s licensed to operate in all 50 states.
Maximum Benefits: Up to $400 per day or $10,000 per month
Benefit Period: Up to 5 years, or unlimited lifetime benefit
Waiting/Elimination Period: 0, 30, 60, 90, 180 or 365 days
Mutual of Omaha is one of the top individual providers of long-term care insurance. They offer some of the best plans in the industry, including lifetime benefits coverage, multiple elimination periods, and inflation protection. They are a full-service insurance company providing coverage in all 50 states, providing virtually all types of insurance policies.
Mutual of Omaha also offers premium discounts. For example, you can save 15% when you purchase a policy for both you and your partner. You can also save 15% if you’re in good health. There’s even a 5% discount if you are married but your spouse does not purchase a policy.
Maximum Benefits: Up to $7,000 per day, up to a $250,000 lifetime maximum
Benefit Period: Up to maximum daily or lifetime limit
Waiting/Elimination Period: One-time deductible of $4,500 up to $21,000
Like Mutual of Omaha, New York Life is a large, well-established and diversified insurance company. In addition to long-term care policies, they also offer virtually every other type of insurance policy available. Also like Mutual of Omaha, New York Life is a mutual insurance company, which means it’s owned by its policyholders, not shareholders. The company partnered with the American Association of Retired Persons as a preferred provider of long-term care insurance policies.
New York Life provides their NYL My Care long-term care policy. The basic parameters are as follows:
Like other direct insurance providers on this list, New York Life also offers annuities and whole-life insurance policies with long-term care riders.
Maximum Benefits: Up to $750,000 maximum lifetime benefit
Benefit Period: Up to 7 years
Waiting/Elimination Period: 90 days
Nationwide is one of the leading providers of long-term care insurance in America. With a maximum lifetime benefit of up to $750,000, they provide the highest lifetime maximum benefit on our list. They also offer a single, simple, 90 calendar-day elimination period. You can choose between two years and seven years for a maximum benefit period.
The policy will also cover home healthcare, hospice, adult day care, household services, home safety improvements, and even family care. And in a unique twist, nationwide also provides international benefits. If you live out of the country during the benefit period, the policy will pay 50% of the maximum monthly benefit.
Maximum Benefits: Up to $250,000 maximum lifetime benefit
Benefit Period: Up to maximum lifetime benefit limit
Waiting/Elimination Period: 90 days
Brighthouse Financial is an insurance provider that offers two types of products, annuities and life insurance. Either is available with a long-term care rider. The company has $254 billion in assets, serving about 2 million customers.
Brighthouse Financial provides long-term care insurance through its SmartCare plan. It’s a combination plan that adds a long-term care provision to a whole life insurance policy. You’ll get the benefit of long-term care if it’s needed, but you’ll also have a life insurance benefit to pay to your beneficiaries if it’s not, or if there are any funds left over after your long-term-care stay.
The policy will cover adult day care, hospice, and home healthcare, in addition to nursing homes and assisted living facilities, and skilled nursing care.
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Maximum Benefits: Varies by provider
Benefit Period: Varies by provider
Waiting/Elimination Period: Varies by provider
CLTC Insurance Services, or California Long Term Care Insurance Services, is a long-term care insurance aggregator, based in San Francisco. Aggregator is a fancy word for an online insurance marketplace. As an aggregator, CLTC will give you access to a large number of long-term care insurance companies. You can then choose the one offering the plan that will work best for you. The main limitation of this provider is that they offer policies only in the state of California.
In addition to long-term care insurance, they also offer annuities and life insurance policies, both with long-term care riders. These types of policies eliminate the need for a dedicated LTC policy, since the cost of long-term care is paid out of the proceeds of the annuity or life insurance. CLTC also offers critical illness insurance.
Long-Term Care Insurance Guide
What is Long-Term Care?
When an individual reaches a point where they can no longer care for themselves, long-term care becomes necessary. That care can be provided by anyone from family members to nursing homes.
The need for long-term care generally applies when the individual can no longer perform one or more of the six activities of daily living (ADL). This can include inability to dress, groom, go to the bathroom, bathe, eat, or even to move about freely.
In most cases, long-term care becomes necessary after a major health event, like a heart attack or stroke. But it can also be the result of an ongoing, degenerative health condition or simply advancing age.
In most cases, long-term care is provided by a family member. But institutional care may be necessary if the individual is unable to perform several ADLs, which may overwhelm the ability of family members to provide ongoing care.
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How to Purchase Long-Term Care Coverage?
We recommend contacting any of the seven best long-term care insurance providers in this guide. Otherwise, do a search and identify insurance companies that offer long-term care coverage. But be aware that not all insurance companies offer it, precisely because of the many variables. It involves.
When purchasing a policy, be aware of the following:
Like life insurance, it’s best to purchase LTC insurance when you’re young and healthy. That’s when the premiums are lowest.
Consider purchasing a long-term care insurance alternative, like a life insurance policy or an annuity with a long-term care rider (see below). It’s generally much less expensive.
Pay close attention to the maximum benefit paid, whether daily, monthly, annually, or lifetime. It should approximate nursing home costs in your area. (Be aware that these costs vary greatly from one state to another.)
Pay close attention to the benefit period. While the typical number of years an individual needs long-term care coverage is three years, there’s no way to tell what you may need. If you can afford the higher premium, it may be best to go with the longer benefit period, say, five years or longer.
Be aware of the elimination period. The standard is 90 days, but it can be as long as one year. This is not a minor factor, since nursing home care at $8,000 per month could cost you $24,000 with a 90-day waiting period before benefits kick in. The waiting period you choose should match the amount of liquid assets you expect to have available to cover it.
When you take a policy, be prepared to pay the premium for the rest of your life. If you take a policy at 60, stop making the payments at 80, then you need long-term care at 85, you’ll get no benefits from the lapsed policy.
According to the website Consumer Affairs, long-term care insurance premiums look something like this:
Now, the screenshot above reflects only sample averages for very specific policies at ages 55 and 65. The actual premium you will pay will be based on a combination of factors, including your age at the time of purchase, any health conditions you have, as well as the dollar amount and term of the benefits your policy will include.
Finally, given how complicated long-term care insurance is, it wouldn’t be overkill to have the policy reviewed by an attorney before accepting it. If so, an attorney who specializes in elder care will be your best choice.
Who Needs Long-Term Care Coverage?
The short answer to this question is everyone. The unfortunate reality is that people turning 65 have an almost 70% chance of needing some type of long-term care services during their lifetimes. Approximately 37% will require institutional care. And statistically, women and single individuals are more likely to require long-term care than men and married individuals.
If you’re unsure if you need long-term care, check out Jeff’s post, Long term care insurance: do you really need it?.
Though it isn’t well-known outside the industry, there are two basic types of long-term care coverage available. The first is a standalone long-term-care insurance policy.
Like a life insurance policy, medical underwriting will be performed. The insurance company will consider your age, your health condition, your family health history, your occupation, requested benefit levels, and other factors in approving your application and setting the premium level. This is the more costly of the two options.
The other is a hybrid policy. Most commonly, this is life insurance with long-term care benefits. You’ll purchase a basic life insurance policy, then add a long-term care rider to the policy. This will increase the premium on the life insurance policy, but it will be much less expensive than a standalone long-term-care policy.
Meanwhile, you’ll also have a death benefit from the life insurance policy, in addition to long-term-care coverage. But the policy may also include using some or all the death benefits to pay the long-term-care benefits. Your beneficiaries will receive only the amount of the unused death benefit upon your death.
Most of the best life insurance companies offer life insurance policies with this rider.
Another variant of this option is to use an annuity with long-term care rider. Annuities are designed to provide an income stream, very similar to a pension. But similar to a life insurance policy with a long-term care insurance rider, you can also add the rider to an annuity.
Again, it will be less expensive than purchasing a standalone long-term-care policy. And the long-term-care benefits may reduce any death benefit in your annuity. But the provision will be much less expensive than purchasing a standalone long-term-care policy.
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Finding the Right Policy
Long-term care insurance is one of the more complicated insurance types. It also includes more potential variables than other policies. For example, not only will you not know if you will need the coverage at all, but you won’t know when, to what degree, what level of care will be required, or how long it will be needed.
Because of all these variables, the cost of a long-term care insurance policy can be all over the place. But it may be better to pay a little bit more for a more comprehensive policy than to price-shop for the least expensive plan.
Before deciding to purchase a long-term-care insurance policy, first review Jeff’s Podcast episode: Long Term Care Insurance – How much do you need? Given how complicated long-term-care insurance is, it’s best to go in with as much knowledge as possible.
How We Found the Best Long-Term Care Insurance Companies
We used the following criteria to determine the best long-term care insurance companies of 2023:
Maximum Benefits: Given that the cost of long-term care can easily run into hundreds of thousands of dollars, we favored companies with the most generous lifetime benefits.
Benefit Period: One of the most basic problems with long-term care is the uncertainty. There’s no way to know in advance what level of care you might need, or how long it might be necessary. For that reason, we favor the companies that provide the most flexibility in this area.
Waiting/Elimination Period: Just as most insurance policies have deductibles, long-term care insurance uses the waiting period in much the same way. The standard delay on benefits is 90 days. But we prefer companies that offer longer waiting periods, since this will represent an opportunity to lower the cost.
Speaking of cost, as much as we would like to provide a list of average costs per provider, this information simply is not available. That’s because long-term care insurance is highly customized. There’s nothing approximating a “one-size-fits-all” policy, as each policy premium is determined by a multitude of factors.
These include your age at the time you purchase the policy, your general health condition, your family health history, the length and amount of coverage you need, and many other factors. The only way to get a reliable premium figure will be to contact one of the companies above and get a quote.
Best Long Term Care Insurance FAQs
What is long-term care insurance?
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Long-term care insurance is a type of coverage that will provide benefits to pay for your personal care when you’re no longer able to do so for yourself. While the typical long-term-care scenario involves a nursing home, it also applies in lesser situations. That can include assisted living arrangements, home nursing care, and even family care. The policy will begin paying benefits when you qualify for care based on inability to perform several of the ADLs.
What does long-term care insurance cover?
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As mentioned earlier, long-term care insurance benefits begin to apply when you are unable to perform activities of basic living. Depending on the type of policy you have, you’ll receive benefits for a stay in a nursing home, an assisted living facility, skilled nursing care, an adult day care, hospice, and even home care provided by your family.
Some policies will even provide for the cost of modifying your home to better accommodate your capabilities, or the purchase of certain helpful equipment.
How long does long-term care insurance work?
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A typical long-term-care insurance policy will pay benefits between two and five years, though some will go as long as seven, and a few providers offer lifetime benefits. You should be aware that you will need to qualify for whatever coverage term you prefer, and the longer the term, the higher the premium will be.
Is long-term care insurance worth it?
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It really depends on your perceived need for the coverage, and your ability to pay the premiums. Need can be determined by your family history. If you have multiple family members who require long-term care, having the coverage for yourself will be highly desirable. But if you’re in excellent health, and there’s little history of a need for care in your family, you may want to pass on the coverage.
And of course, given the high cost of the premiums, your ability to afford coverage can never be ignored. But if you have very limited financial means, Medicaid may provide benefits for long-term care. However, to qualify your total assets must generally be below $2,000.
Summary of the Best Long-Term Care Insurance Companies
Let’s wrap up this guide by giving you one more look at our list of the seven best long-term care insurance companies of 2023:
Long-term care insurance isn’t inexpensive. But given the unusually high likelihood that will be needed at some point in your life, it’s a policy worth having if you can afford it. And if you can’t, consider taking an annuity or a whole life insurance policy with a long-term care provision.
A spendthrift trust is a trust that limits the beneficiary’s access to the trust assets according to specific terms the grantor sets. Spendthrift trusts help ensure that beneficiaries can’t squander their inheritance; they also protect trust assets from creditors.
Rather than allowing the beneficiary to receive a lump sum, the trustee releases the money incrementally
. For that reason, a spendthrift trust can be especially useful if your beneficiary is:
Not mature enough to make wise spending choices.
Impulsive with money.
In heavy debt, or at risk of going into heavy debt.
Easily fooled or defrauded.
Suffering an active addiction that might cause excessive spending.
A child with functional needs and is eligible for SSI or Medicaid
.
Involved in or at risk of getting a divorce (courts may not consider trust assets as marital property when dividing assets)
.
Employed in an industry where lawsuits are common (creditors typically can’t seize trust assets to pay settlements).
How does a spendthrift trust work?
A spendthrift trust is a separate legal entity with three major elements:
A grantor: Also known as a “settlor,” the grantor is the person who creates the trust and transfers their assets into it.
A beneficiary: This is the person who receives benefits from the trust.
A trustee: This is the person who manages the trust assets in accordance with the terms of the trust. You may be able to appoint yourself as trustee, but if you do so, you’ll need to also appoint a successor trustee who can take over after you die or become incapacitated.
Best for: Users who want an all-inclusive experience. Cost: $99 per year for Starter plan. $139 per year for Plus plan. $209 per year for All Access plan.
Best for: Ease of use. Cost: One-time fee of $159 per individual or $259 for couples. $19 annual membership fee thereafter.
Best for: State-specific legal advice. Cost: $89 for Basic will plan. $99 for Comprehensive will plan. $249 for Estate Plan Bundle.
Key characteristics
Special wording
What distinguishes a spendthrift trust from other types of trusts is that it contains a spendthrift clause(also known as a spendthrift provision). This spendthrift clause designates the trust itself as the only owner of trust assets, rather than automatically transferring ownership to your beneficiary when you die. The terms of the trust explain exactly how and when the trustee will release the funds to your beneficiary over time according to a schedule you create.
Creative timing
You can limit the beneficiary’s access to funds. The trustee can transfer fixed amounts on fixed dates, for instance, or you can allow the beneficiary to draw up to a certain amount of money from the trust at certain times. You can even design exceptions for emergencies.
Potential creditor protection
Although assets in a spendthrift trust are often safe from creditors, there are a few exceptions to be aware of, and you should check your state’s rules before proceeding:
Child support obligations.
Creditors with an enforceable court judgment against the beneficiary.
Trust income that’s higher than the beneficiary needs for support.
Alternatives
One alternative to a spendthrift trust is a spendthrift living trust (an inter vivos trust), which disburses funds in increments while you’re still alive. You can act as trustee and make the scheduled disbursements yourself. However, you must name a successor trustee who can take on this responsibility after you die.
Spendthrift trust examples
Here are a few examples that show a spendthrift trust in action.
Miriam is 95 years old and wants to leave her entire estate, worth $450,000, to her beloved great-nephew, Kyle. Although Kyle is mature and responsible, Miriam doesn’t want to give him access to his inheritance all at once. Kyle is still carrying massive medical debt from a major emergency surgery that he’s fighting with his health insurance company to cover. With it unlikely that the insurance company will ever pay out, and creditors constantly hounding Kyle, Miriam decides to create a spendthrift trust that gives Kyle a monthly allowance of $3,000. This will give Kyle enough to make his life more comfortable as he recuperates, but it will also protect the bulk of the estate from creditors, because whatever remains in the trust is considered a trust asset and not Kyle’s personal property to garnish.
Edward wants to leave his granddaughter, Amanda, $50,000 when he dies. Although Amanda is a sweet and loving granddaughter, she’s only in her early twenties and has a notorious history of reckless spending. To prevent Amanda from squandering her inheritance, Edward decides to create a spendthrift trust that allows Amanda to draw up to $1,000 monthly from the account. This lets her treat herself to some luxuries without immediately spending her whole inheritance.
Are spendthrift trusts revocable or irrevocable?
Spendthrift trusts can be revocable (meaning they can be modified at a later date if desired) or irrevocable (meaning they cannot ever be changed).
Revocable spendthrift trusts have the advantage of flexibility, so that you can adjust the terms if your beneficiary matures or their situation changes.
Irrevocable spendthrift trusts have the advantage of potentially reducing estate taxes.
Spendthrift trust pros
Spendthrift trusts bring a number of advantages:
May protect the beneficiary’s trust assets from most creditors and lawsuits.
Gives the beneficiary a reliable stream of income while preventing irresponsible spending of the assets.
Grantor can retain control over the assets.
Spendthrift trust assets are often excluded from the overall estate for tax purposes.
Not subject to probate if established while you’re alive.
Spendthrift trust cons
There are a few disadvantages to spendthrift trusts:
They can be costly to set up and maintain.
If your trust is irrevocable, you won’t be able to modify it if circumstances change.
How to set up a spendthrift trust
You can set up a spendthrift trust yourself by using an online estate planning platform that can guide you step by step. However, you may prefer working directly with an estate planning attorney because even minor errors could compromise or invalidate your trust. Also, states have different rules about when spendthrift trusts are allowed; which creditors can go after assets in spendthrift trusts; and what can happen to the disbursements.
Consider a few important questions that can help ensure your trust will operate according to your needs and wishes:
Who will act as trustee? If you’ve chosen yourself as trustee, who will be your successor trustee if you’re no longer able to fill that role?
Do you want your trust to be revocable or irrevocable?
How often should the beneficiary receive payments, and in what amount?
Do you want the payments to be a percentage of the trust principle or a percentage of trust income?
Should payments occur on a strict schedule or leave room for some flexibility?
For how many years should payments continue? Do you want payments spread over the expected lifetime of the beneficiary or over a limited number of years?
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An irrevocable funeral trust is a way of setting money aside to pay for your funeral and burial expenses. While an irrevocable funeral trust can help your loved ones pay for potentially expensive end-of-life costs, it locks up your money for good and cannot be amended.
A financial advisor with estate planning expertise can help guide you through the often complicated estate planning process.
What Is an Irrevocable Funeral Trust?
An irrevocable funeral trust is a legal entity that helps people save for their end-of-life costs, such as funeral and burial expenses. When you set up a funeral trust, you are establishing a formal trust fund, a separate legal entity that owns the money that you have contributed to it. The purpose of the trust is to hold your money until you die. It then releases the funds to pay for your funeral, burial and any other end-of-life expenses.
As with all trust funds, an irrevocable funeral trust has a trustee that manages its money. In this case, the trustee is determined by an insurance company or funeral services company through which you set up the trust. In most, if not all, cases the trust fund will hold as its single asset a life insurance policy that you have taken out. The trust fund owns this life insurance policy and is named as the sole beneficiary. When you die, the fund collects the policy’s payment and uses this money to pay for your end-of-life costs.
A funeral trust may also name a specific funeral home as the trust’s beneficiary. For example, a given funeral home may agree to a fixed price for a funeral and burial. When you die, the trust pays out its funds to the funeral home to cover the costs of your funeral, burial and any associated services.
As with most trusts, you can establish both revocable and irrevocable funeral trusts. With a revocable funeral trust, you maintain ownership and control of the money and can withdraw it at any time. With an irrevocable funeral trust, you no longer own the money so you can’t withdraw it.
Benefits of an Irrevocable Funeral Trust
A funeral trust does have several benefits. Funeral and burial services can cost a lot of money but with a funeral trust, you can mitigate this problem in two ways.
First, you cover the costs yourself. Even if your will leaves behind money to pay for your funeral, that has to go through the probate process. Your heirs may still have to pay for your funeral upfront and hope to collect reimbursement from your will. With a funeral trust, these payments are handled automatically.
Second, you (or at least your heirs) can pay less. The trust pays for your funeral using the proceeds of its life insurance policy or other investments. This means that you may pay less upfront than you would otherwise.
The details of those costs range based on the individual trust fund. Some funeral trusts only cover basic services, such as a casket, burial or cremation. Others will pay for a full funeral ceremony, with any associated officiants, transportation and other costs. This can also make the planning process easier for your loved ones. If you set up a funeral trust that comes with specific, pre-arranged costs and services, all of those details will already be arranged when you die. Your loved ones will not have to go through the process of finding a funeral home and making arrangements. Those plans will already exist and will automatically go into motion.
The other major benefit to an irrevocable funeral trust is Medicaid eligibility. Since you no longer own these assets, they don’t count against your net worth when calculating Medicaid coverage and any other government benefits. This is only true for irrevocable trusts. The money in a revocable trust is still legally yours, so it counts against eligibility tests. It’s also important to note that Medicaid is administered at the state level, so the details will differ for every jurisdiction.
Disadvantages of an Irrevocable Funeral Trust
There are some downsides to an irrevocable funeral trust though.
As with all irrevocable trusts, once this money is in the trust, it’s no longer under your control. This isn’t necessarily a bad thing, since unfortunately, we all must pay at least some burial costs. However, make certain that this is money you can comfortably part with. These can be expensive products, sometimes costing tens of thousands of dollars, so it’s important to make sure this won’t cause you any hardships.
In addition, if you set up a funeral trust with pre-arranged services, you should confirm these plans with your loved ones. Make sure that they will want the service and burial you have planned since this will be for their comfort. It can be a problem if they discover that you created a funeral plan that doesn’t allow them to properly mourn.
Finally, funeral trusts can have reliability issues. If you set up this trust with a funeral home that goes out of business or has financial issues, you can lose the money entirely. This can happen in a number of different ways, but the two most common are mismanagement (the funeral home makes bad investments with the trust) and business dissolution (you pre-purchased services from a funeral home that no longer exists). This is also a problem if you move later in life. In that case, you can find yourself stuck with funeral plans in a state or town on the other side of the country. These trusts aren’t always portable, which can also be a problem.
Bottom Line
An irrevocable funeral trust is a legal entity that lets you save for your end-of-life costs. It can be a good way to make arrangements for your burial, but make sure you have the flexibility that you need since irrevocable trusts cannot be changed once they go into effect.
Estate Planning Tips
A financial advisor with estate planning expertise can help you set up trusts and make a plan for your assets. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Giving away assets while you’re still alive to the people and causes you care about can lower your estate’s future tax liability. For example, the annual gift tax exemption allows you to gift up to $17,000 to one person tax-free, in any given year. Meanwhile, you’re permitted to give away up to $12.92 million over the course of your lifetime without it affecting your tax liability.
Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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