These days, you can insure just about anything. Merv Hughes is an Australian cricket player who reportedly insured his mustache for over $300,000.

I’ve even heard of fantasy football insurance that refunds your entrance fee if your star player gets moved to the injured reserve. Since you can insure almost anything, the question is, “What is worth insuring?” The answer almost always boils down to how much you’ll have to pay to insure the thing you don’t want to lose — whether it’s your mustache, your fantasy football player, your home or, as I’ll talk about below, your health.

How should I pay for my future healthcare needs?

Many of the clients I work with are concerned about how to pay for their future healthcare needs, particularly the costs associated with long-term care. Planning for these expenses can be tricky, because your future health is uncertain. One way to mitigate these expenses is to insure the risk. As you consider this, there are some important things to know.

On average, an American turning 65 in 2022, will incur $120,900 in long-term care costs* in his or her lifetime. In my experience, that is much less than what most people believe it will cost. The average is far less scary than general opinion. The tricky part is that it’s an average. My two grandmothers spent more than 7 years in facilities due to memory issues. The costs are unpredictable.

It’s important to note that Medicare doesn’t cover long-term care costs, so you can expect to pay those yourself. But roughly 6 out of 10* individuals turning 65 won’t even spend anything on long-term care costs. Because of this, many people make the decision to do nothing. I think this is a possibility you should prepare for.

Come up with a game plan

As a financial planner, I work with all my clients to come up with a game plan for this possibility. There are two ways of mitigating the risk of future healthcare costs:

You can pay someone else to insure this risk.
You can act as your own insurer.

If you decide to work with an insurance company, they will create a pool of benefits that you can use if and when you need to use them. To access the benefits, you generally need to meet some qualifications first. These are called “ADLs” or Activities of Daily living. For example, if you can’t get out of your bed and get dressed for the day, you would need some assistance. This could mean someone comes into the home or you go to a facility. This is one example of qualifying to get access to the benefit pool. Here are the six “ADLs”:

Bathing: The ability to clean yourself up.
Dressing for your day
Eating
Transferring: Getting out of bed to a wheelchair or to your destination.
Toileting: The ability to get on and off the toilet.
Continence: Controlling bladder functions.

In the last 20-25 years, the costs for traditional long-term care insurance have been increasing, making them less affordable and less attractive to insure the risk.

Self-insure the risk

The other option is to self-insure this risk. One of the best ways to do this is to build a Health Savings Account (HSA) now. Why is this the case? The HSA is triple tax-exempt, a unicorn in the tax code. If you contribute through payroll:

You can avoid FICA taxes (Social Security & Medicare)
The contribution is pre-taxed (you deduct this from your income).
You can invest the money in your HSA, and
It grows tax deferred.

Later, if you use it for qualified medical expenses, it’s a tax-free distribution. Below is an example of what can happen if you put money in an HSA, invest it, and let it grow.

Age 40
$5,000 contribution
FICA taxes avoided (7.65%) = $382.50
Federal and State Income taxes saved (assume 30%) = $1,500

If at age 80 you dip into the HSA to pay your nursing home costs, you would have over $35,000 (assume 5% growth). This amount would grow exponentially if you were to continue to add dollars to your HSA every year.

These are only two examples of how to insure the possibility of paying for your long-term healthcare needs. If you are wondering what your best option may be, reach out to your Foster Group advisor or bring it up at your next client connect meeting.

*Based on ASPE Research Brief (August 2022): Long-Term Care Services and Supports for Older Americans: Risks and Financing, 2022