How to Pay 40% Less for Your Long-Term Care Insurance
Funding long-term care expenses has become a major financial concern among physicians, but it can be expensive to carry a policy. Today we’re going to talk about how any physician can fund a long-term
Given the nature of your work, physicians understand better than anyone the importance of being able to fund your long-term care costs. According to a 2018 Report on U.S. Physicians Financial Preparedness, 70 percent of physicians do not have long-term care insurance coverage in place.
Maybe your plan is to make enough money to self-insure, maybe you don’t expect to need long-term care, or maybe you looked into it, realized how expensive it is, and haven’t been able to stomach a policy.
Here’s the problem:
Statistically, 52% of people will eventually be in a position where they need long-term care.
It is expensive. The average long-term care event lasts 2 years. This usually involves at-home care or a private room in a nursing home facility. As you can imagine, costs related to either type of care can vary substantially. In 2020 those costs were between $5,000 -- $10,000 per month and if you assume they last 2 years, the total out of pocket expense would be $120,000 -- $240,000. Over the next 15 years, it is expected for these numbers to DOUBLE.
To cover the costs of long-term care you would need to save $250,000. But remember, these numbers are conservative - you of all people understand the rising cost of healthcare.
So, all this being said, it makes sense to take long-term care insurance seriously.
For all of our clients we see two paths to creating a long-term care plan:
Self-insure: Save enough money over the course of your career that you can stroke a check to cover any costs. If you have $20MM in the bank, this isn’t a problem.
Buy an insurance policy: Contribute a % of your income toward long-term care insurance.
Some of our clients are fortunate to take path 1, but many are not, so we go the route of purchasing an insurance policy. And if you haven’t guessed by the title of this article, we’re going to effectively pay 50% of the traditional cost to achieve the same outcome.
Here’s how we do it (spoiler: it’s not a coupon)
Calculate what your insurance premium would be
Long-Term Care Insurance works just like it sounds: You pay a premium toward a policy, the policy will help offset the costs of a potential long-term care event.
So, all we need to do is figure out what % of your income you need to save to insure $250k-$500k for a long-term care event.
Let’s look at a real example:
A 55-year-old male physician making $870,000 comes into our office looking to protect against a long-term care event.
We calculated the inflated potential risk to him and his family being $328,500.
His effective tax rate is slightly over 40% so that means it would take $547,500 of earnings to cover that bill.
We’re going to allocate some of this salary for this expense, but we’re not going to just start saving a % of his paycheck for insurance, we’re going to expense the insurance payment before his pay, just like your company already does with health insurance, meals, entertainment, office equipment, etc.
Have your C-Corp expense the long-term insurance payment before paying your salary
Quick note: This directly applies to anyone whose business is a C-Corp (whether you own it or not), but I’ll offer a little bonus information at the end on how any physician can make this happen.
In the example above, we are going to talk to this client’s payroll department and have them deduct $8,659.85 from his monthly paycheck and send that money to an insurance company, BEFORE he receives his income.
In simpler numbers, it’s like saying, “Instead of paying me my $105,000/year salary, pay my insurance company $5,000 and then pay me $100,000.”
This might sound like extra work for the payroll department, and in a way, it is, but here’s why they will do it for you (or you can show them why they should):
The business actually SAVES money by avoiding paying the 7.5% in payroll taxes they would normally cover. This adds up as your salary rises.
In the above client’s example, his company saves $650 per year now that they do this.
The client saves $3,500 per month due to his 40% effective tax rate. That’s a full day’s work.
As for the insurance company that your company pays, we’ll help you find the best policy at whatever time you decide to make the move (these policies are changing all the time). Just email me here if interested.
And you’re covered
The client is going to do this for the next 10 years and will retire with a tax-free pool of money totaling the $328,500 in the event he/she ever needs care. This will be the first bucket he pulls from and can be used as needed. Studies show that over 50% of people will be in a position where they will need this money. For 25 days, over 10 years, he committed to covering this expense.
Bonus: here’s how anyone can do this
If your company is not a C-Corp already, it’s not hard to become one, we do this all the time.
If that’s not an option, you can set up a personal C-Corp and have your payroll department expense an allocation of your paycheck there. This C-Corp will pay the insurance premium, deducting this expense, which is 100% of its income. Sound expensive? It’s not: to file your Articles of Incorporation, the North Carolina Secretary of State charges a minimum filing fee of $125.
Even if you’re one of the 3 out of 10 physicians in your office that DOES have long-term care insurance, you should be paying it this way.
It saves you and your company money, and saves money for the other two physicians you shared this newsletter with.
What’s on your mind?
We’ll be sharing tidbits of wisdom like this with any subscriber every two weeks, along with deeper dives for our clients every month or so.
What questions do you have that we can answer in future posts? Reply directly to this email and let me know.
Talk soon,
Chris
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Fortress Physicians by the Numbers
🏡 42 Physician Households as Clients
💰 $680,000 Avg Household Income
👩 Average Age 44
💸 $3.25 Million Net Worth
📈 29% Average Savings Rate
Securities and Investment Advisory Services offered through Fortress Private Ledger, LLC. Member FINRA/SIPC