You thought you'd conquered life's biggest financial milestones, including paying your kids' college tuition, financing your eldest daughter's wedding, and building up a nest egg for yourself. But now another challenge looms ahead: figuring out how to pay for your parents' long-term care.
A quick look at the numbers shows how big this challenge really is. A 2019 Genworth study pegs the national median cost of an in-home health aide at $52,624 per year. And if one of your parents needs more advanced care in a nursing home, that could set you back in excess of $102,000 per year. Perhaps even more troubling is how quickly these costs are rising. A private room in a nursing home today costs 57% more than it did in 2004. If that trend continues, it's tough to know how much you'll ultimately spend to get your parents the care they need.
Once you've exhausted the conventional options of Medicaid and Veteran Aid, it's time to get creative. Try peeking under these four rocks to raise cash to pay for your parents' long-term care.
1. Life insurance
Start with a review of your parents' life insurance policies. You're looking for accumulated cash value or accelerated death benefits. If your folks have cash built up in a whole life policy, they can withdraw or borrow against those funds. Withdrawals up to the amount of premiums paid are tax-free.
Accelerated death benefits allow policyholders to withdraw a portion of their death benefit while they're still living. These cash advances do not need to be repaid, but they will be deducted from the benefit paid out when the policyholder passes. This option is typically reserved for specific situations, such as the policyholder being diagnosed with a terminal illness.
Your parents could also raise cash by selling a life insurance policy in a viatical settlement or a life settlement. These terms are sometimes used interchangeably, but the Life Insurance Settlement Association distinguishes them this way: Viatical settlements occur when the policyholder's life expectancy is shorter than 24 months, and life settlements are used when the life expectancy is longer. If your parents are aged 70 or older and hold a policy with a face value of $100,000 or more, they're good candidates for a viatical or life settlement.
2. Tax deductions
Your parents can deduct unreimbursed medical expenses if those expenses exceed 10% of their adjusted gross income. But if you are covering those bills, you may be able to take that deduction instead. You'd have to claim one or both of your parents as your dependents, and the rules around this are tricky. Try the IRS' dependency quiz to see if your situation qualifies.
If you can claim your parents as dependents, you can deduct long-term care expenses that are medically necessary. Since you are the one taking the deduction, the expenses need to be greater than 10% of your adjusted gross income. Nursing home expenses would qualify if your parent is chronically ill and requires supervision and/or full-time medical care.
3. Reverse mortgage
Any equity your parents have in their home may also be a source of cash -- and they won't have to move. A reverse mortgage is a loan against the home's value that is repaid when the homeowner passes. It can be structured to provide your parents with a single cash payment upfront, a regular monthly payment, or a line of credit for up to 70% of the home's value.
Reverse mortgages are heavily regulated and there are rules in place to protect seniors. For example, the bank cannot force a senior to leave the home, or try to collect more than the home's value. If both of your parents sign on the loan, repayment is delayed until they both pass or move away. This type of loan may be the right option if one parent requires assisted living and the other parent wants to stay in the home.
4. Home equity line of credit
Your parents can also use a home equity line of credit to cash out their equity. This option may be simpler and less expensive in the short term since these facilities often have low or no closing costs and competitive interest rates. The drawback is that regular repayments are required, at least to cover the interest expense. But if you're in a bind and need cash fast, a home equity line might be a workable, if temporary, solution.
Tackle the challenge head-on
Your folks cared for you in your early years, and now it's time for you to return the favor. While the financial challenge of long-term care may seem insurmountable, you likely have options hiding in your parents' assets. If you made it through funding multiple college tuition bills for your kids, you can get through this too.