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CHAPTER 8: HEALTH MATTERS
At some point during their lives, 70 percent of people who are now turning age sixty-five can expect to need some form of long-term care, according to statistics from the US Department of Health and Human Services. As people live increasingly longer, they naturally become more vulnerable to the frailties of old age, despite major advances in health care. It’s little wonder that some of the more common questions that we hear as we help people build their retirement plans are about how they can protect themselves from the high costs of that care.
As the population ages, facilities are rapidly filling up, and long-term care costs are skyrocketing. Many retirees worry that their life savings could evaporate if they need to enter a long-term care facility for an extended stay. The risk is quite real, and so the question becomes how do we go about covering it.
There are three main ways to do so: by purchasing long-term care insurance, by self-insuring, or by purchasing life insurance or annuities with long-term care supplements.
LONG-TERM CARE INSURANCE
A traditional approach is to purchase an insurance policy specifically designed to cover the various risks associated with long-term care. Overall, these policies provide the most comprehensive coverage of the three options.
The long-term care insurance market has changed substantially over the last five to ten years. Premiums have increased at the same time that the policies have become less generous in their coverage. We have seen a trend in the industry in which insurance companies have been requiring a higher premium to maintain coverage.
Retirees who have been paying a set premium for years find themselves forced to decide whether to just drop their policy or find money in their budget to meet the higher cost. Some have abandoned their coverage when they are most susceptible to needing it.
Another option is to self-insure, meaning you decide to simply use resources that you have accumulated to pay those high costs in the event that you should need long-term care. You might also use trust strategies to protect some of your assets.
This can be an expensive proposition. In Iowa, the cost of a stay in a typical long-term care facility is about $5,500 a month. Th at means you would be looking at an annual expense of $60,000 to $70,000, although we have seen facilities with costs as high as $18,000 a month. You can imagine the type of portfolio that you would need to pay for a stay of just five years. At $60,000 a year, that would be $300,000. If you were going the fully self-insured route, we would have to identify within the portfolio for a married couple somewhere between $600,000 to $800,000 and designate that portion to pay for long-term care.
Of course, many of the expenses of living outside of the facility would no longer exist. In that way, self-insurance might not be as onerous as it might seem to some people. Nonetheless, this is an option that you likely will consider only if you have a high level of wealth. It’s out of reach for most.
Those who are self-insuring need to be willing to accept Medicaid assistance if they get to the point where their resources do run out. Once you no longer can pay on your own, you become eligible for Title 19 and the state helps to support your long-term care needs.
Often, people who lack the resources to self-insure and who have no other form of coverage will be depending upon Medicaid assistance from the beginning if they need long-term care. Others who do have resources will employ a strategy in which they move some of those assets into a trust or gift them to family members. This must be done long before you need the care, however, because most states engage a five-year look back provision to check for any such sheltering of assets. Any resources still held in your name, as well as any assets that you moved within those five years, must be spent down before you will be eligible for assistance.
The third strategy for obtaining long-term care coverage is to purchase a life insurance policy or annuity that includes long-term care benefits. Many people are reluctant to pay the high premium costs for a traditional long-term care policy that they might never need to use. Nor do they want to allocate such a large sum within their portfolio to self-insure when that money can be put to other uses. They think, perhaps, of a friend who paid a fortune in premiums, only to die of a heart attack on the golf course.
The supplemental approach therefore uses investment strategies with features that can off set some of the costs of long-term care if it’s needed. For example, you might have a $100,000 universal life policy that would pay that much as a death benefit to your survivors but which would also advance you 20 percent of that benefit per year for up to 5 years if a doctor certified that you needed assistance with any two of the six “activities of daily living”: eating, bathing, dressing, toileting, transferring, and continence. If you never need long-term care, you are not paying premiums to no avail: you still have the benefit of the permanent life insurance policy or of the annuity.
You likely would need more than $20,000 a year to pay for all of your long-term care, so you can purchase a policy that is appropriate to supplement your needs. Th e provisions vary widely in the extent of your long-term care risk that they will cover. You would also be supplementing some of those expenses through other savings and investments.
In other words, you effectively are reducing the amount that you would need to set aside for self-insurance. This is a combination approach in which you are making a calculated decision on how much of the risk you wish to transfer, with the advantage that if you never need long-term care you will still have the benefit of the permanent life insurance policy or of the annuity. Those premiums will count for something.
MEDICARE AND MORE
Health-care costs in general will be rising as you get older. The cost of medical care and products has been growing at a pace far greater than the ordinary inflation rate, and older people inevitably will require more and more of those goods and services. Th e combination of rising costs and rising needs can punch a hole in a family budget.
One important consideration is that if you retire before age sixty-five, when Medicare kicks in, you will experience a gap in medical coverage. Until then, you would need to use either a personal health insurance plan or perhaps a COBRA strategy from the group plan at your former employer.
At age sixty-five, you should file for what is known as Part A of Medicare or you may face a 10 percent permanent penalty. Many people will file for Part B at the same time, especially if they are not covered under a group health plan. Often, people with a group health plan will hold off on filing for Part B. When you turn sixty-six, you will be paying a Part B premium if you’re not covered by a group plan. It will come out of your Social Security check, and it will be based upon your wages in the previous two years. The standard premium currently is $121.80 per month, but this total depends on the previous two years of your income. If you were making more than $214,000, for example, you might have to pay $209 for that Part B premium. With advance planning strategies, you might be able to keep that premium lower as you transition into retirement. For additional information on Medicare costs, go to medicare.gov.
A lot of people consider retiring at sixty-two but decide to wait because they feel they cannot afford the additional $800 to $1200 a month that they might need to pay to continue their health insurance until they are eligible for Medicare coverage. What they may not realize is that those additional years of high wages could increase their Part B premiums at the beginning of their retirement. When they give up W2 wages and the record falls off in a couple years, they will return to normal Part B rates.
As you can see, you have much to consider and balance when making these decisions. All those parts and supplements and deadlines can get confusing, and due to legislative changes the answers to questions are constantly changing. You will do well to seek professional guidance. To make sure that our clients get the best and latest information, we have partners who are full-time health-care specialists with the expertise to make sure these risks are covered appropriately and efficiently.
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