Thanks to advances in medical care and healthier lifestyles, people are living longer than ever before. However, many haven’t factored the costs of living longer into their retirement plans—particularly when it comes to health care costs.
In 2013, Americans age 65 or older made up only 14% of the population, but by 2040, it's expected that the senior population will increase to 22%.1 Longer lifespans mean more people will live longer with chronic conditions that require specialized care not covered by Medicare or some form of long-term care at home or in an institutional setting.2
So while you may have spent years planning to have sufficient income for a comfortable retirement, you need to consider what would happen if you or your spouse unexpectedly require long-term care—and the risk to your family that rising healthcare costs may represent. Even the most robust portfolios may not be able to absorb these ever increasing costs, yet many retirement age Americans tend to avoid planning for these expenses.
What We Don’t Know Can Hurt Us
A 2015 survey by Nationwide Retirement Institute found that 79% of respondents are not aware what their healthcare costs will even though 63% reported that their top fear about retirement is out-of-control healthcare costs.3 Further, according to the American Association for Long-Term Care Insurance, more than two-thirds of adults will require some form of long-term care after age 65.4 The Centers for Medicare and Medicaid Services estimate that overall medical costs will rise about 5.8% annually through 2024.5
So how do you get ahead of unanticipated medical costs, and work toward preserving the hard earned wealth you’ve earmarked for your retirement years and maybe even leave as a legacy to your heirs?
Seth Coren, a Morgan Stanley Private Wealth Advisor, recommends considering long-term care insurance, which allows you to transfer the financial risk of long-term care to an insurance company by paying an annual premium.
“It’s something that a lot of pre-retirees haven’t been considering,” Coren explains, “But it’s a real concern. What happens to your asset base if you have a long-term care situation? What happens to the money that you were planning to leave to your spouse and children? People often factor so much into their retirement planning, but not the potential for long-term health care costs.”
Protect Your Assets and Your Health
Long-term care includes services provided to anyone with a chronic disease, disability or sudden illness who requires assistance with regular daily activities such as eating, bathing, dressing or moving from a bed to a chair. It also includes the supervision of those with Alzheimer's disease or other mental illness that hinders a person’s ability to think or reason.
Generally, long-term care insurance provides coverage for those unable to perform two or more of these types of activities for a period of at least 90 days, or who require substantial supervision due to a cognitive impairment. Further, these policies typically offer the flexibility to choose where and how one receives care. Components to consider when evaluating a long-term care policy include the benefit amount, the total coverage amount, the elimination period and inflation protection.
But according to Coren, the goal of long-term care insurance is as much about asset preservation as it is about healthcare coverage.
“It’s often a tough conversation because often people don’t want to spend money on a monthly premium for an insurance policy that they worry they may not need,” he says. Nonetheless, Coren asserts that the risk to a family because there are no measures in place to help preserve assets may be too high. “We insure lots of things in our life—cars, homes, boats—and spend money on those monthly premiums without hesitation. Your future shouldn’t be any different.”
A Number of Options
One option, according to Coren, is to purchase a permanent life insurance policy with a long-term care rider. “Although this kind of policy costs more,” explains Coren, “you have a policy where, if you never need to utilize those funds for long-term care purposes, your spouse or your children will have access to them, which is a valuable benefit.”
Recognizing the potential need for long-term care as being an important issue toward mitigating asset erosion—and planning sooner rather than later—are key factors to consider, says Coren. “These policies are based on age and health,” he explains. “Age only goes one way—up—and unfortunately, health can sometimes go sideways on us unexpectedly.”
A long-term care insurance policy helps protect the assets you've accumulated, allowing you to provide your loved ones with the meaningful legacy you intended, as well as leaving them with better options for your care while relieving them from full-time caregiver responsibilities.
1 Administration on Aging 2014. A Profile of Older Americans. 2014 http://www.aoa.acl.gov/aging_statistics/profile/index.aspx
2 U.S. Department of Health and Human Services. 2015. National Clearinghouse for Long-Term Care information. http://longtermcare.gov/the-basics
3 Nationwide Retirement Institute, Pre-Retirees Fear Health Care Costs, But Are Not Taking Action, December 2015
4 The 2015 Sourcebook for Long-Term Care Insurance Information, American Association for Long Term Care Insurance
5 The Centers for Medicare and Medicaid Services. NHE Fact Sheet. https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nhe-fact-sheet.html
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