The US Department of Health and Human Services (HHS) estimates that nearly 7 in 10 Americans will need some type of long-term care (LTC) in their lifetime. Combine this with the rising cost of care and it’s no surprise that this topic is a critical consideration when discussing retirement plans with aging clients.
While the statistics seem a bit dire, it is wise to be clear about the real risks as well as the options so that you can provide a calming and informed perspective as you guide clients through the maze of options.
How much care is really needed?
According to the HHS, women tend to need care for longer (3.7 years) than men (2.2 years). Together, the average is around three years. The HHS also estimates that a third of people 65 today will not need any care, while about 20% will need it for more than five years. So where will your customers fit in this spectrum, and how can they best prepare financially to meet this need?
Put numbers on it
Genworth, an LTC insurance provider, estimates the average annual cost of a home health aide in $ 54,912 per year, with the cost of a high-end private nursing home room at around $ 105,850 per year. Other costs for assisted living rooms and shared nursing home rooms fall in between.
This means that for the average woman who may need 3.7 years of care, the costs of professional services can range from around $ 203,000 to over $ 391,000. Men, whose average needs are 2.2 years, can incur a total cost of $ 120,000 to over $ 232,000. With the 401 (k) average balance of an American aged 60 and over being closer to $ 182,000, it is obvious that it is essential to think about it in advance.
The general rule for taking out long-term care insurance
There is a long-standing rule of thumb that purchasing LTC insurance coverage makes more sense when net worth is between $ 200,000 and $ 2 million. This assumes that if assets are less than $ 200,000, LTC insurance is not financially viable since Medicaid would step in quickly to cover the cost of care once assets are depleted.
On the other hand, having assets of $ 2 million or more is usually more than enough to pay for any type of LTC, allowing customers to forgo the cost of premiums and account for the possibility of not needing to. care. For people who fall in between, as many Americans do, the protection afforded by LTC insurance often makes sense.
Where is health insurance taken into account?
While it is widely believed that Medicare does not cover the costs of nursing homes, this is not entirely true. Pay Medicares up to 100 days of care in a skilled nursing facility or LTC hospital after at least three days of hospitalization. Although Medicare does not pay for care related to more permanent conditions such as dementia, it may cover limited LTC services related to conditions clients are expected to recover from, such as after surgery or a stroke.
Review of available options
The best LTC plan for clients will depend on their particular circumstances: the presence of family nearby, their general health, and other options available, such as a workplace LTC plan transferable upon retirement.
Take out long-term care insurance
Apart from the rule of thumb of net worth in determining the need to purchase LTC insurance, another important consideration is family status: is there anyone available to provide care with whom the client would be in need. comfortable to live?
Many people buy LTC policies to avoid becoming a burden on their loved ones, knowing that this insurance generally covers home care in certain circumstances. According to a 2015 AARP report, more than 34 million Americans reported providing unpaid care to an adult over the age of 50 in the past year. Since many of these caregivers end up retiring earlier than expected to provide care, ensuring clients have adequate coverage can have a ripple effect on the financial security of future generations as well.
For clients who are considering taking out LTC insurance, it is recommended to have the policy in place by the age of 65 at the latest. It is also a good idea to study the group policies offered by a workplace, which are usually transferable in retirement, while exploring other group discounts such as alumni or professional associations, as those available. for AICPA members.
It should be mentioned here that there is real concern about the huge premium increases that are regularly reported by policyholders. One thing to note is that many of these increases are seen on policies purchased 20 years or so ago, when there were different assumptions in place that informed pricing. Due to longer lifespans, lower lapse rates, higher costs of care, and consistently low interest rates, insurance companies must make adjustments for the possibility of paying more than planned in the past.
One way to mitigate costs if clients are faced with a large increase in premiums that is beyond their budget is to suggest reducing the benefit period to reflect the average period of two to three years during which most people need care. There are other options available to reduce premiums as well, so a conversation with the insurance company about these options is always wise before you simply let the policy expire.
Life insurance with an LTC rider
An increasingly popular option to deal with the rising costs of LTC insurance as well as the legitimate fear that clients will die before receiving benefits is to add an LTC rider to a whole life insurance policy. The advantage of this strategy is the certainty that a benefit will be payable at Someone, while the downside is that the policy may not pay as much in LTC benefits as a pure LTC insurance policy.
Eligible longevity annuity contracts
To address concerns about outliving one’s savings, Qualified Longevity Annuity Contracts, or QLACs, are growing in popularity. Richer clients may choose to use the minimum distributions required from retirement accounts to fund a QLAC. The policies pay out guaranteed income for the life of the annuitant, but only after they reach a certain age, typically 80 to 85 years old.
The biggest disadvantage of longevity annuities is that the payments end on death, even if the policy owner has not yet started to collect. Another potential problem is when a policyholder needs payments to start earlier for LTC fees – a key feature of QLACs is that they don’t start paying until the annuitant turns 80.
Self-insurance is always an option
Of course, one option for planning LTC costs is to simply use savings, including health savings accounts (HSAs) or retirement savings. Revisiting the rule of thumb from above, people with higher net worth of $ 2 million or more should be able to use their HSA, retirement, or other savings to pay for LTC fees if or when they arise.
Beyond that, self-insurance is the cheapest and most flexible option, the trade-off being that the client may need care longer than expected or leave less inheritance than expected in the future. death.
Many people default to this option due to a lack of planning, but for clients who choose to self-insure, it is best to think that they are essentially allocating a portion of their wealth to potential. future LTC expenses. This should change their investment philosophy and will be a key part of personal financial planning as clients approach retirement age.
AICPA Personal financial planning The section has resources to support planning for LTC as well as other areas of health care and retirement.
– Kelley C. Long, CPA / PFS, CFP, is a personal financial coach in Tucson, Arizona. To comment on this article or suggest an idea for another article, contact Dave Strausfeld, a JofA editor-in-chief, To [email protected].