A growing older population that is expected to live longer than their predecessors and rising health care costs are two of the challenges facing baby boomers and the future elderly population. Overall health care spending is expected to rise by at least 25% by 2030, according to LeadingAge, a not-for-profit dedicated to issues regarding aging. A Medicare-eligible couple who retired in 2009 will need about $240,000 to cover their medical expenses in later life, a 6.7% increase over 2007. That same retired couple will need $85,000 to pay for long-term services and supports, a 50% increase over 2002, the group reports.
This, notes Jesse Slome, Executive Director of the American Association for Long-Term Care Insurance (www.aaltci.org), “is really the first generation that en-masse has to do some long-term care planning.” It is the X factor in retirement planning. The most carefully planned retirement can be derailed by catastrophic illness, chronic disease or other debilitating issues that can deplete retirement funds.
Long-term care insurance typically provides coverage which is not included with regular health care insurance or with Medicare. Such items include in-home care, assistance with daily living, care in nursing homes, hospices or extended care facilities are usually covered in these policies.
In a worst-case scenario, portfolios are put at risk once investors have gone through the money that had been allocated for health care and are forced to tap into other reserves, including the money needed to pay fixed expenses such as utilities, property taxes and food.
Under a traditional long-term care policy, one pays an annual premium. If one never needs the coverage, that money is lost. To help overcome this objection, insurers are offering universal life insurance policies that combine life insurance and long-term care and allow individuals to protect their retirement income while managing long-term care costs.
The premium inside the universal life insurance policy earns an interest rate (typically at least 4%) on a tax-deferred basis, building up a cash reserve that can be used tax free to cover nursing or home-care costs. Unlike traditional long-term care insurance, the money paid in is not lost if you are never in need of long-term care. Any money that is not spent on nursing care benefits will be distributed to heirs as an income tax-free death benefit. If you need the money back, some companies will guarantee a return of the original single premium payment (minus tax implications or other loans and withdrawals).
This hybrid policy option does two things, Slome said. “First, it overcomes the standard objection that people have to long-term care, which is, ‘What if I don’t use it?,' because you’re going to use this policy one way or the other. If you need long-term care, you’re going to have access to the benefits. And if you don’t need long-term (upon your death), your beneficiaries will benefit.”
One drawback to hybrid policies, Slome said, is that a single premium contribution is generally $100,000 or more for an individual. Another objection some have, he said, is that if you need long-term care, the insurance company is giving you back your own money, thus drawing down your assets.
“More people want this because they don’t want to be a burden to their wife or kids,” he said. “If you never have a long-term care claim or a claim that lasts less than two or three years, you’ll be glad you bought it. But if you have a claim that lasts three or more years, it’s very unlikely that you’ll have bought enough of a life policy to cover that risk and you’ll regret you didn’t buy traditional long-term care insurance.”
Slome cannot emphasize enough that one shouldn’t procrastinate in considering long-term care. “If you’re between 55-65, that’s the sweet spot to start looking,” he said. “You must start your planning when you can health-qualify. You wouldn’t start retirement planning at age 60 and hope to have enough to retire at age 65. Long-term care is the same. You can’t wind back the clock. We were all healthier at one point than we are today. Start looking at this while you can health-qualify to get the most options.”