Few Participants Examine Retirement Health Care Costs

This is according to a report just issued by Cogent Reports, based on a survey of 890 plan participants by Market Strategies International. All of the participants were age 55 or older and had at least $100,000 in investable assets. The survey also revealed 76% of pre-retirees haven’t evaluated or purchased long-term care insurance, and 53% haven’t estimated their longevity.

“Death and a lingering passing isn’t something they want to talk about,” he says, but the fact of the matter is that nearly half of those who reach the age of 65 will spend some time in a nursing home, for an average of two to four years at a cost of $200,000 to $300,000 beyond what Medicare will pay for. Even if someone has succeeded in saving $500,000 to $700,000 for retirement, one-third or half of that will need to be spent on medical costs, Love says.

To broach the subject, Love meets with participants in one-on-one meetings, shows them life expectancy actuarial tables and asks them about their family’s medical history and immediate relatives’ causes of death. The tables show that a 65-year-old man today may live until age 81 or 82, and a 65-year-old woman could see 84 or 86.

“We have found that health care costs are often front and center within the news, but longevity is an afterthought,” Dan Dingus, president and chief operating officer at Fragasso Financial Advisors in Pittsburgh, tells PLANADVISER. “We often try to make it more personable by asking how many have relatives or friends in their 80s or 90s. Pretty quickly they begin to realize they may need their retirement to last another 30 years for at least one spouse. Income planning for a person’s potential life span is key.”

Love also educates the participants he serves about the cost of an average private and semi-private room in a nursing home. In Texas, private rooms average $60,000 a year, and semi-private rooms $40,000, but in New York, that jumps to $126,000 for private nursing home rooms and $60,000 for a semi-private room.

This paves the way for Love to then discuss long-term care insurance. “Most people are not interested in long-term care insurance until you put it before them,” he says. “We all think [major illness] is something that is going to happen to somebody else.” He recommends that people buy long-term care insurance in their 50s, when they can get lower premiums and better coverage than if they were to wait until they are older.

Of course, says Mackey McNeill, a CPA personal financial specialist in Bellevue, Kentucky, “it is hard to convince a healthy 50-something-year-old they will need long-term care insurance.” One way she tries to drive the necessity home is by running a Monte Carlo analysis that shows the likelihood a participant will be on track for a successful retirement. McNeill first runs the simulation without adding in health care costs. When retirement health care costs are factored in, an individual with an 80% likelihood of success could see that plummet to 25%, she tells PLANADVISER.

Those statistics can be convincing, she says. Then, to drive the point home even further, McNeill meets with participants in person every six months to go over their portfolio and to remind them of outstanding items on their “to-do list,” including long-term care insurance.

Because many people are in denial that they will ever need insurance coverage for a nursing home, one type of long-term care insurance that Love finds popular with his clients is a “three-way policy.” If the investor does go to a nursing home, it will cover those costs. However, if the investor doesn’t end up going to a nursing home, they can either opt to pay their main beneficiary a life insurance payout or, after a five year holding period after purchasing the insurance, cash out and get their premium back, but with no interest, Love says.

Long-term care insurance also helps couples with one of the spouses in a nursing home who want to protect their assets from government spend-down requirements so their partner will still have adequate assets, McNeill says. Spend-down requirements vary by state, but they generally require a person to use up their assets for long-term care until they have around $100,000 left. However, if they purchase long-term care insurance, the value of that insurance plus the remaining spend-down amount are exempted from that requirement, she notes.

McNeill isn’t a fan of three-way policies or other hybrid alternatives because she doesn’t think they offer adequate coverage. She does recommend that advisers work with insurance agents to help participants select the right long-term care coverage for them from the outset, because it may not be possible to change it.

Leonard Wright, a CPA financial planner in San Diego, tells PLANADVISER “because most people have just barely enough money they retire, I advise my clients that they can do a 1035 exchange from a life insurance or annuity product into long-term care insurance, without paying taxes, which is a nice feature. It is a great opportunity to repurpose an asset.” However, one point to keep in mind, Wright says, is “some insurance companies will accept these 1035 transfers from an outside insurance company, and some will not.”

 Retirement plan advisers absolutely should help their clients face these issues, Love says. “We have a particular calling to discuss these things with our clients so they can consider the possibilities.”

Fortunately, financial firms are creating tools to help plan advisers broach the sensitive issue of retirement health care costs with participants. Genworth Financial has just launched a website, longtermcareinsurance.org, to help individuals and their advisers select long-term care insurance. HealthView Services, which provides retirement health care cost data, recently developed a health care retirement cost planning tool for members of the Insured Retirement Institute (see “IRI Partners withHealthView Partners for Care Planning”).