Can You Afford Your Independence?

Uncategorized Dec 13, 2019

When I teach people about how to prepare for retirement, we focus on financial preparation. Being prepared financially is critical to a sound retirement system, one that can provide security, peace of mind and independence. We often find one overlooked area of financial preparation, which can threaten this independence, is the cost of long-term care. But with medical advancements, life expediencies are increasing, and so is the need for long-term care.

The Bank of Montreal Wealth Institute published a report highlighting this, noting that one of the greatest fears associated with aging and retirement is the inability to afford healthcare services and long-term care when the need arises. According to the BMO report, more than one-third of Americans surveyed stated that losing their ability to live independently is their greatest healthcare-related concern. Yet, 28 percent of these same Americans have not made any plans or preparation for dealing with this fear.

For generations past, this issue hasn’t garnered the same attention. It only has recently because we are facing a tidal wave of baby boomers who have reached retirement age. Increasing healthcare costs are lopsided, with over a third of those costs attributed to Americans ages 65 and older. And with both private and governmental resources under significant strain the fear of being unable to obtain adequate health care and long-term care services is very real.

Unfortunately, there is a gap between the costs associated with long-term care and the funds that retirees have set aside for long-term care. The fear is justified and the problem is not going away any time soon. So, what can we do?

There are a few ways to pay for long-term care. The first is to pay out-of-pocket. Some are fortunate enough to have the assets to do so and having an income plan built into a retirement strategy can help with this. However, with the costs of long-term care being relatively unknown, it can be hard to plan for this expense.

On the flip side of that coin is to qualify for Medicaid, a needs-based federal program. Many try to divest themselves of assets in order to become eligible for Medicaid, but are surprised to learn just how little they are permitted to have before they qualify. Additionally, many do not realize that their options may be severely limited if they are hoping to have Medicaid pick up the tab for long-term care. Not all facilities will accept residents who are on Medicaid.

Another option that has been slow to gain popularity is traditional long-term care insurance, the kind that charges a monthly premium to pay for the possibility of the need for long-term care. With such a policy, if long-term care is not needed, the premiums paid are simply gone, without receiving any benefit in exchange for the premiums. Many people wait too long to apply for such a policy and by the time they do, the costs, which are based on age and health, are prohibitive.

A study by LIMRA showed that only 13 percent of people surveyed had any kind of long-term care insurance policy in place. The good news is that insurance companies are trying to increase that number by offering more attractive plans to consumers. They are providing a wider variety of policies, with different levels of coverage and with costs that can accommodate different financial strategies.

One popular option is to invest in a cash-value life insurance product and select long-term care coverage terms through a rider. With such a product, if the long-term care coverage is needed, the amount paid is deducted from the policy’s death benefit. The purpose of this type of policy is to provide some kind of benefit, either for long-term care, or a death benefit, for the premiums paid. Therefore, if the policy owner ends up not needing long-term care coverage, at least his or her beneficiaries will receive a death benefit in exchange for the premium paid in to the policy.

Like many financial challenges, there is no bulletproof answer that works for everyone equally. Nevertheless, being prepared for long-term care is critical to maintaining security and independence in your retirement. Don’t just simply brush it off as something you will look into down the road. Create a plan now, as part of your broader retirement strategy, so you are prepared when you need it—which is hopefully never.


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