Advisers are challenged to protect against one of the biggest
risks to a retirement plan.
Jul 5, 2018 @ 8:52 am
Nothing strikes fear in the heart of retirees
more than the three letters: LTC. The potentially crushing costs of long-term
care in a nursing home, memory care unit or even at home — most of which are
not covered by Medicare — can easily destroy a retirement plan.
But the unpredictability of who will require
costly care and the diminished availability of
traditional long-term care insurance policies create a
challenge for even the savviest financial advisers.
An estimated 70% of people 65 and older will
need some form of long-term care as they age, according to the Department of
Health and Human Services. The national annual cost for a private room in a
nursing home is $97,452, according to the2017 Genworth Cost of Care
Survey, which includes a state-by-state breakdown of costs
for various levels of care. The average length of a nursing home stay is 2½
years.
The traditional funding choices for long-term
care expenses are self-funding; traditional long-term care insurance; a hybrid
insurance policy or annuity with a long-term care rider; or Medicaid for those
who have few assets and little income.
The crucial component to the self-funding
option is to fully understand the potential costs, the potential risks to other
goals and the impact on a client's family, particularly in the case of home
care, where 80% of care is delivered by unpaid family caregivers.
"It is important that the rate of
inflation used for your health care goal properly reflects expected health care inflation of
at least 5%," warns a guide for advisers and clients, "Taking Control of Health
Care in Retirement," that RBC Wealth Management published
earlier this year.
Philip Lubinski, a veteran financial adviser
in Denver and co-founder of the IncomeConductor retirement
distribution software program, agrees it is critical to use a
higher-than-average inflation assumption for future
health care and long-term care costs. His software program
allows advisers to create, track and manage customized income plans and make
changes as needed, including assigning different inflation factors to up to 15
expense categories.
Mr. Lubinski offered this example using the
IncomeConductor program. A 65-year-old married couple who wants $7,500 per
month of gross income, adjusted annually for 3% inflation, would need a nest
egg of $1,929,917 to start. The income would grow to $15,246 in the 25th year,
and there would be a zero balance at the end.
But one spouse needed long-term care for the
last three years of the plan, it would cost an additional $7,500 per month in
today's dollars. That would require an additional upfront deposit of $155,000
if the adviser used a 3% across-the-board inflation assumption.
Instead, Mr. Lubiniski plugged in the 6%
average annual increase of long-term care costs in his home state of Colorado
and discovered that an extra $300,000 would be needed upfront — not $155,000
—to cover the anticipated future long-term care cost.
"IncomeConductor can not only model every
concern that retirees have, but it automates the analytics to help advisers
manage the retirement income for the life of their clients," he said.
"We owe retirees a lifelong commitment of service if we expect to manage
their lifelong savings."
Separately, the Society of Actuaries is
investigating new ways to finance long-term care that are more practical,
affordable and effective than current models for both consumers and the
industry. SOA recently convened a think tank of long-term care experts to come
up with ideas. The result was two new long-term care product concepts,
according to a yet-to-be-released report, "Long-Term Care and the Middle
Market."
The Life-Stage Protection concept is an
insurance policy that starts as term life insurance during an individual's
prime income-earning years and then switches to long-term care insurance in
later years. It would offer long-term care benefits ranging from $100,000 to
$300,000, with monthly premiums from $63 to $185. About three-quarters of the
consumers surveyed like the ability to lock in long-term care insurance early
and at lower premium levels that current insurance products.
The Retirement Plus concept is a flexible
retirement plan like a 401(k) or IRA but it has long-term care insurance
directly built into the product. The concept offers long-term care insurance
benefits ranging $100,00 to $200,000, with minimum contributions ranging from
$119 to $225 per month. Three-quarters of consumers liked the idea of having
access to additional funds to pay for long-term care in case of exhausting
their savings, as well as the ability to transfer retirement funds to
beneficiaries upon death.
While these SOA product concepts have been
actuarially modeled and tested for consumer reaction, they cannot be introduced
into the insurance marketplace until certain regulatory and tax codes changes
are enacted. In the meantime, it is up to financial advisers to educate their
clients about the risks of what unplanned or unaddressed health care costs can
do to an otherwise successful retirement plan.
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