Some of the big risks we want to protect
against in retirement are major market downturns, higher taxes, inflation,
longevity risk, and sequence risk. What many overlook when planning for
retirement are health care costs. A long-term care event in retirement has the
potential to erode your wealth.
The statistics don’t lie. We're living longer.
Nearly 70% of people age 65 and older will need
long-term care assistance for in-home care, adult day care, or nursing home
care, and one in every three 65-year-olds today
will live past age 90. One in seven will live past 95. Because of these longer
life expectancies, your chances of needing care will be higher as well, with
the average length of care at around 3 years.
One of my grandmothers lived to 95 and needed
care from ages 90-95. During those five years, she moved from upstairs to
downstairs, from her own bed to a hospital-style bed, from part-time care to
full-time care, and then from full-time care to in and out of the hospital
until she eventually passed. It was expensive then, but now the average cost of
a private room in a nursing home today is $8,517 a month. Who knows what the cost will
be 20-30 years from now, but you can probably imagine how quickly it can drain
one’s assets in retirement. There is a reason there are so many senior living
facilities being built all around us — the need for care is great.
There are several ways to protect yourself
against a long-term care event in retirement. Here are three common ways
to do so.
1. Purchase
stand-alone long-term care insurance. Monthly premium averages $2,700 a year.. Most
policies do have a cost-of-living adjustment, because you could potentially pay
into a policy for a long time without needing the benefit, only to need it 25
years from now.
A benefit that grows with a cost-of-living
increase would be important to have to make sure your monthly benefit considers
inflation. Although there is a good chance you'll use the policy at some point
in your life, there is also a chance you won't, and if you don't use it, that's
money down the drain all those years.
For this reason, and because many carriers
have increased policy premiums by an average of
45%, most people now (policyholders and financial
professionals) don't care too much for stand-alone long-term
care insurance.
2. Purchase a hybrid
life insurance or annuity policy that includes long-term care benefits. These
hybrid policies can be good alternatives or additions to a long-term care
policy and can complement existing long-term care benefits. Most hybrid
policies allow a policyholder to use the coverage several ways, offering more
flexibility.
Let's say you own a hybrid life insurance
policy with an additional rider for long-term care benefits. With life
insurance, we know we are going to die, just not when. The cost is based on
mortality tables and not future health care costs, which are unpredictable. As
long as the premium is paid and it's the type of policy that lasts us the rest
of our lives, we know it will pay out at some point or another.
Furthermore, if we added this rider and do
have a long-term care event, but need assistance in our homes, adult day care
facility, or nursing home, these policies allow you to spend down the death
benefit (otherwise payable when you die) while you're alive.
Let’s look at a hypothetical example. Say you
own a hybrid life insurance policy with a death benefit of $300,000. With some
policies (be sure to read and understand the coverage you have and/or
purchase), you may be able to accelerate up to $6,000 of monthly benefit (2% of
the death benefit monthly) to be used for long-term care or ANY expense, as
long as you can prove you can't perform two of the six activities of daily
living.
These are known as living benefit policies
that you don't have to die to use. They are a great concept with good
flexibility. Furthermore, with cash value life insurance, these policies
usually build cash values, which we can withdraw or borrow against. You can
even create a return of premium option so that you get back all the premiums
contributed over time in cash value — another living benefit offering
flexibility.
There are also annuities that offer additional
riders for long-term care benefits. Some will double an income benefit if
confined to a nursing home. Some will double an income benefit if care is
needed in-home, at a nursing home, OR at an adult day care facility. If
you own this rider as part of your policy, having a policy that pays
out and can be used multiple ways is best. This will give you the most
flexibility in using the policy down the road.
3. Self-insure. You
can protect against a long-term care event by setting aside money now for a
future event. If you have enough saved for retirement (perhaps $1,000,000 or
more), the chances of you being able to self-insure are probably pretty good.
You have the most flexibility here and will save yourself annual premiums, but
you would have to be disciplined and truly set aside a portion of your nest egg
strictly for a potential long-term care event later in life. This could be part
of a bucket approach in retirement. A bucket of funds for growth, some funds
for income, a bucket for health care and long-term care, and some for legacy if
so desired.
Whatever you do, have a plan in place to help
insulate you from a future long-term care event. Don't sweep this under the
rug. Address it head on and have a plan.
This content is brought to you by Impact
BrandVoice. Annuity guarantees, including optional income for life, are backed
by the financial strength and claims-paying ability of the issuing insurance
company. Insurance and annuities offered through Abraham Abich, VA Insurance
License #557877. DT1056557-0121
https://www.forbes.com/sites/impactpartners/2020/01/28/income-riders-mount-up/#6061116b4c51
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