Aging is inevitable, and with it comes the increased likelihood of sickness, injury and dependence on others. In fact, according to the U.S. Department of Health and Human Services, 9 million Americans this year will require long-term care – everyday assistance provided at home, an assisted-living facility or a nursing home. That’s approximately 11.4% of the total U.S. baby boomer population.
What’s more, by 2020, the number of Americans needing long-term care is expected to grow to 12 million; 70 percent of all people age 65 and older will need some form of long-term care services during their lifetime.
While it may be less exciting to plan for your future healthcare needs than to set aside money for luxury cruises or your grandchild’s college education, it may help avoid bigger problems down the road.
Frank Bond, a senior financial consultant for Northern Trust, says a typical couple should expect to spend up to $250,000 on healthcare expenses during retirement. Broken down, prices for long-term care can range from $35 per hour for in-home assistance to $75,000 or more for a year’s residence in a nursing home.
When planning for down-the-road healthcare expenses, consider these options to help ensure the costs don’t diminish your wealth in retirement.
Long-Term Care Insurance
Today, 8 million Americans opt for long-term care insurance to plan for future care. The average policyholder is 57 years old, while the average annual premium for a 65-year-old couple with a three-year policy covering up to $150 in daily costs is $4,435, according to Los Angeles-based American Association for Long-Term Care Insurance.
While Bond notes that long-term care policies should provide cost certainty, he acknowledges that healthcare costs could easily top benefits provided without adequate coverage.
One way to lower the costs of long-term care insurance is to buy plans at a younger age when, generally, risks are lower and health is better. Doing so locks in the premium set at the age when the policy was purchased.
More recently, another option has emerged: hybrid products that combine life insurance or annuities with long-term care benefits. With hybrid products, policyholders can use the money for long-term care if needed or, if it’s not needed, have a life insurance benefit upon death.
The upside to such a policy isn’t just protection against unexpected costs, Bond says; it’s also having an insurance company whose interests may be aligned with yours.
“Even for the affluent who may be better able to address long-term care expenses, having a life insurance policy with a generous long-term care provision does something you can’t do as easily on your own,” he says. “You get access to an insurance company that can help you to select a facility you can afford based on the benefit you bought.”
A March 2012 survey by Kalorama Information revealed most Americans aren’t convinced they’ll need long-term care and believe Medicare insurance will cover the costs if they do.
But while Medicare provided by the U.S. government pays for some expenses, it’s not nearly as much as most people think. While many seniors anxiously watched as the Supreme Court debated the legality of President Obama’s healthcare legislation this summer – it was upheld in June – Bond says they may have missed the point.
Even if the legislation was overturned and replaced by a Republican-backed plan with an alternate funding mechanism, the changes wouldn’t affect those currently planning for retirement. For this group, Bond says the most vivid financial threat is a medical emergency that requires treatment not covered by Medicare.
He suggests considering Medigap insurance, coverage designed to fill in Medicare’s gaps. Monthly premiums for these policies cost an average of $177 in 2010, yet only about 20 percent of Medicare beneficiaries bought the insurance, according to a 2011 report by the U.S. Department of Health and Human Services.
Bond says that may be a mistake: “No matter what, people usually don’t drop their home or auto coverage. So if this is something else you can insure at a reasonable cost, you may want to consider it.”
Another strategy for addressing long-term healthcare costs is to set aside money in your personal savings or investments to pay medical bills. For example, one of Bond’s clients devoted $100,000 per year to developing his car collection during the first 10 years of retirement. After that, the same annual sum was redirected toward healthcare expenses.
With the self-insuring option, the money that would otherwise be used to pay insurance premiums can instead be invested and you can benefit from any investment gains. The risk is if you find yourself in a situation where you would have filed an insurance claim, you’ll have to pay out of pocket and may not have enough money set aside to cover costs.
If you opt for this route, Bond recommends considering a Health Savings Account, an IRA-like investment vehicle that allows you to pay for certain medical expenses using pre-tax income.
Regardless of the options chosen, once you design your plan for long-term care, it’s important to convey to loved ones that you have a plan. That way, intentions and expectations are completely clear.
“Clients tell us, ‘If something were to happen to me, I don’t want my kids burdened by it,’” Bond says. “[Planning for healthcare costs] is a clear way to tell them you don’t expect them to handle the responsibility themselves.”