Long-term care is a major risk that many financial advisers just aren’t talking about with their clients. Here’s why and some creative options for your own LTC plan.
With retirement approaching, you have reviewed your numbers and perhaps are feeling good about what you see.
You have a comprehensive plan. One that accounts for taxes. Protects you from market risk and delivers you a strategic form of income to address your routine monthly expenses. And possibly, even the added costs of any bucket-list items that you hope to check off once you have more leisure time on your hands.
But despite all that planning, your retirement income plan may be missing an important, and hefty, expense. Long-term care. If so, you’re not alone. Plenty of retirees, and unfortunately, a lot of the financial professionals who advise them, avoid the topic, even though practically everyone agrees it’s important. About 70% of people age 65 and older will require long-term care at some point, and the cost of that care can be overwhelming, according to Genworth’s annual cost-of-care study. The median monthly cost of an assisted-living facility in the U.S. is $4,300. The median monthly cost of a private room in a nursing home is $8,821.
Clearly, it’s an expense that can rack up quickly, stealing away those dollars that prop up your retirement and maybe even wiping out any legacy you hoped to leave your heirs.
Advisers and Clients Don’t See Eye-to-Eye
Unfortunately, a disconnect exists between financial professionals and their clients on this issue. Advisers say they have talked about long-term care with 48% of their clients, yet just 38% of clients say their advisers have discussed the topic with them, according to a study by the Lincoln Financial Group.
What’s even more puzzling is that nearly every adviser (98%) says it’s essential for families to discuss long-term care, and 96% say it is an important part of a financial plan. Similarly, on the consumer side, 96% of Americans say it’s important to plan for long-term care, but only 17% have planned for it.
Why It’s Not Easy to Talk About
So, what’s causing this disconnect, and why isn’t long-term care a topic of conversation between every adviser and every client?
A few factors come into play, and perhaps the most significant is that, for many financial professionals, the primary focus tends to lean toward helping clients accumulate money for retirement. But that fails to address the client’s comprehensive needs. To fully serve a client, an adviser should also properly prepare for the unique challenges that exist once the client crosses over into the retirement phase of life — where the rules are quite different!
Also, the need for long-term care can raise distressing images, and some financial professionals may feel uncomfortable broaching the topic. They also may feel that they are not well-versed on the subject. Indeed, only 48% of advisers in that Lincoln Financial survey said they feel “very prepared” to discuss long-term care options with clients. So, the subject is set aside for another day — and often, that day never comes. And then it is too late.
One additional factor could be that traditionally, the standard answer for long-term care planning was to buy a stand-alone long-term care policy. That option has receded in popularity as the cost of premiums has risen dramatically, for both new and existing policies, making long-term care insurance unaffordable for many people. What led to those premium rate hikes? An assortment of causes. The data available for pricing earlier policies was limited, and insurers did not price them accurately. Also, insurers were wrong about how many people would use long-term care insurance and how long they would use it.
Other Options Besides Traditional Insurance
But if traditional long-term care insurance isn’t the go-to solution it once was, what alternatives can you turn to so that long-term care doesn’t upend your retirement? Here are just a few options to consider:
Annuities. Many, though not all, annuities have riders that can help clients address their long-term care need should it arise. These annuities still serve the client’s needs as a strategic retirement vehicle — but they also have an enhanced benefit of helping with such expenses as assisted-living facilities and nursing homes. One additional advantage is that the usual underwriting requirements are not necessary when adding the rider. This is great for people with health problems who might be rejected as too great a risk for insurance carriers. Further, the client will not have to stress about their premiums increasing unexpectedly, and quite often, prohibitively.
Asset-based long-term care insurance. Unlike traditional long-term care insurance, this is a life insurance policy designed so you can use the death benefit while you are still alive to pay for long-term care. But if you never need long-term care, the death benefit goes to your heirs tax free when you die. That’s a big advantage over traditional long-term care insurance, which is a use-it-or-lose-it proposition.
Life insurance with a long-term care rider. With the asset-based policy, the long-term care benefit is primary and the death benefit is secondary. But another option is a linked policy, where you buy life insurance and add a long-term care rider as a secondary benefit. This allows you to accelerate the use of the death benefit while you are alive to pay for long-term care.
With any of these options, it is important that the financial strength of the insurance carrier you go with is considered secure as rated by the top rating agencies.
The long-term care conversation is not a fun one to have, but it’s an important one. If you haven’t already had this discussion with your financial professional, it’s time to do it. There is too much at stake!
You and your family will be happy you did.
David Faulkner, CFP
Partner, Spectrum Advisors