Retirees and those nearing retirement face many risks. Health might decline. Inflation and other market risks can degrade assets reserved for retirement. Entitlement benefits might be reduced or lost. And longer life spans could result in some seniors outliving their nest eggs.
With people living longer, more retirement planners and insurance professionals are recommending long-term care insurance (LTCi) as a way to pay for care and preserve retirement assets. Before we talk about LTCi in more detail, let's review some basics about longevity, retirement, and the need to plan for retirement security.
For today's workers and retirees, planning for retirement requires assessing risks and managing them. The traditional concept of retirement -- retire at age 65 and live for perhaps 10 to 15 more years -- is obsolete. With current life expectancies, many seniors can expect to live 20 years or more after retiring. Living longer increases the chances that many people will need long-term care services, either at home, in a care facility, or both. Paying for these services can drain financial resources and trigger significant emotional strain within families. Retirement planners should discuss with their clients the potentially high costs associated with living longer.
A reason some people don't plan how to pay for some form of long-term care in their senior years is the assumption that they will be able to pay for it on their own or that any care they might need will be financed in some other way, such as by Medicare or Medicaid. For the vast majority of people, retirement assets won't be sufficient to cover more than short-term or minimal care. Medicare and Medicaid place significant restrictions and limitations on the amount of long-term care costs they will cover. The bottom line: When it comes to paying for long-term care, careful planning must replace assumptions.
Long-Term Care's Effect on Retirement
As people live longer, it is only natural that they might require assistance with daily living activities. Some people will need little or no help while others will need substantial assistance. This might include help with household chores from family members or friends, home health care visits by nurses and therapists, or extended stays in assisted living facilities and nursing homes. Today's health care environment provides a wide range of resources for individuals needing care. With effective advance planning, you can help your client manage the cost of required care.
Protect Retirement Assets
As much as possible, retirement assets must be protected from the effect of long-term care costs. This is important to:
o Safeguard assets for their intended use in maintaining retirement income;
o Avoid forcing the client to scale back his or her lifestyle to pay long-term care expenses; and
o Prevent asset depletion that could threaten the retirement security of a spouse.
Another reason to avoid paying for long-term care with retirement assets is the potential for taxation. Unexpected liquidation of assets might result in the classic double whammy -- a reduction of working assets and a higher tax liability as the liquidated assets are reportable as taxable income. Persons living on a fixed income or those following a specifically designed distribution plan can find it difficult to recover from such a financial setback.
Difficult Decisions
The sale of an asset for a reason other than its intended use in retirement can disrupt the entire retirement distribution plan. Retirees might be forced prematurely to revisit their plans and devise new strategies to sustain them through retirement. Significant amounts of time and money might be involved to rework the plan. For example, if assets reserved for estate transfer are invaded to pay long-term care expenses, additional cost might be incurred for an attorney's work to modify the plan.
If a client finds it difficult to make the lifestyle changes necessary to reduce expenses in retirement, then a more aggressive investment strategy might be required. Some retirees might not be comfortable with the shift in investment philosophy. If increased market risk is unacceptable, there might be other options depending on your client's circumstances. When assets are sold unexpectedly, however, the likely result is that people will be forced to make difficult decisions and live with new, less favorable plans.
New Planning Strategies Include LTCi
Retirement planning always has considered the factors associated with living a longer life, but those factors never have been as complex in their interaction as they are today. Part of the new retirement planning reality is LTCi, which, though not a new product, still is misunderstood by most consumers at all income levels and even by many professional advisers. For those who have experienced the emotional and financial costs of caring for an elderly person, LTCi is by far the best way to manage the risks and cover the costs of extended care.
Similar to other insurance, LTCi leverages a measurable premium payout to protect against an open-ended risk. After people understand that long-term care costs seriously can erode or even eliminate a retirement portfolio, they likely will regard LTCi as a valuable tool for protecting against that risk. Selling LTCi is like selling other insurance. If you personalize the need and show how the product meets the need, the consumer will believe in the product and buy it. In the context of retirement planning, it is vital to educate clients about the importance of LTCi as "retirement plan insurance." Any retirement plan, no matter how detailed, no matter how well-suited to the client's life goals, has a serious risk exposure in the absence of LTCi coverage.
As more people become aware of LTCi and its benefits, this form of coverage will take on a larger role in retirement planning. Advisers should help their clients understand all of the factors of their greater longevity and how LTCi can help make their retirement years more comfortable and rewarding by protecting the assets reserved for retirement.
LTCi and Taxes
Planners are not the only ones who are beginning to understand the need to protect retirement assets from the effect of long-term care costs. In both houses of Congress, legislation has been introduced that encourages people at all income levels to buy LTCi. The Senate and House bills both would provide an "above-the-line" tax deduction for premiums paid to purchase LTCi policies. The tax deduction would be phased in over five years. The proposed legislation also enables people to buy LTCi policies with pre-tax dollars through cafeteria plans and flexible spending accounts. These initiatives indicate that many legislators understand the superiority of individual insurance-based solutions over expanded government programs in financing long-term care costs.
Planners should help their clients decide which kind of LTCi policy -- qualified or non-qualified -- will serve them best. For a qualified LTCi policy, under current tax law, the "eligible premium" might qualify to be included with unreimbursed medical expenses, which might be tax deductible if they exceed 7.5% of adjusted gross income. Taxpayers must itemize deductions to get the savings. Also, benefits paid under a tax-qualified LTCi policy are not taxed. There's still some question whether non-qualified LTCi benefits are taxable. It's clear, however, that non-qualified LTCi premiums are not tax deductible.
Taking More Responsibility
Advances in medical care are expanding the retirement years for many retirees. But they also are increasing the financial risks of increased longevity. At the same time, seniors are taking more responsibility for addressing their retirement needs, including how to pay for long-term care. To help them, professional retirement planners should evaluate LTCi for its potential to help manage risk and pay for the extended care many retirees will need.
Thomas J. Fridrich, JD, ChFC, CLTC, is an advanced markets specialist focusing on retirement planning and charitable giving. Mr. Fridrich has earned his Series 6 and 63 licenses. He is a member of the Nebraska State Bar Association, the Society of Financial Service Professionals, and the National Association of Insurance and Financial Advisors.
