As people near retirement age, they naturally start thinking more about where all the money will come from once they stop working. Of course, the federal government helps consumers a bit, but anyone counting solely on Social Security and Medicare or Medicaid could be in for a rude awakening.
"Every report that is published talks about the enormous Medicare and Medicaid shortfall in terms of funding," said Jesse Slome, executive director of the American Association for Long-Term Care Insurance. "Social Security is considered the third rail of politics. You can't count on the government."
That's why it's important for your clients to start thinking about funding retirement and health expenses early on and to plan for the use of fixed insurance products that will help cover the range of needs that one has as they get older.
"It's a good base, but for many people, they need to understand that that's all that Social Security is -- a base," said Jim Johnson, vice president of advanced sales at Allianz Life. "For people making a reasonable income today, Social Security payments in retirement aren't sufficient to give them their current standard of living."
By taking advantage of the products in your portfolio, your clients can fill any gaps left by government assistance. Annuities and long term care are good starters -- so take a look at how your portfolio can supplement government benefits to fill the gaps left in your clients' retirement income plan.
Supplementing Social Security with annuities
As the experts show, your clients can't expect Social Security to cover all their retirement expenses. Many recommend using income annuities with Social Security benefits, even using annuities for the basics, freeing up their Social Security payments for travel or luxury purchases.
"Something I have seen is a reduction in credit company pension plans. With that reduction and elimination, a lot of pre-retirees are realizing they need to do their own savings," said Chris Rand, senior financial planner with MetLife. "Utilizing income annuities and/or tax-deferred variable annuities with income riders is maybe a great complement to help generate the income stream that is not there like it used to be for your grandparents."
Most people don't consider annuities until they retire, but they are products that your clients should be thinking about much sooner, as they can help greatly in the long run.
Rand offers this example: "Let's say I have a client who needs a guaranteed income of $5,000 a month. They know that $3,000 may come from Social Security, so they have a $2,000 income gap. If they are 15 years away from retirement, income riders on annuity contracts can predict how much money they need to put in to solve for that income gap."
Johnson explains that there are five elements to one's risk management focus: automobile, homeowner's, medical and disability, life, and long term care insurance. Annuities fit into a sixth level of risk management -- the risk of guaranteeing the money will last as long as the client does -- which can often top out at 30-plus years after retirement. Someone who is currently 45 and wants to retire at 65 would receive 240 more paychecks. To take you into retirement until you were 95, that's 360 checks you would need after the fact, said Johnson.
"We believe that variable annuities handle two things," he said. "How do I accumulate money from 45 to 65 [years of age] and how do I get the money out from 65 to 95? That's why [annuities] are important to explore."
LTCI and Medicare/Medicaid
LTCI can often be used to supplement Medicare/Medicaid in order to cover health costs that can't be met by relying solely on government funding programs.
"First of all, when you are talking about long term care insurance, you are talking about planning for the future," said Slome. "So you cannot look at today's conditions and expect them to have any relevance to what you are going to face in the years ahead. That's the most important thing for consumers to understand."
Today's average LTCI applicant is in their 50s. Those consumers must understand that between now and retirement, much can happen to the Medicare and Medicaid systems, and the news is not likely to be good.
When it comes to Medicare/Medicaid, Slome divides the market into two distinct categories: those who are already eligible (or getting very close) and baby boomers, who haven't even begun to think about what Medicare and Medicaid can do for them.
"Market A is the easy one because they already are acutely aware of how little Medicare pays," Slome said. "We keep hearing it's only going to get worse, and people are aware of the shortcomings. The message they need to understand is that Medicare really only pays a limited amount of long term care benefits, and it is not designed for your long term care needs."
When it comes to Medicaid, some states are more generous than others, but most will not cover home care or assisted living. In addition, those programs may force patients into crowded government facilities and give them little choice over geographical placement, potentially putting them far from family members.
"You are trying to transfer the risk of being in a nursing home that is not up to the level of your choice," Johnson said. "Long term care gives you a choice as to where you go. Medicaid doesn't give you that choice."
Rand also pointed out that while Medicare pays for basic expenses such as doctor and hospital bills and prescriptions, it won't pay for such things as extended stays in a nursing home.
To baby boomers, Medicare is just some amorphous program, and they typically have no clue as to what it pays for and what it doesn't. For that group, Slome recommends a tougher message.
"Just as you can't count strictly on Social Security, there really are no government programs in place for your long term care needs, and those that exist are woefully inefficient," Slome says. "Long term care insurance can piggyback the Medicare program. If you want choice, control and independence, and asset protection, it's important to purchase long term care insurance."
Final thoughts
Many in the industry predict that we are closer to a Social Security or Medicare crisis than the government will have us believe. That's why it's important that you help your clients plan for their futures and not count on federal money that might not be as prevalent as they hope -- and using your existing portfolio can certainly help supplement those programs' benefits.
"One solution does not cover all your needs," Johnson said. "The sooner they come to the financial planner for help, the sooner they will have a program that will be more holistic. You should not only have fixed index products, but there should be some growth potential there, as well."
Keith Loria is a freelance writer and frequent contributor to the Agent's Sales Journal. He can be reached at freelancekeith@aol.com.
