A world of hurt over health care
Rising medical expenses and confusion over coverage have left many seniors grasping for answers.
Possible changes to Medicare. Rising health-care costs. It's no wonder seniors are baffled when it comes to how they will fund their medical expenses in their later years. Add to that misunderstandings about what Medicare covers and LTCI and advisors have their work cut out for them. Here are some common misconceptions and how you can clear them up for you clients.
The mysteries of Medicare
A recent National Association of Insurance Commissioners survey showed that baby boomers are confused about their Medicare eligibility. Specifically, 28 percent said they didn't know at what age they would become eligible for Medicare, and another 36 percent gave incorrect answers. Coverage alternatives were also unclear to respondents, with 66 percent reporting that they were "not very familiar" or "not at all familiar" with options such as Medicare Parts B and D, Medicare Advantage and Medigap insurance. "Many boomers incorrectly think Medicare coverage is available at age 62, when they initially become eligible for Social Security benefits," said NAIC president Sandy Praeger. (Medicare eligibility kicks in at age 65.)
Adding to a general lack of knowledge regarding Medicare is the current debate about the program's pending insolvency, which was recently moved up five years. If the growth in health-care costs is not curbed, said Treasury Secretary Timothy Geithner in a recent statement, "our commitments will become unsustainable."
Regardless of which proposal to shore up Medicare wins out, changes are coming to the program and seniors have reason to be concerned. "A significant change in public policy like Social Security and Medicare benefits could be disastrous for many retirees," according to vice president of LIMRA Retirement Research Marie Rice.
When taken as a whole, a senior's health-care requirements require solid financial planning because the expense can be huge. For example, the nonprofit Employee Benefit Research Institute totaled up expected health-care costs, including long-term care, for a couple turning 65 in 2009. In order to have a 50 percent chance of covering these costs, the study concluded, this couple would need $210,000, and to have a 90 percent chance, $338,000 would be required. And because of various unknown factors, such as longevity, disability and health-care inflation, "many individuals will need more," EBRI researchers noted.
Out-of-pocket costs are where seniors have felt the pinch of rising health-care costs most. According to a recent SmartMoney magazine article, "evidence suggests that most people saving for retirement don't realize how much Medicare doesn't cover. Medicare co-pays can range from 20 percent to 45 percent of the cost of many types of outpatient medical care."
Medicare Advantage premiums have also been putting pressure on seniors' health-care budgets, with a 14.2 percent spike last year, according to Washington health advocacy group Avalere Health. This increase, said Avalere vice president Lindsey Spindle, "fit[s] into a broader trend of increased financial pressure on the insured through rising co-pays and increased premiums."
LTC: Delusion and denial
When it comes to LTC, there is not so much a possibility that a senior will need care as a probability. But many Americans have no idea how they will pay for LTC. The common misperception that health insurance, Medicare or Medicaid will cover the cost of LTC, held by some 36 percent of respondents to a 2011 survey by insurance giant Aviva, may explain why more people do not purchase LTCI. "Despite years of publicly and privately funded efforts to raise consumer awareness about the importance of planning for long-term care needs, Americans seem to understand almost all forms of insurance better than they do long-term care insurance," observed Prudential LTC vice president Malcolm Cheung.
Despite its value to estate preservation, a recent Lincoln Financial survey showed that less than half of Americans had taken steps to prepare themselves for an LTC event, even as most Americans acknowledge the risk. More than half of respondents to Senior Market Advisor's 2011 Senior Survey (p.34), for example, were not covered by LTC insurance.
For those who fail to acknowledge their risk, denial is the main factor, according to Howard Gottlieb of LTC Partners in Pinole, Calif. "People deny that they'll ever be in LTC. They don't believe that it will be them who will need it," he explains. "People will be in their 70s and say they're as healthy as a horse. But it's not about your health, it's about longevity." Roughly 13 percent of respondents to Senior Market Advisor's survey made this mistake, saying they didn't think they would need LTCI.
In general, the LTC insurance market is a huge mystery to many seniors. According to a 2011 Prudential LTC survey, four in 10 respondents said they were unsure of the cost of LTC insurance and could not even venture a number. Of those who did manage a guess, the average estimate was $3,900 annually, well above the actual cost of owning a policy. "On average, respondents estimated the average daily rate for a semi-private room in a nursing home at $450--more than double the actual average of $215," according to Prudential researchers. When those nearest retirement who didn't have insurance were asked why they did not have coverage, half cited cost as the main barrier.
What is the consequence of ignorance and denial? Procrastination, which can be a real problem for those seeking LTC coverage. Forty percent of respondents to the Prudential survey said that they believed the right time to buy LTC insurance is after age 60. Waiting, however, can result in prohibitively high premiums or, worst of all from a planning perspective, not being able to pass the underwriting requirements.
According to Phyllis Shelton, author of "Long Term Care: Your Financial Planning Guide," "it's prudent to buy coverage as soon as you can afford to" because arrangements for care are best made before one's health begins to falter.
CASE STUDY: Doris S.
When Alzheimer's sufferer Doris S. turned 89, she became unable to care for herself and entered an assisted-living facility located in an upscale residential home near the beach in Los Angeles. There she was nursed by geriatric care personnel, was seen by medical professionals on a regular basis and received daily-living assistance. Doris lived in the home for four years at a cost of $4,000 per month. Fortunately for her and her heirs, her LTC policy paid for nearly all of her $200,000 stay in the facility.
- According to the Department of Health and Human Services, there is a 70% chance that an individual over 65 will require some form of LTC.
- When asked how they would pay for long-term care, 56% of respondents said they would sell their homes, and a shocking 18% said they would declare bankruptcy.
- Lincoln Financial Group survey, 2010
- Why have you elected not to purchase LTCI?
58% said it was "Too expensive"
13% said "Don't think I'll need it"
5% said "No one's tried to sell it to me"
- Senior Market Advisor's 2011 Senior Survey
- Nationally, annual median costs for care settings surveyed were:
Assisted Living: $39,135 - up 2.4% from $38,220 in 2010
Private Nursing Home: $77,745 - up 3.4% from $75,190 in 2010
In-Home Care: Remained flat at $18 per hour
Home Health Aide Services: Remained flat at $19 per hour
- Genworth Financial's 2011 Cost of Care Survey
Budget cuts could severely impact senior women, says coalition
A coalition of women's groups is pressing the Administration for a seat at the table when federal
budget deliberations take place.
In a telephone press conference on May 24, members of the Older Women's Economic Security (OWES) Task Force of the National Council of Women's Organizations said that cuts to Social Security and Medicare would disproportionately harm older women, particularly low-income senior women. Therefore, women need to be represented during budget negotiations.
According to NOW President Terry O'Neill, the group may get a meeting with White House staffers. However, the coalition remains committed to holding a direct meeting with President Obama and Vice President Biden, she said.
During the conference call, Bobbie Brinegar, executive director of the Older Women's League (OWL), said that since women live longer than men, they rely "more heavily" on Medicare and Social Security, noting that 56 percent of Medicare beneficiaries are women. She further pointed out that women are less likely to have an employer-sponsored pension and even for those that do, it's likely to be smaller due to a shorter work history and lower wages than men.
"For OWL supporters, Social Security and Medicare are bedrocks," she said. "Cuts to these programs would have devastating effects and place an enormous burden on senior women."
Gwendolyn Mink, chair of the Women's Committee of 100, said that nearly half of all older women are dependent upon Social Security for at least 80 percent of their income. "Without Social Security some 58 percent of all women over age 75 would be living in poverty," she said. "The economic precariousness of life in a shredded safety net needs to be a core part of the deliberations to reduce the deficit. We need to be at the table and in the conversation to challenge the impacts of deficit reduction decisions on economically vulnerable women."
The speakers said they oppose raising the retirement age or reducing Social Security benefits based on a senior's income.
O'Neill said that raising the retirement age would in some cases amount to a 30 percent cut in benefits. As for basing benefits on a recipient's income, she said that "Social Security is an income replacement insurance plan. It's for all of us and the idea of making it need based turns it, frankly, into a poverty program, which will eventually be squeezed down to nothing as we've seen other poverty programs squeezed down."
Instead, the group favors lifting the cap on FICA wages. Today, Social Security taxes are imposed only on the first $106,800 of gross wages. "If you scrap the cap, the system is solvent for the next 75 years," O'Neill said.
Mink said that changing the benefit schedule would "create stratification among retirees."
O'Neill suggested other changes to Social Security, such as establishing a caregiver credit. "So many women drop out of the workforce, which then reduces their Social Security payments for their old age," she said.