Americans have challenges when it comes to saving for retirement, but at least some workers have 401(k) plans and individual retirement accounts (IRAs).
Karl Polzer, a long-term care (LTC) policy consultant in Washington, cites a survey showing that the typical head of household ages 55 to 64 who has any of those types of retirement accounts has an average balance of about $300,000.
Polzer starts with that statistic and proceeds to add some weight to a common LTC finance dream: The idea of having the government change tax policy to let retirement account holders use part of the money in the account to pay for LTCI coverage.
Consumers already use retirement accounts to buy stocks, bonds, mutual funds, and even real estate and fine art. Why not let them make the money stretch further by letting them use some of the money to buy an insurance product that could protect the rest of the money, or at least amplify the power of the money to protect the saver against catastrophic long-term care expenses in old age?
Consumers can already buy life insurance and annuity products that include some benefits for long-term care. The rise of a retirement account-LTCI market would create options for consumers who do not need additional life insurance and find that keeping money in a retirement account suits their needs better than putting the money in an annuity.
Polzer looks at the concept in a paper included in a Society of Actuaries monograph on long-term care.
Securities brokers and mutual fund companies may hate the idea of letting retirement account money flow to insurers, and issuers of LTCI may need some time to get used to the idea of selling coverage with virtually no lapsation.
A popular retirement account LTCI program could also lead to changes in how money flows throughout the investment markets. Consumers who take money that they now invest in both stocks and bonds via mutual fund companies and put it in the general accounts of insurers, would likely invest the bulk of the money in high-grade corporate bonds.
But there are also many ways the concept could help consumers, and increase sales of private LTCI.
For ideas about how that could happen, drawn from insights in Polzer’s paper, read on.
1. Consumers thinking about buying LTCI would know where they would get the money to pay for the LTCI.
Private LTCI coverage does not necessarily cost any more than a typical moderately affluent couple might spend on gourmet coffee or beer, but not everyone can afford to drink lattes and Belgian beer every day.
Even GenXers and Millennials who can afford to pay LTCI premiums today may wonder, given the volatile state of the economy, how long they will have the income to do so.
If consumers could use part of the money already in retirement accounts to pay LTCI premiums, they might be more likely to buy the coverage, because they would know where the money for the premiums would be coming from.
2. People could think about the risk of needing long-term care along with the joys of retiring on a houseboat in Florida.
Many people fail to plan for LTC needs simply because they have no interest in thinking about LTC needs and ward off discussions about the topic with statements such as, “My long-term care insurer is Smith & Wesson.”
A retirement account-LTCI program would get past that wall of denial by making LTC planning a small, routine, easy-to-accept part of ordinary retirement planning.
3. Insurers and agents could make a case that the LTCI component would make the consumers’ retirement arrangements more recession-resistant.
Polzer says one possible argument against letting people use retirement account assets to pay for LTCI premiums is that the reduction in assets in an account weakens the saver’s ability to withstand investment market downturns.
Any retiree depending on a defined contribution retirement account could be affected by an economic downturn, Polzer says.
In some ways, he says, adding an LTCI component might help compensate for ups and downs in the economy.
If the economy were very bad, professional LTC services might be cheaper, and friends and relatives might have more free time they could use to provide informal care, Polzer says.
If the economy were good, investment gains could offset the money spent on LTCI, and the retiree could use the LTCI coverage to cope with increases in LTC costs occurring as a result of the economic boom, Polzer says.
See also: Stocks, Rollovers Pump Up IRA Assets.
4. The arrangement might free up government resources for activities (or tax cuts) that will leave consumers with more disposable income.
Right now, one of the barriers keeping consumers from buying private LTCI and other insurance products is that the government collects so much tax money to pay for social welfare programs. Increased spending on Medicaid nursing home benefits could make that situation worse. Successful private LTCI programs could lighten the load on the government.
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5. The existence of the new accounts could give rise to a new catastrophic LTCI or LTCI stop-loss market.
The government could complement a new retirement account-LTCI market with plans meant to protect consumers from LTC needs that exhaust the benefits of the LTCI purchased with the retirement account money. If the government chose not to provide the backstop protection, private insurers could create products to fill that niche, Polzer says.
See also: CNO makes LTCI reinsurance deal.