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Long-Term Care Probably Won't Bankrupt Your Clients, but Planning Is Key

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One of the biggest fears among retirees is that health-care expenses associated with long-term care will deplete their savings.

New research from T. Rowe Price finds that 65 percent of retirees are concerned about the cost of long-term care and services such as nursing homes, assisted care and home health care, and 51 percent are concerned about out-of-pocket health-care expenses.

This is not surprising given that the median annual cost of a semi-private room in a nursing home tops $90,000 and the median assisted living charges now approach $50,000 a year.

“With that in mind, fear of these unknown costs could be having an effect on retiree spending patterns,” the research report said. “Other research around retiree spending shows that many retirees cautiously spend their money. In particular, those with higher assets tend to spend down at a slower rate.

“This behavior is likely driven by uncertainty on many fronts, such as market risk, longevity risk and the future cost of medical care and long-term care. It’s more about fearing the storm of the century than a rainy day,” it explained.

The research pointed to three key insights:

  1. The likelihood that health-care costs in the final two years of someone’s life will inevitably deplete their finances in retirement is low, although the concern is undoubtedly real.
  2. Among non-Medicaid recipient retirees, nearly half have no nursing home expenses during their final two years of life. Even after age 90, there is a less than 10 percent chance that health-care costs will exhaust their assets.
  3. When planning for late-in-life health-care expenses, one should weigh costs vs. preference when it comes to insurance, care provided by family or a facility and whether there is a strong desire for asset preservation or a bequest.

Although the numbers suggest it’s unlikely that health-care expenses incurred during the last two years of life will exhaust people’s assets among the non-Medicaid population, the possibility can’t completely be ruled out. Therefore, it’s necessary to plan.

“One has to determine whether or not they have enough money to self-insure or if a better option is to purchase long-term care insurance (LTCI) or a hybrid product that can offer both long-term care coverage as well as a death benefit,” the report said. ”An alternative consideration may be to purchase a product designed specifically to provide income in later years, such as a deferred income annuity.”

T. Rowe Price recommends discussing these topics.

If purchasing insurance, evaluate the details. LTCI policies become more expensive as people age. The other caveat to waiting is that health changes could affect eligibility. If looking to reduce the risk of catastrophic costs, consider a policy with a long elimination period and several years of coverage.

If choosing to self-insure, plan ahead. Set aside an account earmarked for long-term health-care expenses. If a health savings account exists, money from that account should be exhausted first, because an HSA is not ideal to pass along to beneficiaries.

HSAs can pay for qualified medical expenses and LTC insurance premiums but not hybrid policy premiums. Once that is determined, it’s important to have conversations with family members about expectations for future health care.

Who will provide care? Can a family member or spouse can provide some degree of in-home care or is that not possible or preferred? If not, nursing home and other long-term care facilities may be an option. Those are likely to be more expensive and may not be covered by Medicare. LTCI may be able to help offset these costs.

Asset preservation and need for bequests. This is an important consideration for couples if they are concerned that one’s medical costs may not leave enough for a surviving spouse or partner. For those with higher assets or those who don’t want to burden their family with medical costs, some type of insurance may be a way to protect their wealth.