For some people on the brink of retirement, the future looks secure. That’s because they’re convinced that they’ve done a good job planning and preparing for that day when the retirement they’ve dreamed about will finally begin. But sadly, those dreams could go up in smoke for retirees who fail to plan for the biggest potential expense most will ever face: long-term care. In this 2021 article from Kiplinger, financial planner David Faulkner warns that financial advisers and their clients too often fail to address the perils of long-term care costs, an oversight that can ruin the best-laid retirement plans.
The topic is so important that we wanted to bring it back for further discussion. When it comes to long-term care, it’s essential that families take a close look at all the options out there.
Don’t Be Complacent About Long-Term Care Costs
Faulkner begins his article with a rosy picture. “With retirement approaching, you have reviewed your numbers and perhaps are feeling good about what you see,” he writes. “You have a comprehensive plan. One that accounts for taxes. Protects you from market risk and delivers you a strategic form of income to address your routine monthly expenses. And possibly, even the added costs of any bucket-list items that you hope to check off once you have more leisure time on your hands.”
It all sounds good, so far, until he adds this warning: “But despite all that planning, your retirement income plan may be missing an important, and hefty, expense. Long-term care.” According to Faulkner, this failure to deal with the very real danger of long-term care expenses is all too common.
Average Nursing Home Costs Reach $9,000 per Month
“Plenty of retirees, and unfortunately, a lot of the financial professionals who advise them, avoid the topic [of long-term care],” he writes, “even though practically everyone agrees it’s important.” Faulkner cites this 2019 HHS report stating that roughly 70 percent of people age 65 and older will require long-term care at some point, and at a potentially devastating cost. Genworth Insurance, a company that surveys care costs annually, pegs the average nursing home cost at nearly $9,000 per month, compared with assisted-living facilities in the U.S. which charge about half that. Those numbers could break just about any budget.
“Clearly,” Faulkner says, “it’s an expense that can rack up quickly, stealing away those dollars that prop up your retirement and maybe even wiping out any legacy you hoped to leave your heirs.” The key is proper planning and careful preparation, something most retirees overlook.
Advisers and Clients Don’t See Eye-to-Eye
Faulkner says that both financial planners and retirees are to blame for that oversight. “Unfortunately,” he says, “a disconnect exists between financial professionals and their clients on this issue.” Financial advisers claim they have talked about long-term care with about half of their clients, yet just over one-third of those clients say their advisers have actually discussed the topic with them. That data comes from this comprehensive study done in 2020 by the Lincoln Financial Group.
The Lincoln Study (all 79 pages of it) reveals other interesting facts about long-term care. Virtually all financial planners agree that planning for long-term care is important, yet almost 80 percent of these advisers say their clients resist discussing the topic. On the client side, 96 percent of Americans say it’s important to plan for long-term care – yet fewer than one in five have actually planned for it. Moreover, only about 10 percent of responding clients say they in fact have a plan in place to cover LTC costs.
Why It’s Not Easy to Talk About Long-Term Care
“So,” asks Faulkner, “what’s causing this disconnect, and why isn’t long-term care a topic of conversation between every adviser and every client?” Part of the answer lies in the focus of most financial advisers on building wealth. “For many financial professionals, the primary focus tends to lean toward helping clients accumulate money for retirement. But that fails to address the client’s comprehensive needs. To fully serve a client, an adviser should also properly prepare for the unique challenges that exist once the client crosses over into the retirement phase of life — where the rules are quite different!”
Another reason clients and advisers fail to address long-term care is that the topic can bring to mind what Faulkner calls “distressing images.” This makes some financial professionals uncomfortable about broaching the topic. In the Lincoln study, more than one-third of clients said they found the topic of long-term care “too difficult or depressing to talk about.” A similar number said the topic is too overwhelming, and they don’t even know where to begin.
Lack of Training, High Cost Can Also Impede the Conversation
In the Lincoln study, a high number of financial advisers reported that they feel ill-equipped to address the topic of long-term care. “Indeed,” says the Kiplinger article, “only 48 percent of advisers in that Lincoln Financial survey said they feel ‘very prepared’ to discuss long-term care options with clients. So, the subject is set aside for another day — and often, that day never comes. And then it is too late.”
It’s true, as the article points out, that the LTC insurance marketplace has grown much more complex. “Traditionally, the standard answer for long-term care planning was to buy a stand-alone long-term care policy,” says Faulkner. “That option has receded in popularity as the cost of premiums has risen dramatically, for both new and existing policies, making long-term care insurance unaffordable for many people.” Earlier policies were priced too low, he suggests, and were based on erroneous data about how many people would use long-term care insurance and how long they would use it. Newer, more accurate data has driven up the cost.
Other Options Besides Traditional Insurance
“If traditional long-term care insurance isn’t the go-to solution it once was, what alternatives can you turn to so that long-term care doesn’t upend your retirement?” Faulkner writes. He explains a few options retirees might want to consider. We’ll hit the highlights here, and suggest that you discuss these in more depth with your financial adviser.
- Annuities. According to Faulkner, some annuities now include riders that can help clients address their long-term care expenses. These specialized annuities “have an enhanced benefit of helping with such expenses as assisted-living facilities and nursing homes,” he states. Many also involve less stringent underwriting requirements than insurance policies, which can be a big help for people with health problems.
- Asset-based long-term care insurance. “Unlike traditional long-term care insurance,” Faulkner explains, “this is a life insurance policy designed so you can use the death benefit while you are still alive to pay for long-term care. But if you never need long-term care, the death benefit goes to your heirs tax free when you die. That’s a big advantage over traditional long-term care insurance, which is a use-it-or-lose-it proposition.”
- Life insurance with a long-term care rider. As Faulkner describes it, these policies are a twist on asset-based policies. “With the asset-based policy, the long-term care benefit is primary and the death benefit is secondary,” he says. “But another option is a linked policy, where you buy life insurance and add a long-term care rider as a secondary benefit. This allows you to accelerate the use of the death benefit while you are alive to pay for long-term care.”
As we said at the outset, the key is planning. “The long-term care conversation is not a fun one to have, but it’s an important one,” he states. “If you haven’t already had this discussion with your financial professional, it’s time to do it. There is too much at stake! You and your family will be happy you did.” We concur with that statement one hundred percent.
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(originally reported at www.kiplinger.com)