Consider this advice
For many people approaching retirement, health care is a financial wild card— there is no way to predict their health, or health care costs, during this life phase. In fact, results from The 2006 Merrill Lynch New Retirement Study show that 53 percent of respondents worry about their ability to cover ongoing health insurance premiums, and 71 percent would be willing to work a few extra years in retirement in order to save more money for health care costs.
When analyzing the future of your health care costs during retirement years, an important consideration is the possibility for the need of long-term care. In 2000, a 65-year-old woman could expect to live an additional 19.5 years, while a 65-year-old man could anticipate living another 14.5 years—and longevity projections continue to increase. In addition to longer life spans, there is another statistic that can significantly impact your overall retirement strategy: about 60 percent of Americans over the age of 65 will need long-term care at some point in their lives, and the average period of such care is 2.5 years.
Because long-term care can be extremely costly, adequately preparing for it is an essential consideration to maintain your long-term financial goals.
Rising Costs of Long-Term Care
In fact, sources report that the costs of long-term health care are on the rise. A 2007 survey by Genworth Financial found that the average rate for a private room in a nursing home was $205 a day, or about $75,000a year. A 2004 survey by Metropolitan Life Insurance Co. found that in some areas of the U.S., nursing home costs are as high as $331 per day, or over $120,000 per year. Assuming an increase of 6 percent per year, costs will double in about 12 years. Thus, by 2017, the average cost of a nursing home could be nearly $140,000 per year, and much higher in some areas.
Even when long-term care is received at home, the cost of non-institutional care can be significant. Metropolitan Life puts the average hourly rate for home health aides at $18 per hour. If aides are paid that rate for 11 hours a day or more, the cost of home care would exceed the already-high average cost of nursing care noted above.
Purchasing Long-Term Care Insurance
For many people, the thought of spending six figures a year for such care—perhaps over the course of many years—is truly daunting. Married couples also face the prospect of one spouse incurring extensive costs in a long-term care facility while the other spouse continues to live independently and bear the expenses of maintaining a home.
Such financial risks may be minimized with the purchase of long-term care insurance. Long-term care policies offer a wide variety of plan options. Some policies may pay for care not only in a nursing home, but also in an assisted living facility or at the home of the individual who needs care. Policies may include cost-of-living adjustments, which would increase future benefit payments, and some companies also offer long-term care policies that cover both spouses at a discounted rate versus two separate policies for each spouse.
There are also life insurance policies which can include long-term care insurance features. Although these policies will cost more, with such coverage, long-term care expenses will be covered if necessary, reducing the policy’s death benefit. If long-term care is never required, the policy owner’s beneficiary can receive the full death benefit upon the insured person’s death.
Long-term care insurance should be arranged well before the traditional age of retirement, as the percentage of people who are denied coverage increases among older applicants. Purchasing long-term care insurance during your younger years, while you are still healthy, can help you ensure that you will be eligible for coverage as you get older.
Protecting Your Assets
Another way to mitigate future health care costs is to budget possible long-term care costs into your long-range financial strategy, which will extend into your retirement years. In effect, this option amounts to self-insuring for long-term care, as personal assets will be used to pay the bills.
Under certain circumstances, self-financing can be a viable option. Wealthy families may be able to pay $70,000, $140,000 or even $200,000 per year for long-term care without suffering a major decrease in net worth. A move into a nursing home also may permit the sale of one or more residences, freeing up cash for long-term care purposes.
However, it is important to consider that securing adequate long-term care insurance can protect a family’s assets from being dissipated by an extended period of care. The wealth that remains intact can provide a legacy for a surviving spouse, children, grandchildren or favorite charities.
Talk to your Financial Advisor about whether purchasing long-term care insurance makes sense considering your individual circumstances, as well as how to evaluate which policy options may work most effectively to preserve your wealth.
The 2006 Merrill Lynch New Retirement Study: A Perspective from Individuals and Employers was released in May 2006. For more information on the study, visit: www.totalmerrill.com/retirement.
Merrill Lynch and its representatives do not provide tax, accounting or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S. federal, state or local tax penalties. Please consult your own independent advisor as to any tax, accounting or legal statements made herein.
Andrew J. Bucklee is National Sales Director, Merrill Lynch Insurance Group.
©2006 Merrill Lynch, Pierce, Fenner & Smith Incorporated. Member, Securities Investor Protection Corporation (SIPC). Reprinted by permission.