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Avoid This Parent Trap: Prep for Long-Term Care Expenses

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April 2, 2015
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There’s a potential retirement crisis in the offing and it’s not necessarily your own. As you map out your plans for financial security in an uncertain future, you should also be thinking about your parents.

Why? Because people are living longer—and it’s surprising even them.

According to the Social Security Administration, men who reach 65 today can expect to live, on average, to 84 years or longer. Bump that even higher for women, who, on average, will see at least their 86th birthday. And, as SSA reminds us, those are just averages. One out of every four 65-year-olds today will live past age 90. One of 10 will reach 95 or older. Living longer can mean added health care costs, including sometimes-pricey in-home services, that may stretch an entire family’s savings.

"There's a growing need for income that is guaranteed to last a person's entire life, as people are living longer and are concerned about outliving their assets," agrees Matt Sadowsky, president for The Insurance Agency of TD Ameritrade.

As Problems Go, Not a Bad One

Many Gen Xers and the Ys right behind them already know these longevity statistics and are factoring them into retirement planning. Younger Boomers, too. Their parents, however, didn’t count on living this long, and many of them are ill-prepared. Are your parents among the 13% of Americans who actually have long-term health care insurance?

They may be able to subsist on Social Security and/or a nice pension with some supplementary income through dividends or withdrawals from Individual Retirement Accounts (IRAs). But what happens when Alzheimer’s, mobility issues, or some other health curveball barrels in? What happens if the value of a home or a stock portfolio goes south just when those assets are needed most? That’s when the real financial pain begins. Long-term care can be very, very expensive. 

Even if long-term health insurance has been purchased, it’s likely that the costs are skyrocketing and the policies are getting tighter. That’s because the insurance industry itself didn’t always factor in "persistency." The industry was expecting more LTC policies to lapse. It wasn't expecting that people would keep paying the premiums and keep them in force to the extent that they did. So as a result, more people are cashing in the insurance when they needed long-term care and it has had an effect on the industry. For example, Genworth, the largest seller of long-term coverage, is scrambling to shore up reserves and stem billion-dollar losses as policies written decades ago are now dragging it into a deep hole. 

Think About Future Income Now

Income-paying annuities may be a piece of retirement planning worth a closer look.

Annuities that were set up to generate income for the “nice-to-have things” in retirement like vacations, hobbies, or visits with grandchildren can instead be used to cover health care costs if needed, Sadowsky says.

There’s also been some uptick in sales of the so-called “nursing-home annuity.” This is a Medicaid-compliant, single-premium immediate annuity, or SPIA, that’s an emergency purchase when long-term care is needed. In this case, the assets are no longer accessible by the individuals. Instead, those assets become the property of the insurance company in exchange for a guaranteed lifetime income stream. So the individuals essentially forfeit the asset, which should bring their total net worth down low enough to qualify for Medicaid. Even though they don't still hold the assets that went into the annuity, they get some benefit from them.

Just keep in mind that the best family time may be spent asking some tough questions about multi-generational retirement planning, including meeting long-term health care needs.

After all, a birthday cake crowded with candles is a good thing; financial surprises in our golden years are not.

Annuities: When You Need Some Guarantees in Life

Whether you’re staring down retirement or still years away, exploring guaranteed income from a fixed or variable annuity may make sense for your planning.

The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.

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