New ways to estimate and fund long-term care costs

Advisers are challenged to protect against one of the biggest risks to a retirement plan.

Nothing strikes fear in the heart of retirees more than the three letters: LTC. The potentially crushing costs of long-term care in a nursing home, memory care unit or even at home — most of which are not covered by Medicare — can easily destroy a retirement plan.

But the unpredictability of who will require costly care and the diminished availability of traditional long-term care insurance policies create a challenge for even the savviest financial advisers.

An estimated 70% of people 65 and older will need some form of long-term care as they age, according to the Department of Health and Human Services. The national annual cost for a private room in a nursing home is $97,452, according to the 2017 Genworth Cost of Care Survey, which includes a state-by-state breakdown of costs for various levels of care. The average length of a nursing home stay is 2½ years.

The traditional funding choices for long-term care expenses are self-funding; traditional long-term care insurance; a hybrid insurance policy or annuity with a long-term care rider; or Medicaid for those who have few assets and little income.

The crucial component to the self-funding option is to fully understand the potential costs, the potential risks to other goals and the impact on a client’s family, particularly in the case of home care, where 80% of care is delivered by unpaid family caregivers.

“It is important that the rate of inflation used for your health care goal properly reflects expected health care inflation of at least 5%,” warns a guide for advisers and clients, “Taking Control of Health Care in Retirement,” that RBC Wealth Management published earlier this year.

Philip Lubinski, a veteran financial adviser in Denver and co-founder of the IncomeConductor retirement distribution software program, agrees it is critical to use a higher-than-average inflation assumption for future health care and long-term care costs. His software program allows advisers to create, track and manage customized income plans and make changes as needed, including assigning different inflation factors to up to 15 expense categories.

Mr. Lubinski offered this example using the IncomeConductor program. A 65-year-old married couple who wants $7,500 per month of gross income, adjusted annually for 3% inflation, would need a nest egg of $1,929,917 to start. The income would grow to $15,246 in the 25th year, and there would be a zero balance at the end.

But one spouse needed long-term care for the last three years of the plan, it would cost an additional $7,500 per month in today’s dollars. That would require an additional upfront deposit of $155,000 if the adviser used a 3% across-the-board inflation assumption.

Instead, Mr. Lubiniski plugged in the 6% average annual increase of long-term care costs in his home state of Colorado and discovered that an extra $300,000 would be needed upfront — not $155,000 —to cover the anticipated future long-term care cost.

“IncomeConductor can not only model every concern that retirees have, but it automates the analytics to help advisers manage the retirement income for the life of their clients,” he said. “We owe retirees a lifelong commitment of service if we expect to manage their lifelong savings.”

Separately, the Society of Actuaries is investigating new ways to finance long-term care that are more practical, affordable and effective than current models for both consumers and the industry. SOA recently convened a think tank of long-term care experts to come up with ideas. The result was two new long-term care product concepts, according to a yet-to-be-released report, “Long-Term Care and the Middle Market.”

The Life-Stage Protection concept is an insurance policy that starts as term life insurance during an individual’s prime income-earning years and then switches to long-term care insurance in later years. It would offer long-term care benefits ranging from $100,000 to $300,000, with monthly premiums from $63 to $185. About three-quarters of the consumers surveyed like the ability to lock in long-term care insurance early and at lower premium levels that current insurance products.

The Retirement Plus concept is a flexible retirement plan like a 401(k) or IRA but it has long-term care insurance directly built into the product. The concept offers long-term care insurance benefits ranging $100,00 to $200,000, with minimum contributions ranging from $119 to $225 per month. Three-quarters of consumers liked the idea of having access to additional funds to pay for long-term care in case of exhausting their savings, as well as the ability to transfer retirement funds to beneficiaries upon death.

While these SOA product concepts have been actuarially modeled and tested for consumer reaction, they cannot be introduced into the insurance marketplace until certain regulatory and tax codes changes are enacted. In the meantime, it is up to financial advisers to educate their clients about the risks of what unplanned or unaddressed health care costs can do to an otherwise successful retirement plan.