Even in Good Times, a ‘Silent Stalker’ Can Raid Your Retirement Plan

If you’re someone who pays attention to the U.S. economy and thinks about the effect those numbers could have on your financial future, you’ve probably been feeling rather optimistic lately.

The stock market has bounced back from its recent downturn. The nation’s unemployment rate ticked lower in June, with 4.8 million jobs added to the payrolls. The housing market has showed signs of recovery. And, thanks to the Tax Cuts and Jobs Act, income tax rates should stay at historic lows through 2025.

Most of the retirees and pre-retirees I meet — many of whom watched their stock portfolios soar in 2019 — tell me they’re feeling increasingly confident about their ability to maintain a comfortable lifestyle without running out of money. And isn’t that the goal for retirement?

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Yes, but ...

Too often, I find folks with that fat-and-happy attitude about the future having forgotten all too quickly about a silent stalker that could raid their savings and eat up their money — and fast — if they don’t put a plan in place to protect themselves.

What is that sneaky portfolio (and legacy) killer? It’s the cost and expenses of extended long-term care — the assistance many retirees will need to manage the tasks of everyday life, such as bathing, dressing and personal care, including restroom visits. For those less ambulatory, this may also include transferring to and from a bed to a chair.

Unfortunately, the odds are pretty good that you or your spouse will need this type of care at some point during your retirement. According to the U.S. Department of Health and Human Services, someone turning age 65 today has almost a 70% chance of needing some type of long-term care services (opens in new tab) and support in retirement, and 20% will need help for longer than five years.

What does that price tag look like? Well, it varies depending on where you live, but in 2019, the annual Genworth Cost of Care Survey (opens in new tab) found that the median monthly cost in the U.S. was $7,513 for a semi-private room at a nursing home, $4,385 for a home health aide, and $4,051 for an assisted living facility.

And researchers say you can expect those costs to keep rising, in part, ironically, because the economy is doing so well and qualified health care providers, who are in high demand, are asking for higher wages. A 2019 study by Georgetown University Medical Center (opens in new tab) reported: “Nursing home care is arguably the most significant financial risk faced by the elderly without long-term care insurance or Medicaid coverage.”

So, how can you get the coverage you need?

A basic health insurance policy generally doesn’t cover the long-term care costs of nursing homes, assisted-living facilities or in-home care. Medicare won’t pay for what it calls “custodial care” unless you require skilled services or rehabilitative care, and even then, there are limits (opens in new tab). And Medicaid won’t kick in unless your income is below a certain threshold and you meet minimum state eligibility requirements.

That means the only sure way to protect yourself, your family and your assets is to purchase private insurance specific to long-term care. For many retirees, in times past, that meant paying the premiums on a stand-alone long-term care insurance policy designed to cover long-term services, including personal and custodial care.

However, in recent years, that strategy has become problematic. Fewer and fewer companies still offer traditional long-term care policies, and it has become increasingly difficult to qualify for coverage (opens in new tab). Premiums, which are lower if you buy in when you’re young, can increase and become unmanageable when you’re older. And, just like car, health or homeowners insurance, if you end up never needing the policy, you lose all the money you’ve paid in. This is a turnoff for many retirees, who often decide to forgo the insurance and put their money into investments with a more reliable return.

But there is another way to go ...

A hybrid insurance policy, also referred to as asset-based long-term care, combines long-term care insurance with permanent life insurance. A policy of this sort provides both living and death benefits.

You can purchase this type of policy with a single upfront premium, with a set of premiums for a fixed term or with ongoing premiums. If you need long-term care (due to age, illness, etc.), you can withdraw the funds from your life insurance policy, and when those funds run out, the insurance company will pay. If you don’t need care, or if you have some money left over after receiving care, your heirs will receive the remaining insurance benefit 100% tax-free.

Like all financial strategies, hybrid policies have pros and cons. The premiums can be higher compared to a traditional long-term care policy, and it’s important to be clear about what types of care will qualify under the policy you choose. But the underwriting process is typically less rigorous for a hybrid policy, and a couple can share one policy. This can make obtaining coverage easier and more affordable than a traditional policy.

As long as you pay your premiums, you’ll have a contractually guaranteed death benefit, guaranteed cash value and a guaranteed amount of long-term care coverage. And if, for some reason, you decide to cancel the policy, you can get most of your premiums back — once you pass a designated surrender charge period. That’s a way out that traditional long-term care insurance doesn’t offer.

Does this mean you should rush right out and buy a hybrid policy? Absolutely not. But if you want to give long-term care costs the slip, you should sit down with a seasoned financial professional — someone with long-term care expertise — and talk about the costs, benefits and disadvantages of each coverage option. With this critical piece of protection in place, you really can feel good about the future.