Important Planning Considerations: Insurance & Long-Term Care
Your retirement plan isn’t complete until you’ve looked into getting the insurance you need, including life insurance, disability insurance and a plan for long-term care.
When the topic of financial planning is raised, people’s thoughts tend to immediately focus on saving, investing and ultimately generating income in retirement. While these are certainly critical components of building a solid financial foundation, so too are strategies for protecting your income and assets from the unexpected.
The future is always an uncertainty. Therefore, you need to prepare as much as possible for the unexpected. Having the appropriate insurance protections in place — whether for your personal property, your family’s financial well-being if you should die or become disabled, or protecting your savings from being eroded by the costs of a major health care crisis — brings with it the peace of mind that your goals can still be achieved whatever the future may hold.
As you create your own plan, make sure you don’t overlook the following key income and asset protection strategies:
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More than 30 million Americans who own life insurance policies don’t have enough coverage, according to a recent LIMRA study. While the average shortfall in coverage is around $225,000, it’s even greater for high income earners.
Why such a large coverage gap? Often, it’s because people tend to treat life insurance as a “check the box” task. They’ll buy a $500,000 policy when they’re younger (figuring it’s more than enough coverage to replace lost income), and then put it aside and forget about it.
But your life and wealth are constantly evolving. A policy that would replace a decade’s worth of income when you were making $50,000/year, suddenly only covers two years when your salary has climbed to $250,000. In addition, you may now have a couple of children — meaning it’s not just a matter of replacing income but funding college educations.
There are no hard and fast rules when it comes to determining how much coverage is enough. The amount will vary greatly depending on your level of wealth, your liabilities and your personal circumstances. Often, the best place to start is by asking yourself the following four questions:
- How much would your spouse need to pay off any mortgages if something happens to you?
- How much beyond what you’ve already saved will be needed to fund your children’s future educational costs?
- Are you carrying any other debt or liabilities that will need to be paid off if you die?
- And how much of an additional safety net would your family need to ensure they would be able to maintain their lifestyle?
Keep in mind that the younger and healthier you are when you purchase a policy — whether term, universal or whole life — the easier the process will be and the more affordable the annual premiums.
Even as you get older and your income replacement needs diminish, life insurance can still play an important role in your financial plan. It can serve as an additional source of tax deferral if you’re already maxing out your 401(k) and IRA accounts but want to save more for retirement. It can enhance the value of wealth you place in trust to transfer to the next generation. And it can serve as a way to leverage your RMDs (if you don’t need them for income) to provide an additional legacy for your heirs.
You probably have some sort of group disability insurance through your employer to help replace your income if you ever get sick or injured and are unable to work. But did you know that the average employer policy only covers about 60% of your salary, with a cap on monthly benefits? And if you work in a profession where commissions and bonuses make up a major portion of your compensation, most employer disability policies don’t cover this income.
Take time to figure out just how much any existing disability coverage would provide you with each month. If it isn’t enough to cover your monthly expenses, you may want to consider a supplemental individual disability policy to cover that gap.
Not only will an individual policy travel with you if you switch employers, any monthly benefits you receive from the insurance won’t be taxed (unlike employer-paid policy benefits, which are usually taxable). Make sure, however, to carefully review each policy’s “definition of disability” when shopping for coverage, as they can vary greatly. Some policies might pay if you can’t perform your specific job, while others might only pay if you are completely unable to work. And one policy might only pay benefits for a few years, while another might provide coverage until you reach age 65.
Long-term care insurance
According to the U.S. Department of Health and Human Services, 70% of adults who are turning 65 today will require some type of long-term care (e.g., home health care, a nursing home stay, or time in an assisted-living facility) during their lives. These are costs that are NOT covered by Medicare.
And the potential expenses associated with long-term care are so high (on average $55,000/year for a full-time home health aide; and $93,000/year for a semi-private room in a nursing home), that they can quickly drain a lifetime’s worth of savings — assets that might otherwise provide a legacy for your heirs.
Yet long-term care is one of the most challenging insurance needs to plan for. Firstly, none of us want to spend a lot of time contemplating our own physical or cognitive decline. In addition, traditional long-term care insurance carries a very real risk that you might pay years of premiums without ever needing any of the benefits (in which case your premiums are lost). But there are other alternatives such as hybrid life and long-term care insurance policies — where you can “tap into” the policy’s death benefit to pay long-term care expenses, with the remainder being passed on to your heirs when you die — as well as long-term care insurance riders that can be added to certain types of annuities.
The important thing is to not wait until you start experiencing a physical or cognitive decline before seeking out coverage. The underwriting/approval process can be rigorous, and you’ll likely be declined for coverage if a serious ailment or health issue has already arisen.
Typically, in order to be considered a “coverable” long-term care event, you must be unable to perform at least two activities of daily living (ADLs), or suffer a cognitive impairment. There are six common ADLs as defined by most medical professionals:
- Eating — maintaining the ability to feed yourself.
- Dressing — retaining the ability to dress and undress.
- Transferring — having the ability to sit, stand and move about (mobility).
- Bathing — having the ability to bathe/shower and groom yourself.
- Toileting — retaining the ability to safely use (on and off) and maintain proper hygiene.
- Continence — being able to control bodily functions.
Contrary to popular belief, however, you don’t have to be admitted into a nursing home to claim benefits. A typical long-term care policy can be used in a variety of situations, including in-home care, rehabilitation services, assisted living or nursing home care. So, “aging in place” in the comfort of your own home is still a viable option.
From managing cash flow to funding your children’s education, saving for retirement, and protecting future income and assets, a well-crafted financial plan gives structure and direction to your life. Having the right protections in place serves as your plan’s “safety net” — ready to catch you in the event of a mishap.
Planning, however, isn’t a one-and-done event. It’s a continuous process that needs to evolve as your life and circumstances evolve. Protection needs and coverage amounts will increase and decrease as you progress through various life stages. But the sooner you commit to planning, the easier it will be and the more options you’ll have available to you.
Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax adviser.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Martin Schamis is the head of wealth planning at Janney Montgomery Scott, a full-service financial services firm, providing comprehensive financial advice and service to individual, corporate and institutional investors. In his current role, he is responsible for the strategic direction of the Wealth Planning Team, supporting more than 850 financial advisers who advise Janney’s private retail client base. Martin is a Certified Financial Planner™ professional.
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