Using Life Insurance to Help Offset Retirees’ Healthcare Costs
AUGUST 8, 2017
Healthcare costs pose a very serious risk to retirement savings – but the costs could be even greater than many clients or their advisors might expect.
Medical expenses are on the rise nationwide, and not even the most affluent clients are immune to the associated costs. As Americans live longer, they may be likely to incur more – and higher-dollar – out-of-pocket healthcare expenses.
Permanent cash value life insurance, while first and foremost the source of a valuable death benefit, may also be an effective way to help pay for unexpected medical care that can easily derail even the best-laid retirement plans. By expanding their use and the client’s understanding of permanent life insurance, advisors can provide clients with another option to offset those healthcare costs.
Americans today are living longer than they did just a few decades ago. According to the Centers for Disease Control’s “Health, United States” report, life expectancy increased to 78.8 years in 2014, compared with 68.2 years in 1950.
We’re also more likely to be sick in our senior years than at any other time, and the associated healthcare expenses can take a toll on savings and income.
And despite their resources, ultra-high-net-worth investors need to be prepared for the additional expenses that getting older can bring. (Spectrem Group defines ultra-high-net-worth as “households with net worth, not including primary residence, of $5 million to $25 million.”)
Ultra-high-net-worth investors say they’re concerned about making their money last for the rest of their lives, according to the Spectrem’s 2017 report “The Millionaire Investor: Financial Behaviors and the Investor’s Mind.”
As your clients age, they’re much more likely to confront a costly chronic or life threatening disease. Cancer is much more common in older people: 87 percent of all cancers in the U.S. are diagnosed in people 50 years of age or older, according to the American Cancer Society’s “Cancer Facts and Figures 2017.”
Aging is one of the risk factors for coronary artery disease, says the American Heart Association in the “Older Americans & Cardiovascular Disease Statistical Fact Sheet 2016 Update.”
THE CHALLENGE FOR AFFLUENT CLIENTS
Affluent retirees face an additional challenge when it comes to healthcare costs: rising Medicare premiums.
Income-based Medicare surcharges greatly impact affluent clients; in 2018, Medicare means testing brackets will be altered, which means more affluent clients will end up in high MAGI (modified adjusted gross income) thresholds and be subject to higher income-based surcharges. According to HealthView Insights’ “2016 Retirement Healthcare Costs Data Report,” a 40-year-old man earning $150,000 per year will end up in the top bracket, incurring $380,754 (in today’s dollars) over his lifetime in Medicare surcharges, compared with $68,148 in lifetime surcharges for a man earning $40,000 at retirement. (MAGI thresholds are not indexed to inflation.)
Medicare Part B and prescription drug coverage premiums are also calculated based on income; as Medicare premiums rise across the board, your affluent clients can expect to pay even more in the future. (Income tiers are not indexed to inflation.)
Still, your clients may think that Medicare and private health insurance are worth the cost since they’ll cover all healthcare expenses. But this is actually a common misconception.
Medicare typically doesn’t cover assisted living facilities or home health aides, according to Medicare.gov. And private health insurance may cover only some of this type of care, usually with stipulations. If needed, this could be one of your clients’ biggest healthcare outlays.
Medicare Part A generally provides no coverage for vision care unless it’s a medical emergency or traumatic injury and the beneficiary is admitted to the hospital. Medicare Part B provides limited vision care coverage. Medicare also doesn’t cover dental care (including dentures), care abroad or experimental treatments – all of which can add up to significant lifetime expenses.
And while many clients may not believe they’ll face a chronic condition such as Alzheimer’s or a life-threatening disease like cancer, it makes sense to prepare for any scenario. As their advisor, you can take the opportunity to present them with information that shows their likelihood of incurring these costs and how standard health insurance falls short in paying for many medical expenses – information that can come from a strong partnership with your providers.
A STRATEGY FOR CLIENTS
Healthcare costs – and costs of coverage -- have been rising, and traditional health insurance, whether private or government-sponsored, may not do enough to cover your clients’ unexpected expenses. In the absence of a solution, they may have to dig into savings, reducing their available retirement income and potentially facing a large tax hit with certain withdrawals.
This is where permanent life insurance can help.
Before considering this strategy, the client must, first and foremost, have a legitimate need for a death benefit – either heirs or another need for wealth transfer. The primary goal of life insurance is, after all, to provide a death benefit. In addition, the client must be able to afford paying more than minimum premiums, even during retirement. Cash value can accumulate over time, though, and any accumulated cash value may be accessed for any purpose – including medical expenses, as needed.
This cash value can be tapped through loans and withdrawals. With no restrictions on how loans or withdrawals are used, life insurance can be quite flexible, as well. For example, the money can be used to help pay for any type of healthcare need, whether building a ramp or hiring home health aides. Permanent life insurance, in other words, can provide a living benefit that’s not strictly earmarked for medical expenses.
While loans and withdrawals reduce a policy’s cash value and death benefit, they provide an often-overlooked option to help cover healthcare and related expenses in retirement, if needed. For some clients, permanent life insurance can be a good option for helping to handle unexpected medical costs as they occur.