Retirement security may depend on it
“[T]he public is becoming aware that Medicaid benefits are going to be cut.”
—Jesse Slome
Executive Director
The American Association of Long-Term Care Insurance
By Thomas A. McCoy, CLU
In retirement planning discussions, the elephant in the room is long-term care. The high cost of entering a care-giving facility is difficult to talk about. So are the adjustments that younger family members have to make to provide care at home for an older family member.
“Long-term care planning tends to be one of the most overlooked aspects of financial planning, especially because many people avoid thinking about their own decline or the needs of aging family members,” said Kaylee Ranck, Ph.D., director of the Office of College Research at The American College of Financial Services.
“However, a crisis such as a stroke, a fall or rapid cognitive decline can instantly thrust individuals, families and caregivers into a situation without any warning. These events come with emotional consequences as well as massive financial implications.”
The Employee Benefit Research Institute (EBRI) conducted a survey of 2,400 workers in May and found that only 40% of them think they will need access to long-term care services as they age; 32% were unsure; and 24% did not think they will need them.
The study identified certain groups that were more likely to anticipate the need for long-term care services: those with experience receiving care; those with a disability, having filed a short-term disability claim; and those with higher incomes.
Whether the need is recognized or conveniently ignored, it isn’t going to disappear. In fact, the long-term care risk seems certain to grow as baby boomers continue to swell the ranks of the elderly, and as medical advances continue to increase overall longevity.
Research from Morningstar projects that 43% of baby boomers will incur long-term services and support costs (long-term care) in retirement. Of those with this need, Morningstar projects mean costs of $242,000.
Speaking at a recent EBRI webinar, Spencer Look, associate director of the Morningstar Center for Retirement & Policy Studies, explained the effect these costs will have on retirement income adequacy.
“We calculate that when long-term care [costs]are excluded, about 26% of Americans are likely to be unable to fund their expenses in retirement; when long-term care costs are included, 41% are likely to be underfunded; for single women, the long-term care costs raise the likelihood of an income shortfall from 34% to 52%.”
Long-term care insurance (LTCI) has been around for decades, but its penetration in the workplace has been limited. In EBRI’s survey, only 24% of the workers had access to long-term care insurance through their employer, and only 9% reported that they are enrolling in their employer’s long-term care insurance program.
Yet, employees of all ages express an interest in the coverage. A Transamerica Center of Retirement Studies study of all major employee benefits found that for workers of all ages, LTCI was tied for third (with critical illness) in importance to them; only health insurance and life insurance ranked higher. Yet, only 23% of employers offered the coverage.
Steve Cain, director of LTCI Partners, a national broker that implements employer-sponsored long-term care insurance programs, said, “We’ve found over time that different generations are showing an interest in long-term care. We enroll 50-plus cases a year, usually large employers, and we’ve seen the average age of those who apply for coverage drop from 57 to 47.”
Jesse Slome, executive director of the American Association of Long-Term Care Insurance, still believes the coverage is most appealing to people who are retired or close to retirement. He says the market for long-term care insurance, both in and out of the workplace, is currently “flat,” but he believes that could change, depending on a couple of developments.
“[T]he biggest financial risk in retirement is healthcare. And long-term care expenses are the biggest
healthcare risk in retirement.”
—Steve Cain
Director
LTCI Partners
“First, the public is becoming aware that Medicaid benefits are going to be cut,” says Slome. “Medicaid pays for a significant portion of nursing home and long-term care costs. As the cuts occur, nursing homes will have to figure out what to do with all those Medicaid patients they aren’t getting paid for anymore. Inevitably, this will start to make news.
“In addition, a lot of Medicaid costs are borne by the states,” he continues, “and with all the cuts that are happening, states won’t be able to pick up the tab, so they will start amplifying the message of this need.
“Long-term care insurance providers can explain to people, ‘We’re not here to solve Medicaid issues, but if you’re concerned about your long-term care, you should start planning for yourself. Start thinking about it in your 60s so it doesn’t become a problem in your 80s or 90s.’”
Slome says that while it is difficult to estimate how much of an opportunity the Medicaid cuts will open up, “awareness is always a key driver of sales.”
One bright spot for long-term care insurance sales in recent years, both in and out of the workplace, has been linking the coverage to a life insurance policy. EBRI’s survey found that 37% of respondents had purchased a life insurance policy outside of the workplace, and among those who did, 41% purchased one with a long-term care insurance rider or acceleration clause.
Cain said that workplace life insurance with a long-term care rider has become the “dominant product.” Speaking at the EBRI webinar, he said, “Employees like these guaranteed issue, dual purpose policies, and the insurance companies are a lot more comfortable pricing these types of contracts.”
Long-term care insurance should be considered an integral part of financial wellness and retirement readiness programs, Cain pointed out. “Employee benefit plan sponsors consistently say that the biggest financial risk in retirement is healthcare. And long-term care expenses are the biggest healthcare risk in retirement.”
A wild card to consider in the discussion of long-term care expenses is what might happen in the legislative/regulatory realm. In 2021, the state of Washington enacted a state-run long-term care insurance program funded by a .58% payroll tax. It will begin paying benefits ($36,500 lifetime maximum) in mid-2026.
When Washington State’s program first went into effect, for a six-month period, individuals could opt out of it by purchasing private long-term care coverage. About a half million people did.
Since that time, Massachusetts and New York have proposed legislation to establish state-run long-term care programs. Four others—California, Minnesota, Hawaii and Vermont—are studying the issue. A federal long-term care program, known as the WISH Act, also has been proposed.
“We know this kind of legislation will take a long time to move forward, but the conversations have started,” said Cain.
The author
Thomas A. McCoy, CLU, is an Indiana-based freelance insurance writer.
