A world of hurt over health care
Rising medical expenses and confusion over coverage have left many seniors grasping for answers.
Possible changes to Medicare. Rising health-care costs. It's no wonder seniors are baffled when it comes to how they will fund their medical expenses in their later years. Add to that misunderstandings about what Medicare covers and LTCI and advisors have their work cut out for them. Here are some common misconceptions and how you can clear them up for you clients.
The mysteries of Medicare
A recent National Association of Insurance Commissioners survey showed that baby boomers are confused about their Medicare eligibility. Specifically, 28 percent said they didn't know at what age they would become eligible for Medicare, and another 36 percent gave incorrect answers. Coverage alternatives were also unclear to respondents, with 66 percent reporting that they were "not very familiar" or "not at all familiar" with options such as Medicare Parts B and D, Medicare Advantage and Medigap insurance. "Many boomers incorrectly think Medicare coverage is available at age 62, when they initially become eligible for Social Security benefits," said NAIC president Sandy Praeger. (Medicare eligibility kicks in at age 65.)
Adding to a general lack of knowledge regarding Medicare is the current debate about the program's pending insolvency, which was recently moved up five years. If the growth in health-care costs is not curbed, said Treasury Secretary Timothy Geithner in a recent statement, "our commitments will become unsustainable."
Regardless of which proposal to shore up Medicare wins out, changes are coming to the program and seniors have reason to be concerned. "A significant change in public policy like Social Security and Medicare benefits could be disastrous for many retirees," according to vice president of LIMRA Retirement Research Marie Rice.
When taken as a whole, a senior's health-care requirements require solid financial planning because the expense can be huge. For example, the nonprofit Employee Benefit Research Institute totaled up expected health-care costs, including long-term care, for a couple turning 65 in 2009. In order to have a 50 percent chance of covering these costs, the study concluded, this couple would need $210,000, and to have a 90 percent chance, $338,000 would be required. And because of various unknown factors, such as longevity, disability and health-care inflation, "many individuals will need more," EBRI researchers noted.
Out-of-pocket costs are where seniors have felt the pinch of rising health-care costs most. According to a recent SmartMoney magazine article, "evidence suggests that most people saving for retirement don't realize how much Medicare doesn't cover. Medicare co-pays can range from 20 percent to 45 percent of the cost of many types of outpatient medical care."
Medicare Advantage premiums have also been putting pressure on seniors' health-care budgets, with a 14.2 percent spike last year, according to Washington health advocacy group Avalere Health. This increase, said Avalere vice president Lindsey Spindle, "fit[s] into a broader trend of increased financial pressure on the insured through rising co-pays and increased premiums."
LTC: Delusion and denial
When it comes to LTC, there is not so much a possibility that a senior will need care as a probability. But many Americans have no idea how they will pay for LTC. The common misperception that health insurance, Medicare or Medicaid will cover the cost of LTC, held by some 36 percent of respondents to a 2011 survey by insurance giant Aviva, may explain why more people do not purchase LTCI. "Despite years of publicly and privately funded efforts to raise consumer awareness about the importance of planning for long-term care needs, Americans seem to understand almost all forms of insurance better than they do long-term care insurance," observed Prudential LTC vice president Malcolm Cheung.
Despite its value to estate preservation, a recent Lincoln Financial survey showed that less than half of Americans had taken steps to prepare themselves for an LTC event, even as most Americans acknowledge the risk. More than half of respondents to Senior Market Advisor's 2011 Senior Survey (p.34), for example, were not covered by LTC insurance.
For those who fail to acknowledge their risk, denial is the main factor, according to Howard Gottlieb of LTC Partners in Pinole, Calif. "People deny that they'll ever be in LTC. They don't believe that it will be them who will need it," he explains. "People will be in their 70s and say they're as healthy as a horse. But it's not about your health, it's about longevity." Roughly 13 percent of respondents to Senior Market Advisor's survey made this mistake, saying they didn't think they would need LTCI.
In general, the LTC insurance market is a huge mystery to many seniors. According to a 2011 Prudential LTC survey, four in 10 respondents said they were unsure of the cost of LTC insurance and could not even venture a number. Of those who did manage a guess, the average estimate was $3,900 annually, well above the actual cost of owning a policy. "On average, respondents estimated the average daily rate for a semi-private room in a nursing home at $450–more than double the actual average of $215," according to Prudential researchers. When those nearest retirement who didn't have insurance were asked why they did not have coverage, half cited cost as the main barrier.
What is the consequence of ignorance and denial? Procrastination, which can be a real problem for those seeking LTC coverage. Forty percent of respondents to the Prudential survey said that they believed the right time to buy LTC insurance is after age 60. Waiting, however, can result in prohibitively high premiums or, worst of all from a planning perspective, not being able to pass the underwriting requirements.
According to Phyllis Shelton, author of "Long Term Care: Your Financial Planning Guide," "it's prudent to buy coverage as soon as you can afford to" because arrangements for care are best made before one's health begins to falter.
