Maryland Bar Bulletin
Publications : Bar Bulletin : May 2005

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Strategies for Health Risk Planning Through Retirement
By Sally H. Leimbach

Planning for financial security through retirement is a tough assignment. None of us has a crystal ball, so how do we decide where to put our efforts and how to direct our financial resources?

Planning must be customized, as we each have our own unique needs created by our personal circumstances. Since few are experts in all the areas that need to be addressed, even the professionals need professionals to do the proper job. One critical component of comprehensive planning is to properly identify the impact of health-related risks, beginning with where you are and continuing through retirement. It is then important to define these risks in financial terms instead of allowing them to remain unknowns.

Guesstimates must be a component of all planning due to events and issues beyond our control, such as fluctuation of the stock market and interest rates, an accident or illness, a 9/11-type incident or changes in federal legislation. However, it is within our capability to think through worst-case scenarios and the impact that they could have on our families and their future security.

There are four tiers to health-risk planning:

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Tier One: Medical Risks Prior to Medicare Qualification

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Tier Two: Disability Risks

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Tier Three: Long-Term Care Risks

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Tier Four: Medical Risks Post-Medicare Qualification

Tier One: Medical Risks Prior to Medicare Qualification
Health risks in earlier adult years are statistically fewer than in later years. Young professionals are often protected against their feeling of invincibility by access to their employer’s medical plan. Before the purchase of a home and marriage, they have few obligations, and if they do become caught up in a catastrophic circumstance, they may feel they have little to lose but perhaps access to the best quality of care.

However, marriage and thoughts of starting a family, with the medical costs associated with pregnancy and childrearing, often start the process of paying close attention to medical risk. Thus, identifying and then budgeting for (1) Medical, (2) Vision, (3) Dental and (4) Prescription Drugs become important. A number of pre-Medicare eligible people will have chronic condition maintenance, ranging from braces to diabetes and MS, which will require more planning and often more cash outlay. An important part of planning can be to work for an employer who provides the most extensive benefits to cover a particular family’s needs.

Health-risk planning for medical insurance can influence such life decisions as what profession and employer are chosen and where a family chooses to live. For those wishing to become entrepreneurs or consultants, the need for medical insurance may take that dream “off the table”. This is also true for people wishing to retire prior to becoming eligible for Medicare.

Tier Two: Disability Risks
Disability is certainly an important health risk to recognize and address. If one becomes disabled during working years, the family can be left without expected income. Lifestyles can be turned upside-down, and contributions to education and retirement funds may come to a grinding halt. These statistics from the Health Insurance Association of America dramatically illustrate the problem:

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“Approximately 30 percent of all people 35 to 65 will suffer a disability for at least 90 days, and about one in seven can expect to become disabled for five years or more.”

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“Statistics show that you are three-and-a-half times more likely to be injured and need disability income insurance than you are to die and need life insurance.”

The loss of income due to disability has a catastrophic impact on families. However, the potential negative impact can be easily identified and insured against with disability-income insurance. Jane Bryant Quinn summarized this in a column by saying, “If you work for a living and have no disability insurance, you effectively have no financial plan.”

Replacing 50 percent to 60 percent of income can be affordable through group and/or individual disability-income policies, especially at younger ages when lower rates are available and often guaranteed.

Tier Three: Long-Term Care Risks
However, there looms out there another significant health risk in the form of long-term care. According to the Merck Institute of Aging & Health, the number of Americans over age 65 is expected to be 71 million (representing 20 percent of the population) by 2030. Retirement periods of 25 to 30 years are now anticipated, and it is highly probable that you will need long-term care at some point during this time.

At whatever age a financial plan is created, the health-risk exposure of long-term care needs to be addressed. Under certain circumstances, such as high potential reoccurrence of certain genetic diseases or the un-insurability of one spouse at an early age, it may be important to secure long-term care insurance prior to age 45. Also, if one spouse stays at home to raise children, long-term care insurance may be the only way to financially cover the exposure of that spouse being disabled and unable to care for the children and, in fact, needing care themselves.

Just as a disability can wreak havoc on a financial plan, so can the need for long-term care. A recent study by the Met Life Mature Market Institute revealed that 18.2 percent of Americans over age 85 live in nursing homes. Many more receive long-term care at home, relying on family and/or paying aides an average of $17 per hour ($408 for a 24-hour period), according to the Met Life Survey of Nursing Home and Home Health Care. And over three million adults residing in the community need help with two or more activities of daily living, according to The Journal of Gerontology.

Long-term care insurance is analogous to disability-income insurance, but is meant to see you through retirement. In fact, as you near age 65, the potential benefits that might be received from disability-income insurance diminish while the premiums continue at the same level. An appropriate strategy is to use at least a portion of the premiums you were using to pay disability income premiums to purchase long-term care insurance.

However, it is not a good strategy to wait until age 60 to purchase long-term care insurance because premiums are directly related to age and health at purchase. For many, establishing a long-term care insurance program closer to age 50 is a better strategy.

There are certain times in our lives when financial pressures subside and the “found money” available can make the establishment of a long-term care insurance program less painful. “Found money” times include when:

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home mortgage/s are paid off

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college tuitions are finished

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an inheritance is received

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an unexpected year-end bonus is received

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a car loan is paid off

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life insurance needs change as families grow up

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reduced or eliminated term insurance cost

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dividends (from whole life insurance policy) can be used to pay premiums, freeing up money

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cash values of whole life policy can be used to pay premiums for long-term care insurance.

Tier Four: Medical Risks When Qualify for Medicare
Many people are counting on Medicare to take over as primary medical insurance at age 65. An alarming number of people erroneously think that Medicare will also pay for long-term care needs. This is a time of great uncertainty as to what Medicare will be able to do for Baby Boomers.

Medicare benefits may well become tied to income and assets, or at least premiums may become means tested. This would result in higher medical costs due to less-predictable coverage and higher premiums. What happens to Medicare will directly affect the cost and coverage of Medicare supplement policies.

The greatly-touted Prescription Drug Coverage, due in its final form in January 2006, is unclear and will probably continue to evolve as the actual cost impact is felt on the Federal Budget.

The bottom line for incorporating Medicare into your health-risk planning is that it is unpredictable. There is no way to avoid relying on Medicare for regular health coverage after retirement at this time. However, more contributions could be required by higher premiums and/or out-of-pocket costs for health care, and the wise individual should probably plan accordingly.

Conclusion
The simplistic bottom line for health-risk planning through retirement is a combination of private medical insurance, disability-income insurance, long-term care insurance and Medicare and Medicare Supplement Medical Insurance. The coverage is age- and life-circumstance sensitive and will often overlap.

Your strategy for health-risk planning through retirement is incomplete if any one of these elements is not blended in as is appropriate for your unique circumstances. Working with a planning professional to integrate health-risk planning into your overall financial plan is important. You may also want to work with specialists within the Four Tiers of Health-Risk Planning.


Sally H. Leimbach, CLU, CEBS, CLTC, is an associate specializing in long-term care insurance with FranklinMorris, Coordinating Broker for the Bar Associations Insurance Agency, Inc. For more information on the insurance benefits available to MSBA members, visit our website at www.msba.org/departments/membership/baia/
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Publications : Bar Bulletin: May, 2005

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