Whether you are caring for a loved one or are concerned that you will need care yourself, the emotional and financial costs can be life altering. It’s critical to be prepared.
There are few things more wrenching than realizing that an aging parent or loved one can no longer manage alone. In the flurry of decisions that follow—about living arrangements, responsibility for care, and where the money will come from—family members may disagree about what’s best. Unfortunately, numerous adult sons and daughters are now in the unenviable position of having to make such choices.
What’s more, many of these same adults will one day have to confront the same issues from the other side—when they become the ones who will need the care. According to the Department of Health and Human Services, around 70% of today’s 65-year-olds will need some form of long-term care in the future and, with Americans living longer, that need will likely increase.1 That makes planning ahead crucial—whether you’re concerned about giving care, needing care, or both. And, with so much at stake, dealing with eldercare issues requires flexible, innovative solutions and early action, including making use of more than one strategy.
Have the eldercare “talk”
“As families begin to confront the financial and emotional challenges of eldercare, they often find themselves plunged into an array of unfamiliar questions,” says Bill Hunter, director, Personal Retirement Strategy & Solutions at Merrill Lynch Wealth Management. Although these discussions are never easy, it’s imperative to talk to aging parents about their wishes—no matter how difficult that might be. It’s also best to include the whole family in the conversation long before decisions have to be made. Doing so can reduce tensions and ease the transition for everyone involved. Yet, only 10% of people in the Merrill Lynch 2013 Retirement Study Family & Retirement: The Elephant in the Room had ever talked with their parents about how to pay for long-term care.2
Plan for the rising cost of care
Looming over all eldercare decisions is the question of finding the money for the care that is needed. For those who have time to plan, buying a long-term-care policy well in advance for either your parents or yourself can help. That’s because the sooner you buy long-term care insurance, the lower the premiums—and the less likely a health condition will disqualify you or a loved one from coverage.
You can also make a number of choices that could reduce the cost of coverage:
- You might limit the amount of inflation protection purchased—though many advisors recommend that you don’t drop insurance protection completely.
- A longer “elimination period,” the number of days you choose to pay fully until your benefits for qualifying care begin.
- The services covered can make a difference. Policies that specify home- and community-based support are generally priced lower because nursing home costs are rising more quickly than home-care expenses.
- It’s also worth noting that many states offer tax deductions or credits to help offset the cost of qualifying long-term care policies.
Traditional long-term care insurance may not be the answer for everyone. Health-related requirements for coverage are becoming more stringent and some big insurers have stopped offering traditional long-term care policies altogether. Moreover, many people are understandably reluctant to spend years paying for coverage they may never use.
But, a number of alternatives to paying for long-term care expenses are available that may be better suited for many people because of their flexibility. Among them are “hybrid” life insurance policies that contain additional features to help cover long-term care and other financial needs. These are permanent life insurance policies with long-term care benefit riders, which come at an additional cost. These are generally purchased with a single lump sum payment and—unlike traditional long-term care policies—come with a return of premium rider so that assets can be tapped for other needs. So, there are three benefits for the consumer: long-term care benefits if needed, a life insurance death benefit if the policy is not used for long-term care, and a money-back guarantee if you change your mind. (A long-term care rider that charges against the account value are not a taxable distribution, although they do reduce the client’s cost basis.)
Additionally, individuals who don’t currently have the liquidity to purchase long-term care coverage but do have life insurance may be able to exchange their policy tax-free and purchase either a stand-alone long-term care policy or a hybrid policy.
Another solution, the trusteed IRA, can be useful for retirees who don’t have close relatives or don’t want to burden their children with the responsibility of managing their financial affairs as they grow older. Under this arrangement, the owner of an IRA authorizes a trustee to invest the IRA assets, make required distributions, and pay bills and address other needs in accordance with the owner’s stipulations. Accordingly, the trustee might direct funds to pay for a nursing home or other facility if the owner is somehow incapacitated. The trustee can ensure that the IRA owner takes all required minimum distributions and can manage the distribution of any remaining assets to heirs according to the owner’s wishes.
When planning ahead isn’t an option
Unfortunately for many, by the time they begin to think about eldercare, it may be too late to obtain long-term care insurance—either for themselves or for their parents. However, you may be able to find other ways of handling these financial challenges by meeting with your Financial Advisor and conducting a thorough analysis of your current investment strategy with the aim of generating guaranteed income that you can dedicate to these expenses. Annuities can be useful in this process. Your Financial Advisor can help you determine which strategic changes to your portfolio might best fit your circumstances.
However you decide to manage the situation, the most important thing is to set your course as far ahead of time as you can, making your plans as flexible as possible to account for a range of scenarios. When it comes to the challenges of care, whether you’re giving it or receiving it, having a strategy in place early can be the greatest gift you give yourself—and others.
Ask your Financial Advisor how you can prepare for the cost of eldercare—for loved ones and yourself.
- How can I incorporate eldercare into my retirement and legacy planning?
- Does a long-term care policy make sense for a family member or for me?
- What alternative strategies can I consider to help cover health care costs?
Can a trusteed IRA help see to it that I won’t be a burden to my children?
When conducting an insurance policy review and evaluating options that include replacing an existing insurance contract, it is important to consider the risks and benefits. Clients should carefully consider the risks and benefits before taking action, including their current need for coverage, their current health status and insurability, fees and charges associated with terminating an existing contract, and future liquidity needs.
Long-term care insurance coverage contains benefits, exclusions, limitations, eligibility requirements, and specific terms and conditions under which the insurance coverage may be continued in force or discontinued. Not all insurance policies and types of coverage may be available in your state.
All guarantees and benefits of the insurance policy and all annuity contract and rider guarantees, or annuity payout rates are backed by the claims-paying ability of the issuing insurance company. They are not backed by Merrill Lynch or its affiliates, nor does Merrill Lynch or its affiliates make any representations or guarantees regarding the claims-paying ability of the issuing insurance company.
This communication was prepared to support the promotion and marketing of insurance and annuity products. Merrill Lynch and its representatives do not provide tax, accounting or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S. federal, state or local tax penalties. Please consult your own independent advisor as to any tax, accounting or legal statements made herein.