Physician Retirement: Be Aware of Long-Term Care Costs

December 21, 2014

Unforeseen long-term care expenses are common in retirement and relying on Medicare, Medicaid, or self-funding may not be prudent. Here are options to consider.

There are many nuances to successful retirement planning, and one of them is being able to think about "income" from a new perspective. In their working years, physicians for the most part rely on income from their own practices or other medical employment to support themselves and their families. To protect that income flow in case of illness or injury, many physicians take out disability insurance. Life insurance could also be viewed as a form of "income ''protection" for a surviving spouse and family.

It is important to keep the income-protection mindset in place for the retirement years, though the risks are different. Once retired, assets become finite for the most part. In other words, even as the values of investments hopefully increase, most retirees, even those with a large amount of assets, are spending them down. In the best case, people approaching retirement will have a plan in place and have some awareness of income needs going forward to ensure that their assets last as long as they do. A financial professional can help with this.

A factor that is often underestimated is the potential financial impact of a long-term care event. Most of my clients have a hard time believing that a medical catastrophe can happen to them. But in reality, there is a whopping 68 percent probability that an individual over age 65 will become cognitively impaired or unable to complete at least two "activities of daily living" -including dressing, bathing, or eating - over his lifetime.

According to Genworth Insurance Company's 2014 Cost of Care Survey, the cost of a home health aide was $20 perhour, an assisted living facility was $3,500 per month, and nursing home care was $87,600 peryear for a private room. It is prudent to consider what impact the costs would have on your nest egg. The answer will be different depending on individual circumstances, but everyone should give some thought to unanticipated developments in retirement, especially health-related ones.

Meeting the expenses of long-term care can be accomplished in a variety of ways. Let's look at these options.

• Medicare can be a source, but it covers only medically necessary care and focuses on acute care, such as doctor visits, drugs, and hospital stays. Coverage also focuses on short-term services for conditions that are expected to improve, such as physical therapy to help regain function after a fall or stroke. Medicare may pay for up to 100 days of care in a skilled nursing facility per benefit period.

• Medicaid requires that the applicant have limited income and assets. Typically, the income limit for an individual is less than $500 per month and less than $2,000 in assets. If a person gives away assets in an effort to qualify for Medicaid, there is currently a five-year look back provision. Choice of care is limited and rules are different for each state.

• Self-funding is an option. However, the most important consideration here is whether you will you have enough money. The question after that would be, from where will you pull the money? If withdrawn from qualified, tax-deferred retirement accounts, then the entire amount will be taxable. Liquidations of any portion of non-qualified investment accounts would most likely result in capital gains taxes in addition to possibly liquidating investment positions at an inopportune time.

• Long-term care insurance first appeared approximately 30 years ago and has continued to evolve. The basic concept is that you pay an insurer to have a tax-free pool of money that will be available to help pay expenses if you become cognitively impaired or can no longer complete certain activities of daily living. This sounds great, but the downside is that the premiums are not guaranteed to remain at the same level. Moreover, if you don't use it, you lose it.

• Life insurance with a long-term care (LTC) riders provide the ability to accelerate the death benefit if there is a long-term care event. This allows the insured to access the proceeds of a life insurance policy during the insured's lifetime if the insured becomes cognitively impaired or cannot complete certain activities of daily living. The acceleration will, however, reduce the proceeds paid to the beneficiary at the death of the insured. As an example, if someone had a $250,000 policy and used $200,000 for long-term care, the beneficiary would receive the other $50,000 upon the death of the insured.

Typically, LTC riders can be found on both universal life and whole life policies. Depending on the type of policy, payments can also be flexible, including a lump sum payment, payment over a certain amount of years, or a combination of both.

The insurance landscape is ever-changing, and products are continually designed, redesigned, and phased out. It can prove worthwhile to look at the options with your tax, legal, and financial advisers who know the product landscape well. Being conscious about protecting your income, including potential long-term care costs, can help optimize your income and reduce risk in retirement.

This article was prepared by Vincent J. Cucuzza and is not intended as legal, tax, accounting or financial advice. The opinions provided above are those of [name of rep] and not necessarily those of MetLife and are provided for general information purposes only. MetLife does not guarantee the accuracy of the information presented as the features and benefits being presented may not be applicable to MetLife insurance products.