What to Tell Your Clients about Long-Term Care Insurance

What are the costs of an aging population? The issue continues to escalate for society and retirees in particular.

First, there’s the dramatic increase in the federal government’s long-term care insurance, available through John Hancock. And the Social Security Board of Trustees recommended up to a 22% increase in Medicare Part B premiums that would impact almost a third of all Medicare beneficiaries. Those affected are people who receive higher-than-average monthly payments; those who receive less than the average amount will not incur any increase in their Part B premiums.

Against this backdrop, many agents may have forgotten that the CLASS Act provided long-term care insurance on an opt-out basis—in other words, coverage for every worker, with employee payroll deductions addressing the $125/month cost. However, since the program’s design was voluntary and not subject to medical underwriting, it was ripe for adverse selection: Healthier, younger employees would opt out of coverage, while older, less healthy employees would enroll. With participation estimates in the 3% range, the actuary concluded the program’s design was unsustainable in the long term.

As the population continues to age, the costs of Medicare, Medicaid and Social Security will only continue to put stress on the state and federal budgets. Not to mention, the unfunded liabilities of state and local pension systems are estimated to reach $1 trillion under the current discount rate assumptions the plan sponsors use. Under assumptions that adjust for the risk properties of pension payments—namely since courts have ruled in almost all cases against cutting accrued benefits and for treating them essentially as guaranteed payments—the estimated unfunded liabilities exceed $3 trillion.

Paying down the unfunded liabilities would require steep increases in contributions or reductions in benefits—both of which would be necessary even if the goal is not to pay down the unfunded liabilities, according to “Financing State and Local Pension Obligations: Issues and Options” by William G. Gale and Aaron Krupkin.

The lessons: 1) The U.S. population needs to increase its savings rate in order to secure adequate retirement funds. 2) Eventually, federal, state and local taxes must increase to fund these obligations. 3) Politicians are not addressing the situation with the urgency that it requires.

The cost of these programs will impact Americans in a variety of ways as pension and health care costs constrain resources. Agents should advise their clients to be as self-sustaining as possible in order to deal with these challenges by using long-term care insurance and retirement savings vehicles.

Dave Evans is a certified financial planner and an IA contributor.