Important planning considerations: insurance and long-term care
When the topic of financial planning comes up, people’s thoughts tend to immediately focus on saving, investing, and ultimately generating income in retirement. While these are certainly essential elements in building a solid financial foundation, so too are strategies for protecting your income and assets against the unexpected.
The future is always an uncertainty. Therefore, you should prepare for the unexpected as much as possible. Have the right insurance protections in place – whether it’s for your personal property, the financial well-being of your family should you die or become disabled, or protect your savings from being eroded by the costs of a major crisis health care – brings the peace of mind that your goals can still be achieved, whatever the future.
When creating your own plan, make sure you don’t overlook the following key income and asset protection strategies:
More than 30 million Americans with life insurance policies lack sufficient coverage, says recent LIMRA study. While the average coverage gap is around $ 225,000, it is even larger for those with higher incomes.
Why such a gap in coverage? Often, this is because people tend to view life insurance as a âtick the boxâ task. They will buy a $ 500,000 policy when they are younger (feeling that it is more than enough coverage to replace lost income), then put it aside and forget about it.
But your life and your wealth are constantly changing. A policy that would replace a decade of income when you were making $ 50,000 a year suddenly only covers two years when your salary has soared to $ 250,000. Plus, you can now have a few kids, which means it’s not just about replacing income, but funding college education.
There are no hard and fast rules when it comes to determining how much coverage is sufficient. The amount will vary greatly depending on your level of wealth, your liabilities and your personal situation. Often the best place to start is to ask yourself the following four questions:
- How much would your spouse need to pay off the mortgage if something happened to you?
- How much more than what you have already saved will it take to finance your children’s future education costs?
- Do you have any other debts or debts that will need to be repaid if you die?
- And what additional safety net would your family need to ensure that they would be able to maintain their lifestyle?
Keep in mind that the younger and healthier you are when you purchase a policy – whether it’s term, universal, or whole life – the easier the process and the more affordable the annual premiums will be.
Even as you get older and your income replacement needs decline, life insurance can still play an important role in your financial plan. It can serve as an additional source of tax deferral if you are already maxing out your 401 (k) and IRA accounts but want to save more for retirement. This can increase the value of the wealth you put in trust to pass it on to the next generation. And it can be used to leverage your RMD (if you don’t need it to generate income) to provide additional inheritance for your heirs.
You probably have some form of group disability insurance through your employer to help replace your income if you ever become ill or injured and are unable to work. But did you know that the average employer’s policy only covers around 60% of your salary, with a cap on monthly benefits? And if you work in a profession where commissions and bonuses are a large part of your earnings, most employer disability insurance policies don’t cover that income.
Take the time to figure out how much existing disability coverage would provide you each month. If that’s not enough to cover your monthly expenses, you may want to consider an additional individual disability insurance policy to fill this gap.
Not only will an individual policy travel with you if you change employers, but the monthly benefits you receive from the insurance will not be taxable (unlike employer-paid policy benefits, which are generally taxable). Be sure, however, to carefully consider each policy’s “definition of disability” when shopping for coverage, as they can vary widely. Some policies may pay if you cannot do your specific job, while others may only pay if you are completely unable to work. And one policy might only pay benefits for a few years, while another might provide coverage until you reach age 65.
According to the US Department of Health and Human Services, 70% of adults who are 65 years old today will need some type of long-term care (e.g. these are costs that are NOT covered by health insurance.
And the potential expenses associated with long-term care are so high (on average $ 55,000 / year for a full-time home health aide; and $ 93,000 / year for a semi-private room in a nursing home), which they can quickly deplete a lifetime’s savings – assets that could otherwise leave a legacy for your heirs.
Yet long-term care is one of the most difficult insurance needs to plan for. First, none of us want to spend a lot of time contemplating our own physical or cognitive decline. Plus, traditional long-term care insurance comes with a very real risk that you can pay years of premiums without ever needing any of the benefits (in which case your premiums are lost). But there are other alternatives such as hybrid life and long-term care policies – where you can ‘leverage’ the policy’s death benefit to pay for long-term care costs, the rest being passed on to your heirs when you die – such as long-term care riders that can be added to certain types of annuities.
The important thing is not to wait until you begin to experience physical or cognitive decline before seeking coverage. The underwriting / approval process can be rigorous and you will likely be turned down for coverage if a serious illness or medical condition has already occurred.
Generally, to be considered a âcoverableâ long-term care event, you must be unable to perform at least two activities of daily living (ADLs) or have a cognitive impairment. There are six common ADLs as defined by most healthcare professionals:
- To eat – maintain the ability to feed.
- Bandage – maintain the ability to dress and undress.
- Transfer – have the ability to sit, stand and move (mobility).
- Bathing – have the possibility to take a bath / shower and to wash oneself.
- Make your toilet – maintain the ability to use safely (on and off) and maintain good hygiene.
- Continence – be able to control bodily functions.
Contrary to popular belief, however, you do not need to be admitted to a nursing home to apply for benefits. A typical long-term care policy can be used in a variety of situations, including home care, rehabilitation services, assisted living or nursing home care. So âaging in placeâ in the comfort of your own home is still a viable option.
From managing cash flow to financing your children’s education, saving for retirement, and protecting future income and assets, a well-designed financial plan gives structure and direction to your life. Having the right protections in place serves as a âsafety netâ to your plan – ready to catch you in the event of an accident.
Planning, however, is not a one-off event. It is an ongoing process that must evolve as your life and circumstances change. Protection needs and amounts of coverage will increase and decrease as you progress through the various stages of life. But the sooner you commit to planning, the easier it will be and the more options you will have at your disposal.
Janney Montgomery Scott LLC, its affiliates and employees are not engaged in providing tax, regulatory, accounting or legal advice. These documents and all tax returns are not intended or written to be used, and may not be used or relied upon, by a taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice from an independent tax advisor based on their particular situation.
Vice-President and Head of Heritage Planning, Janney Montgomery Scott
Martin Schamis is responsible for wealth planning at Janney Montgomery Scott, a full-service financial services company, providing comprehensive financial advice and services to individual, corporate and institutional investors. In his current role, he is responsible for the strategic direction of the Wealth Planning team, supporting more than 850 financial advisors who advise Janney’s private retail clients. Martin is a Certified Financial Planner â¢ professional.