Here’s a story I heard at a convention of disability insurance sales professionals:
A woman answers a knock on her front door late on a stormy night only to find a police officer standing there, water dripping from his rain gear.
“Oh my,” the woman says. “My husband was in a car crash!”
When the officer confirms her fears, she asks, “Is he dead?”
The cop answers: “I’m sorry, ma’am, but it’s worse. He lived.”
The moral of the story is that sometimes you want financial protection for personal disasters – especially those that result in a lifelong recovery. The husband has been seriously injured, with large medical costs, and may not be able go back to work anytime soon. He and his family in this situation could have used insurance.
What are the odds?
However difficult it is to anticipate a debilitating auto accident, it should be easier to plan for our living to an old age, or our eventual passing.
And while there is insurance for both living and dying, many consumers fail to fully plan for either. Like disability insurance when you’re younger, needs change in what I call “Stage Two” of retirement – when healthcare and medical costs predictably increase. So what are the odds?
The Social Security Administration says that remaining life expectancy for a new retiree at age 65 in the United States currently is 20 years for a male and 22 years for a female. Age 85 and 87, respectively, are the ages at which 50% of those retirees have left us – and the other half are still living.
Your odds of living even beyond those ages are pretty good; and 70 percent of people turning age 65 can expect to use some form of long-term care during their lives.
For a couple the odds are even greater. If a husband is 65 years old and his wife is 63 at retirement, they have a better than 40% chance of one or both living past 90. And again the odds of needing a caregiver for one member of the couple increases.
As illustrated in the story about the husband’s accident, there’s a risk in just living.
Insure your insurance
Let’s talk about three kinds of insurance that come into play late in retirement: life insurance, long-term care insurance and longevity insurance.
Life insurance, no matter how long you live, helps take care of those you leave behind. The older you get, the more useful life insurance is as a vehicle to provide a financial legacy for your children and other beneficiaries. Many people plan on life insurance as the largest part of their legacy, and may have done some expensive estate planning based on life insurance.
Long-term care insurance pays bills that Medicare won’t cover, such as nursing home care or nurses who will visit you in your home. It helps you avoid spending down all your assets in order to obtain coverage from Medicaid.
A problem many consumers discover as they age is that the bills for both types of insurance can be expensive. And if you can’t continue making those premium payments, the coverage you counted on may disappear.
With certain life insurance policies, you may have minimally funded the policy earlier since you didn’t figure on living so long. Now to keep the policy in force your premiums may take a big jump.
Or you might have bought long-term care policies when you were younger, but companies often are allowed to increase rates. So again, you may be facing large premiums.
If you stop payment on those policies, which you may have been paying for over several years, the insurance could disappear. Hence the need to insure the insurance.
Insurance for a long life
If you are one of those who did buy life insurance or long-term care insurance, consider longevity insurance to pay the premiums on those policies late in retirement.
If you didn’t get around to buying life insurance or long-term care insurance, longevity insurance is a good — but not perfect — substitute. For example instead of drawing down your savings late in retirement and depleting your estate, longevity insurance can provide cash flow. Or if you have caregiver expenses late in retirement, longevity insurance can go a long way to meeting those expenses.
Importantly, this income is paid whether you’re healthy or need care in your home or in a nursing home. It’s money you can count on.
Types of Longevity Insurance
I suggest a contract called a QLAC that you can purchase from your rollover IRA or 401(k) account. Under federal rules, you are allowed to spend up to 25% of those accounts, or no more than $125,000, to purchase a QLAC. This form of income annuity will then pay you a lifetime income starting at an age you choose, normally 80 or 85.
For personal savings outside an IRA, there’s a deferred income annuity (DIA). A DIA gives you more options than a QLAC as to amounts, income start dates and certain features. But just as with a QLAC, the benefit of a deferred income annuity purchased from a highly rated insurance company is that it will provide you with income for the rest of your long life.
And those are the types of options you want: Plans that keep you from being the subject of a wry joke at a convention of insurance sales people.