The Financial Consequences of a Long Life

Long term care and retirement planning go hand in glove

by Thomas Smoot

Mr. Smoot is Vice President, Life Product Strategy & Marketing at The Guardian Life Insurance Company of America. Connect with him by e-mail:

As life expectancies continue to extend, the risks associated with longevity continue to garner attention from retirees, pre-retirees, and their children. The reality is that in addition to the longevity risk associated with outliving their money, Americans now also have to anticipate the loss of independence due to a major illness in their later years.

Some of the statistics we see make it clear that long term care (LTC) and health issues threaten to derail even well-executed retirement savings plans:

  • About 70% of people over age 65 will require some type of long-term care services during their lifetime.
  • Approximately 44% of people reaching age 65 are expected to enter a nursing home at least once in their lifetime.
  • Of those who do enter a nursing home, about 53% will stay for a year or more.
  • People use at-home or facility long-term care for an average of three years.

These are eye-opening numbers, but people – especially those still working and drawing a paycheck – tend to ignore the issues associated with morbidity risk, especially the issues surrounding financial preparations for long term care. People tend to focus on the present and hope for the best in retirement or count on self-insuring, which exacerbates financial problems when steady paychecks stop arriving.

This is an area where financial professionals can add a lot of value. By showing clients earlier than later how to start thinking clearly about and planning for their long term care needs, financial professionals build trust and demonstrate their knowledge. This tends to reinforce good client relationships and helps grow their practices. However, these are delicate topics. It does not help to scare consumers so that they become frozen with indecision, but we do want to ensure that they make those important decisions that could prove disastrous if deferred. At the end of the day, it’s always going to be an emotional conversation, and financial professionals need to employ their best, most empathetic communication skills in order to impress upon clients the likelihood of future long term care needs.

The likelihood of longevity

To be sure, more people are starting to realize that there is a real likelihood they will live longer and will need some type of care as they age. This is often because of experiences with long term care events, having seen friends or relatives in need of care or even needing long term help themselves. And one need not be elderly to require long term care. While nobody likes to think too much about it, there are many illnesses and injuries that can lead younger individuals to long term care. This knowledge tends to create a sense of urgency, sometimes anxiety, and puts clients in a good position to hear about their financial options.

These are eye-opening numbers, but people – especially those still working and drawing a paycheck – tend to ignore the issues associated with morbidity risk, especially the issues surrounding financial preparations for long term care

Many people who tackle these questions head on will brace for post-career contingencies by self insuring and counting on the potential growth of current earnings and assets. But that basket may not hold enough, or the right kind, of accessible wealth. It is difficult to know how much of an asset to earmark for care and many assets may already be allocated for other things, like retirement living expenses. Additionally, Medicare and Medicaid are not designed to cover long term care expenses and will only pay for certain aspects of care – with complicated rules, limits and restrictions. At the same time, the market for long term care products has been contracting, making the array of planning alternatives seem narrow.

The good news is that effective options do exist. One trend that has been gaining in popularity in recent years is carriers marrying life insurance with a long term care rider, which allows consumers to develop a financial strategy that accounts for two contingencies – preparing for future health care expenses and ensuring that loved ones will still receive legacy benefits from the life policy. Some of these riders feature a large pool of money that can be drawn down if needed, and also specify the exact dollar amount that is not available for acceleration under the rider. If it’s a $1 million life insurance policy, clients can reserve, for example, $500,000 to be passed to beneficiaries.

Some riders let clients access funds immediately if a contingency presents itself, as opposed to creating a sinking fund that targets a rate of return over 30 years in order to have enough to pay for a long term care event. Plus, qualified long term care riders are becoming more popular at the moment. These can be excellent options for people who have a primary need for life insurance – and are a great way to make a life insurance policy more versatile while offering some additional tax benefits versus nonqualified riders. Demographically, younger clients can be great candidates for these solutions. If, as a financial professional, you are able to get a 45-year-old to consider an LTC rider, then you are talking about life insurance too and that’s a win-win.

As the population ages into retirement in greater numbers than ever before, individuals will need financial planning options that account not only for their longer lives, but also for the contingency events that are likely to arise. By helping clients understand the need for long term care planning, financial professionals can take a big step towards creating a robust longevity risk plan that can stand the test of time.



Sources: National Clearinghouse for Long Term Care Information, – based on 2010 government statistics.
A Shoppers Guide to Long Term Care Insurance. 2010 National Association of Insurance Commissioners.