Using Life Insurance To Offset Retirement Health Costs

My practice,, was built to address the three main concerns of people as they approach and live into their retirement::

(1) will I have enough money for the rest of my life;
(2) how will I pay for health care during retirement; and
(3) how can I lower or eliminate taxes.

This article focuses on #2, and the ramifications associated with the concern, and a method to pay for costs that can’t be covered by other means.

Healthcare costs pose a very serious risk to your retirement savings. If we also include the costs of extended care, the effects can be catastrophic. Medical expenses are always on the rise, and not even the most affluent clients are immune to the effects.

The success of our health care system has lead to longer lives, but as Americans live longer, they will incur more, ever higher, out-of-pocket healthcare expenses.  In short, how can we pay for health care for older Americans? 

Medicare is the obvious answer, for those people that do not have access to an employer-sponsored health plan. What about those areas of care that Medicare does not cover? As new therapies and medications come online, will Medicare be able to help pay for these life extension therapies?

Also, what about paying for extended, or custodial care, which Medicare does not cover? And, recall that Part D has no out-of-pocket maximum — how to pay for the costs of extremely expensive prescription drugs?

The simple truth is that paying for uncovered health care and extended care costs, once someone is in retirement, will have to be paid out of retirement savings, which in turn lessens the ability of that person to have income lasting their entire lives.

Insurance helps to protect those retirement assets by covering the costs of care during our retirements. Our central goal is to nurture those savings for their intended purpose —  as income.

Additional coverages for Medicare, such as Medigap or Medicare Advantage, help cover health costs. Certain ancillary coverages, such as accident, chronic illness, or hospital charges are available to help with out-of-pocket costs associated with Medicare Advantage plans, . Long term care insurance will cover the costs of institutional or home health care.

But carrying coverage to protect against any conveivable loss, can be a prohibitively expensive approach.

So…let’s consider an innovative approach that can mitigate these expensive coverages. A certain type of life insurance offers a possible solution wherein we can cover multiple losses with one solution. Permanent, or cash value life insurance, while first and foremost providing a valuable death benefit, may also be an effective way to help pay for unexpected medical care that can easily derail even the best-laid retirement plans. How is this done?

A strategy

A cash value life insurance policy, when properly constructed, can be used to create a pool of money from which, using primarily policy loan provisions, monies can be withdrawn to pay for unexpected medical or drug costs — a living benefit. In addition, many such policies contain accelerated benefit riders that can tap the death benefit provisions for costs associated with a terminal illness or for chronic care, both while the policy holder is still alive — more living benefits.

Cash value policies that might be considered for this type of use can be funded in the following ways:

(1) Periodic payments (monthly, quarterly, etc). In order for the policy to build up cash value quickly, the policy owner should consider over-funding the premium. Illustrations show that even a slight over-funding, for a period of time, can build substantial cash value quite quickly;
(2) Older purchasers of a cash value policy obviously do not have significant periods of time to build up the cash account, so in such cases using available cash to pay up a policy over a 7 or 10 pay period, or even a single premium, can accomplish the task of creating significant cash value.

So that the cash value can build quickly, we also will minimize the death benefit and over fund the  premium, within limits. Furthermore, we select policies that offer minimum costs (ideally just small administrative fees and mortality charges), steering clear of costly riders. We can also select a policy contract that can deliver stable returns, or chose an option that is indexed to market gains, to build value more quickly.

For many people, permanent cash value life insurance is an innovative way to create a stable and secure pool of cash for handling unexpected medical costs as they occur. If you would like to see how we can make this work for your situation, just give me a call.

R Allan Jensen

Background sources include Prudential, Midland National, and North American life insurance companies.