We are in the midst of Medicare Open Enrollment season, where those turning 65 and other Medicare eligible populations can shop for Medicare Supplement and Medicare Advantage Plans. These plans can help cover a significant amount of care and reduce out-of-pocket costs. Yet most people forget to think about one of biggest holes in Medicare - coverage for long-term care costs. Should the almost 4 million 65 years old's who are just entering the Medicare market also look at LTC Insurance?
First, let's assume a 64 year old couple from Michigan currently has to pay for their own private health insurance (perhaps they are early retirees or self-employed). A quick glance online can give you an example of what kind of plans are available and their costs. For a high deductible HSA eligible, PPO type coverage a couple could expect to pay about $2,000 per month in premiums - and that's before the thousands of dollars in deductible and co-insurance costs.
Turning 65 and signing up for Medicare will dramatically decrease those health insurance premium costs. Instead of that couple spending $2,000 month for premiums, they have the option of enrolling in either Traditional Medicare or Medicare Advantage plans.
Medicare Advantage plans are managed care plans - and often have low or no premiums. Of course, the tradeoff is a restricted network plan - no fee for service options. There are some deductibles and coinsurance with Medicare Advantage plans, but in 2022 the maximum out-of-pocket costs are $7,550 for in-network and $11,300 for combined in and out of network .
Because of concerns about HMO style networks, about half of people decide to stick with tried-and-true Traditional Medicare Parts A and B. Part A Medicare does not charge premiums, but Part B charges monthly premiums. For couples with a combined annual income less than $182,000, they will pay a monthly premium of $170.10 each. For higher income couples premiums slowly increase - to a maximum of $578.20 per person for a couple earning more than $750,000 per year.
Most people who stick with traditional Medicare also buy a Medicare Supplement plan, (even if they were used to high deductibles and co-insurance costs before turning 65). Medicare Supplement plans cover the deductible and out-of-pocket costs of Medicare. As an example (and depending on the state), a Medicare Supplement Plan G will cover almost all out of pocket costs, including Part A hospital deductibles and part B coinsurance amounts. A 65 year old couple should expect to pay about $2,700 annually for a Part G plan.
That same couple turning 65 would probably also be interested in prescription drug coverage - or Medicare Part D. Medicare part D plans vary in coverage, but assume about $40 to $60 per month for a couple to enroll in an RX plan that will limit out-of-pocket costs for prescriptions.
Let's review. A 64 year old couple who was paying perhaps $24,000 in annual health insurance costs plus deductibles should now be closer to a total premium outlay of around $7,428 annually - consisting of $4,080 in Part B premiums, $2,628 in Medicare Supplement G premiums, and $720 in Part D drug premiums. Plus, they will have lower deductibles and co-insurance than what they were paying when they weren't Medicare eligible.
Long-Term Care - the Missing Coverage
Of course, so far, we have not discussed one of the biggest potential costs in retirement - long-term care. Medicare is clear in stating they don't cover custodial long-term care costs - https://www.medicare.gov/coverage/long-term-care . How does Medicare.gov suggest you pay for care? Here is their quote: "You may be eligible for this care through Medicaid, or you can choose to buy private long-term care insurance."
Despite this clear communication, how many people turning 65 consider LTC coverage? In the example of our couple who is now spending much less in health insurance, are they thinking about possible LTC costs? LTC Insurance sales figure sadly suggest they are not.
For those who do explore further, what kind of coverage can a 65 year old couple get? In the example below, a healthy 65 year old couple can obtain LTC policies for a combined annual premium of $5,406. For that premium, they would get an initial monthly benefit of $4,500 - or about what assisted living costs per month in their home state. The combined pool of money benefit of the policies is about $350,000 - and both the benefit and pool of money increase slightly each year in this example.
The combined premium of the Medicare coverage and the LTC coverage for the 65 year old couple - $12,834. Plus, if the couple has money in their HSA account, they can use it for LTC premiums - paying with tax-favored funds. This is a significant savings from their previous years health insurance expenditure.
The smart financial move, however, is not to wait until 65 to buy long-term care insurance. The sweet spot for coverage is from the mid 40s to the later 50s. Unfortunately, this is the time when pressures such as college expenses and health insurance costs may be the highest.
How is it that many advisors think Medicare Supplement Insurance is a must purchase, but LTCI Insurance, which covers a bigger potential cost, is a “Maybe”? Could it be that a lot of advisors simply do not understand the risk/reward of these coverages? It takes a real planner to pull off an early LTC purchase - or the advice of a knowledgeable advisor.