Near 1104 A.D., many historians agree that Venice, Italy, began its transformation into one of the most flourishing economies of its day. Its famed shipyard could produce a complete seaworthy ship within one day, whereas typical shipyards could produce the same in three months. These ships were not only made quickly, but with the utmost quality. These products soon became trusted vessels of the wealthy to transport great payloads of treasure throughout the Adriatic Sea and beyond. With ships being made that fast, can you imagine if one individual shipbuilding craftsman missed a detail such as filling a small crack or hole? It seems that small leaks could eventually become someone else’s sunken treasure.

Today, let’s take a look at an often overlooked hole that may greatly affect your journey through retirement: long-term care expenses. According to Genworth Financial, if you are age 65 or older, you have a 70 percent chance of needing long-term care. Its 2016 cost of care survey reports that a private room in a nursing home(1) averaged $92,378, and a home health aide(1) averaged $46,332. In areas of the country where the cost of living is higher, these costs are considerably higher. A common retirement planning mistake is the presumption that Medicare and other types of insurance will cover the costs of long-term care. Medicare only provides skilled nursing care and some therapy services after a 3-day hospital stay. From there, the first 20 days are fully covered by Medicare, the next 80 days are partially covered and no long-term care benefits are covered after that. As you can see, a financial leak of this magnitude could prove costly to your retirement and could leave the healthy spouse with less income to carry them through their retirement.

Unless someone has accumulated or inherited enough money to cover these costs out-of-pocket, retirees are faced with a decision to purchase long-term care insurance. Like life insurance, long-term care insurance policy premiums largely depend on your age and health. If you take out a policy when you are young, you can expect to pay comparatively low premiums during the life of the plan, while starting a new policy when you are older will entail significantly higher monthly premiums. The insurance industry sees the immediate need to help individuals transfer this risk to insurance companies, but the use-it-or-lose-it model of the traditional long-term care policy has made individuals hesitant to place their money into this type of product. Their biggest fear is that they would never use it and the premiums that would have been paid throughout the years would be lost. Over the last few years, insurance companies have developed policies that address these concerns. As a result, we have seen the introduction of hybrid life insurance policies that combine life insurance with long-term care benefits. By adding a long-term care rider to the policy, the insured is able to use a portion of the death benefit to pay long-term care expenses, thus reducing the death benefit proportionally. Therefore, if the policy owner never has a long-term care need, the policy will pay a death-benefit. These policies are known to have a lower level of underwriting requirements and may be easier to get coverage over traditional long-term care coverage.

Long-term care annuity products have recently gained popularity in the last few years. Traditional fixed annuity investments have been combined with a long-term care rider to provide an inflated income benefit for long-term health care expenses. For someone that may have health issues and might other wise not be able to obtain other insurance coverage, these products can be very attractive.

Please ask your Financial Professional about your alternatives and weigh the benefits of each.  Ignoring the potential costs of long-term care or somehow thinking that the government or your heirs will take care of these costs may cause the small leak in your retirement income to become someone else’s sunken treasure.


Tim Nichols is a financial consultant with Nichols Wealth Management. He may be reached at timothy. nich- ols@lpl.com. Securities offered through LPL Financial, Member FINRA/ SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk, including loss of principal.

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