Knowing Health Care Can Push Advisors Ahead of Competition

Life and health insurance agents who want to stay ahead of their competition might consider becoming experts at funding medical costs in retirement, a health care financing expert said.

Simple math will dictate that it’s only a matter of time before health care costs eat away at the what retirees can expect to take home in Social Security, said Ron Mastrogiovanni, CEO of the health care cost projection software firm HealthView Services.

“What I tell them (advisors) is that clients are extremely interested in addressing this problem,” Mastrogiovanni said. “It’s the No. 1 issue and to ignore it is a competitive issue for advisors.”

Advisors don’t need a degree from Caltech, or even expertise in Medicare financing, to understand that health care inflation threatens to rob clients of a comfortable retirement unless they follow a health care retirement financing plan, he said.

“It’s not that complicated in terms of what we need to know in terms of how to plan effectively,” he said.

When advisors see the numbers, they tend to recoil at the cost of health care in retirement or grouse that they don’t know much about the nuances of Medicare.

Many advisors themselves are uncomfortable with projecting health care costs in retirement until they come across simple, clear and easy software applications complete with webinars and help desks to get them through the calculations, Mastrogiovanni said.

But in fact, many advisors have managed more complicated retirement financing challenges than how to manage health care expenses in retirement for clients.

Social Security’s file and suspend, a recently terminated strategy to boost Social Security income for married couples is more complicated than the challenges of financing health care in retirement, said Mastrogiovanni.

Health Care Projections

Health care retirement spending projections appear in Health View’s 2016 Retirement Health Care Costs Data Report issued earlier this year.

The report breaks down retirement health care cost components and projects those component costs into the future.

“Driven by age, health care inflation (which continues to be a multiple of the U.S. inflation rates), and cost shifting, health care expenses are on a path to exceed Social Security benefits for many future retirees,” the report concludes.

The potential income loss underscores the need for diversified retirement portfolios and investing in tax-advantaged accounts like 401(k)s and health savings account.

The projected health care inflation rate of 5.1 percent for retirees in 2015 far exceeds the annual U.S. inflation rate of 0.7 percent, according to Health View’s report.

Factor in the meager 1.7 percent cost-of-living adjustment that Social Security paid recipients in January 2015 — recipients received nothing in 2016 — and it doesn’t take much to figure out that before long every dollar paid by Social Security will erode to pay for
Medicare premiums, the report said.

A 65-year-old couple retiring in 2016 can expect to pay $644 a month or $7,250 a year for Medicare Parts B, D and supplemental insurance, the report said.

By age 85, that same couple can expect to pay $2,387 a month or $28,644 a year, and that doesn’t even include out-of-pocket medical costs.

Over the life of their retirement, the average healthy 65-year-old couple retiring this year is projected to spend $288,400 in today's dollars on lifetime Medicare Parts B, D and supplemental insurance (Plan F) premiums, the report found.

When dental, hearing, vision and all other out-of-pocket expenses are included, the total retirement health care bill rises to $377,412, the report found.

Life Insurance and Means Testing

While there may be little to celebrate in adding health care cost inflation to death and taxes among life’s certainties, there are ways to mitigate those costs through shrewd planning and the use of life insurance and annuities.

Medicare “means testing,” which affects how much recipients pay based on financial means, is an “emerging issue” for future middle-class retirees as revised income tiers affect how much people will have to pay.

Aside from life-changing events such as the sale of a house or the death of a spouse, rising wages can push an average into a different bracket. That can trigger Medicare surcharges that result into more health care costs in the form of higher premiums, the Health View report said.

Since nonqualified annuities and life insurance policies don’t fall under the means test, advisors should think about the optimal mix between Roth 401(k) accounts, health savings accounts and life insurance as components of a health care retirement planning tool.

“Today we recommend advisors look at life insurance as critical component for planning not for the death benefit, tax benefit, but for the other piece,” Mastrogiovanni said.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.

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