Longer Life Means More Financial Strain

Expanding health care costs will likely force retirement plan advisers to consider new ways of protecting client assets.

According to Prudential Group Insurance, a business of Prudential Financial Inc., at least 60% of men and 80% of women will need to pay for long-term care at some point in their lifetime, and the related expense is likely to damage retirement savings and independence.  

Three factors in particular are pressuring the financial wellness of employees and widening insurance coverage gaps, says Robert Pokorski, vice president and medical director for Prudential Individual Life Insurance, particularly in the event of a critical illness.

First, most households have insufficient savings available to meet higher out-of-pocket expenses, Pokorski says. In fact, about half of U.S. households have savings less than $10,000. Moreover, nearly half of households report that, if needed, they would not be able to come up with $2,000 in cash within 30 days. And while some employees may be covered by disability insurance, the benefit received is usually only a portion of the employee’s income, making cash outlays in the event of a critical illness difficult for the nearly 70% of Americans that Prudential says are living paycheck to paycheck.

Next, health care costs are expected to continue to increase faster than inflation for some time to come. On Prudential’s assessment, health expenditures are expected to grow at 5.3% through 2020, whereas inflation is projected at 2.1% over the same period. That will put even more strain on American workers who are already struggling to save effectively for retirement, Prudential says.

And finally, in response to rising health care costs, many employers have been forced to shift more responsibility for health care expenses to employees. So even though employers paid 20% more towards their employees’ health insurance in 2010 than they did in 2005, workers paid significantly more (47%) during the same time frame, while wages only increased 18%.

Those figures have significant implications not just for employees and their families, but also for the financial professionals tasked with advising workers on such matters, says Robert Patience, vice president of voluntary benefits for Prudential Insurance Group.

Patience says several of Prudential Financial Inc.’s life-insurance businesses have recently released products that can deliver advanced death benefits and cash support for both medical and nonmedical costs associated with short- and long-term care, both on an individual basis and through workplace arrangements.

He pushed one new style of product in particular, critical care insurance, as a means for large employers and advisers to offer an affordable-but-effective benefit that helps their employees deal with the potentially catastrophic financial impact of illnesses such as cancer, heart attack, stroke, Alzheimer’s and various others.

The products take a fundamentally different approach to benefit delivery than traditional long-term care arrangements, Patience says, which may be more attractive to advisers and workers than more traditional long-term care insurance. Many advisers shy away from offering long-term care solutions simply due to their expense and complexity, but that could change as the U.S. population ages and demand for care grows (see “Will Advisers Add Long-Term Care to Offerings?”).

The new types of solutions, Patience explains, pay a lump sum upon the diagnosis of a specific covered illness or condition, which can be used for any purpose—not just for medical bills. Patience says the critical care offerings are far more affordable than traditional long-term care options, which can assess thousands of dollars in annual premiums for even modest coverage. With the critical care products, Patience says, the average worker pays closer to $250 a year for around $15,000 in cash coverage.

“That’s going to boil down to a very affordable per-paycheck premium,” Patience says, which should in turn mean better uptake by participants.