Banks have not plunged into offering retirement health-care products for the broad consumer market — despite the growing need — because the products to help retirees cope with health-care costs remain limited and expensive.
And whether banks will be able to help their retiring customers finance health care will depend both on new products and on people’s willingness to make saving for these costs a priority.
The need to consider post-retirement health care has become more pressing lately, even in light of the recent expansion of Medicare benefits, because more employers are cutting what they offer to their retired employees.
But people are finding that the world of post-retirement health care is filled with products that are either expensive — such as long-term-care insurance and individual health policies — or decidedly mediocre, like the coverage most people get under Medicare.
“You can’t today, in many situations, always count on an employer to be there to get you to your retirement age and through it. People now have to start taking the steps necessary to guarantee that they are going to be able to do it without an employer,” said Jeffrey Levine, a managing director in the advanced planning group at Comerica Bank in Detroit.
In a survey of some of the largest U.S. employers released in January, Hewitt Associates and the Kaiser Family Foundation found 10% saying they had eliminated subsidized health benefits for future retirees in the preceding year and 20% saying they were likely to do so in the next three years.
However, health-care costs in retirement are a misunderstood expense that many people don’t consider or plan for, said Paul Fronstin, the director of health research and education at the Employee Benefits Research Institute, or EBRI, in Washington.
“People don’t know what it is,” Mr. Fronstin said. “How can you expect them to plan for it?”
He said a 2001 study by his group found that retiree health benefits were not even on the radar screen for most working people.
But health benefits, and the need to pay for them, are inescapable. Frank Zurlo, senior vice president, financial services, at Webster Insurance, says, “Any financial plan for retirement must include coverage of medical expenses and medical insurance,” including long-term-care. Webster Insurance is a unit of Webster Bank in Waterbury, Conn.
This is especially important for people who are considering retiring early and may not realize that they will most likely be without health insurance until they turn 65 and become eligible for Medicare. Individual health insurance for a couple in their early sixties could easily cost $1,400 to $1,500 a month, Mr. Zurlo said.
The weighing of options needs to include what Medicare does and does not cover, something many people are confused about, Mr. Zurlo said. For example, many think Medicare covers long-term-care nursing home care, but it does not.
Customers also need to consider whether they want to buy Medigap insurance policies that cover some of the co-pays and deductibles under Medicare. Mr. Zurlo said many companies offer such products; the best known is sold through AARP.
Even with supplementary insurance, the savings required to pay for health care can be steep.
An EBRI study has found that an employee with access to employment-based health care who must pay the whole premium himself and who retires in 2004 at 65 would need $73,000 of savings just to pay health-care premiums if he or she lives to be 80. If that person lives until 90, he or she would need $158,000. These examples use a conservative 7% estimate of annual premium increases.
The same study estimated that a retiree who wants to use Medigap insurance to pay for some of the costs associated with Medicare would need $40,000 to $118,000 of savings. These estimates are lower than for employee-based health-care costs, but the coverage provided by Medicare and Medigap does not supply comprehensive prescription drug benefits. Prescription drugs can run retirees from a few hundred to a few thousand dollars a year.
The study said that since Medicare was not designed to cover all medical expenses, nearly all retirees have some sort of additional insurance — only 13% do not. Most use an employee-sponsored plan or Medigap.
Ken Reynolds, the managing director of the American Bankers Insurance Association, or ABIA, in Washington, said he has no data on how many banks offer individual health products but said he thinks banks are limited by the products available.
“It’s so difficult to get good coverage at reasonable prices, especially for the senior community,” Mr. Reynolds said.
“The banks have done fairly well in addressing the needs of their most affluent clients,” he said, “but it’s a bigger challenge for the category that are below the super-affluent.” And the very affluent have “a net worth buffer” when it comes to health-care costs in retirement that the average person lacks, he said.
Actually, high-net-worth customers generally have their post-retirement needs covered through a company plan or some other means, said Jay F. Mastilak, a senior vice president at PNC Investments who specializes in serving that clientele. However, she said, health care may become more of an issue for these clients as companies drop their plans.
For people who do not want to spend down their assets to pay for nursing home living, Webster’s Mr. Zurlo said, his bank and others offer long-term-care products. Ms. Mastilak also said this is an important part of the discussions she has with her high-net-worth clients.
Long touted as a potentially big product for banks, long-term-care policies have been slow to get off the ground at banks and elsewhere because of their complexity and high cost.
However, banks continue to add the product to their menus. In a 2003 “Study of Leading Banks in Insurance” by the ABIA and Reagan Consulting, 7.4% of the respondents said they planned to add long-term-care insurance to their product rosters within two years. And 8.9% had done so in the preceding three years; 17.7% said they had added the product more than three years before. A total of 26.6% of respondents said they offered long-term-care insurance.
But Comerica’s Mr. Levine said that baby boomers are getting a reality check about long-term-care policies as they consider their parents’ requirements. This should influence their decisions about their own needs, he said. “It really hits when people see it closer to home,” he added.
Mr. Zurlo said many people are under the impression that Medicare covers long-term care and so do not want to get the product. Medicare covers rehabilitative care, for example, if someone needs physical therapy after a hip replacement, but does not “pay for custodial care.”
“And that’s what we see destroying the hard-earned money that they’ve put away,” Mr. Zurlo said.
Long-term-care insurers have also developed products that people in their 40s and 50s can buy and pre-pay during their key earning years, Mr. Zurlo said, with a return-of-premium feature that lets them reclaim the premium if the product is not used.
Long-term-care insurance not only lets people avoid spending down their assets to get care but also offers more choices of facilities, Mr. Levine said. And older people with assets they want to pass on to their children are looking at the product as a way to protect that legacy, he said.
“It’s becoming more of an estate planning product than it was in the past,” he said.
PNC’s Ms. Mastilak said that clients also need to worry about how one spouse’s need for long-term care could affect the funds left for the other to live on.
“If the healthy spouse can continue to live in retirement at the same level, they could self-insure,” she said, meaning the couple would plan to absorb any long-term-care costs. “But if we determine that their retirement plan is adversely impacted because of a spouse’s LTC need then we recommend that they consider insurance.”
Those who want to retire early may find some help in the Health Savings Accounts signed into law in December, said Mark Baran, the ABIA’s senior tax counsel.
Instead of shelling out thousands for a traditional health insurance plan, these people could buy a cheaper high-deductible plan and use the tax-advantaged HSAs to pay for health care.
As of June, he said, 17 banks were Health Savings Account trustees, including big names like Wells Fargo and Mellon, and 40 insurers were offering the product. Another 80 insurers are expected to add it by December, he said.
“These Health Savings Accounts could be a really great alternative” for people retiring early, Mr. Baran said.
However, people eligible for Medicare are not allowed to put money in these accounts, so it is not a way for post-65 retirees to pay health costs.
Mr. Zurlo said potential legislative changes make Medicare “a moving target” for younger people who want to start thinking about things like health-care costs in retirement. But for those 45 to 50 years old, now is the time to put “some serious thought into what you’re going to do.”
