How to Pay for a Serious Illness in Retirement

April 22, 2024 |read icon 10 min read
A man in his 70s meets with his doctor to discuss his ongoing treatment and thinks about how he’s going to pay for a serious illness in his retirement years.

A serious illness is one of the few things that can seriously derail your financial aspirations. It can be even more devastating once you retire. Without the buffer of a regular salary, medical costs can quickly eat into retirement funds, potentially affecting your financial stability and long-term goals.

Predicting future care needs can be challenging. It’s hard to put money towards something you may never need.

However, the financial impact of a serious illness is real. One in three Americans is part of a family that would consider their medical bills a financial burden. One in five struggles to pay those bills each month and one in 10 admits they wouldn’t be able to pay them at all. Even for those who have private insurance, many need to stagger their medical payments because they can’t afford to pay off those bills entirely at the end of the month.

Life insurance and annuities can help in covering the costs of a serious illness while simultaneously aiding you in achieving other financial goals.

What about private insurance and Medicare?

Keep in mind that even the best health insurance won’t cover all your health costs. Even with the best planning, there will be unforeseen and unexpected charges. In fact, 62% of Americans who are struggling with medical bills have health insurance.1 46% of Medicare beneficiaries being treated for a serious illness face prescription copayments of more than $500 a month.2

Additionally, Medicare doesn’t typically cover long-term care services because it’s designed to provide coverage for acute medical care rather than custodial or ongoing care needs. Long-term care often involves assistance with activities of daily living (such as bathing, dressing and eating) or supervision due to cognitive impairments, rather than medical treatment.

Just to clarify

It’s important to keep in mind that life insurance and annuity riders are not long-term care insurance. Depending on the type of policy, they may differ in purpose, coverage, triggering events and use of funds.

What about my savings?

You may feel that you have enough savings to cover these costs. But which one of your accounts could you liquidate at the precise moment needed without concern about marketability, loss or taxation? These factors may erode the amount you have available to pay your bills.

Many individuals use personal savings, investments and other assets to pay for long-term care services. However, the high cost of long-term care can quickly deplete these resources, leading some individuals to rely on Medicaid once their savings are exhausted.

Life insurance may help

These hypothetical examples illustrate how a permanent life insurance policy with an accelerated death benefit rider can help reach your financial goals, including a way to ease the financial burden of a serious medical condition. This type of rider provides a portion of your policy’s death benefit while you’re still living, giving you more options to deal with the financial strain of your condition.

Accelerated death benefit riders are not a long-term care product and may vary in some states.

Maintaining standard of living: Life insurance example with Mike and Susan

Mike and Susan Anderson are 57 and recently retired. Currently, they own 15 rental properties that provide a nice income – more than they need to support their retirement lifestyle. Mike actively manages the properties, taking care of routine maintenance and minor repairs himself. They’re very thankful for this income, not only because it allowed them to retire early, but also because between getting their four kids raised and sending them to college, they didn’t have the chance to save much. They even have some extra income that they’d like to invest somewhere safe so they can leave something for their kids.

Susan worries about Mike becoming seriously ill and not being able to manage the properties any longer. She knows that they would probably have to end up selling the properties, which would mean losing the income from them.

They’re both in good health and decide to purchase $500,000 permanent life insurance policies with an accelerated death benefit rider, which will address many of their planning needs:

  • Permanent life insurance provides funds for the surviving spouse when one of them passes away.
  • In the meantime, they can deposit the excess income from their properties into the policies, where it can grow tax deferred, free from short-term market risk. They may access the life insurance cash value down the road if they need extra money for something, such as helping pay for their grandkid’s college educations.3
  • When the surviving spouse passes away, their policy death benefit offers an efficient way to pass assets on to the children.
  • If either of them experiences a serious medical condition, the accelerated death benefit of the life insurance policy could help cover those expenses. This will help preserve the couple’s assets. For instance, they could use the accelerated benefit to hire someone to manage the rental properties if Mike was too ill to manage them on his own.

By the time they are 73, Mike is suffering from severe arthritis and is unable to care for the rental properties. Even more concerning, he can no longer care for himself.

They decide to file a claim for his accelerated death benefit, providing verification that Mike is unable to perform at least two of the six activities of daily living. He’s eligible to receive half of his policy’s death benefit, or $250,000. He can receive it in a lump sum or in annual $50,000 payments.

They decide to take it as a lump sum. This gives them enough money to pay for a management company to manage their properties while they get them ready to sell. The proceeds from the sales will provide for the rest of their retirement years.

They continue to pay the premiums on both their policies. Upon Mike’s death, his beneficiaries will receive the remaining death benefit, which is guaranteed5 to be a minimum of $50,000. Susan still has the full accelerated death benefit, cash value and death benefit available on her policy.

Protecting loved ones: Life insurance example with Donna and John

Donna is 48 and teaches third grade. Her husband John is also 48. He was forced to retire early due to an unexpected medical condition. Donna spends a lot of her time away from school caring for him. They have enough money to get by, but Donna worries about something happening to her. If she experiences any medical needs in the future, those expenses could eat up money that they might need later in retirement, not to mention what they had planned to leave to their two children.

John’s health issues have taught them both how much impact these expenses can have on their financial plans. They can’t afford more medical expenses in addition to what they are already dealing with. Donna is also concerned about who would provide John’s care if something were to happen to her. She has a small life insurance policy through work but worries that it isn’t enough to cover all his needs.

While getting life insurance for John would probably be too expensive, Donna can buy a permanent life insurance policy that helps address her needs:

  • The death benefit will provide for John’s needs if she passes away before him.
  • If John should pass away before her and she no longer needs to plan for his care, the death benefit from her policy can now provide an efficient way to leave something for their children when she passes away.
  • If she experiences a serious medical condition, she can access the accelerated death benefit rider to help pay for her care, preserving their other assets.
  • In the meantime, the cash value of the policy will grow tax deferred. They may access the life insurance cash value down the road if they need to.

Learn more about our life insurance offerings to see if one is right for your financial strategies.

An annuity with a guaranteed lifetime withdrawal benefit rider may help

An annuity can be an integral part of a retirement income strategy. Not only does it give you a place to potentially grow and protect your money as you save for retirement, it also provides a foundation for guaranteed4 income once you retire.

A GLWB is a feature offered by some annuity contracts. It provides you with a guaranteed amount of money for life, even if the annuity’s actual value decreases to zero.

Some GLWB riders offer a plus option that you can add for an added charge when you buy your policy. This example shows how, with this option, the amount of money you receive will double if you are unable to care for yourself. This can be another source of money you can use to pay expenses in this type of situation.

Securing guaranteed income: Annuity hypothetical example with Mary

At age 55, Mary buys an annuity with a GLWB rider for $250,000. She chooses the plus option that will double her income if certain healthcare is needed. This will provide her with $33,195 every year once she retires.

  • At age 65, Mary retires and decides to begin receiving her guaranteed lifetime income of $33,195 per year.
  • At age 68, Mary falls and breaks her hip. Due to several complications, she is confined to a wheelchair for a year and needs help with bathing, dressing and getting around. Her plus option kicks in, and she receives $66,391 this year to help cover the costs of her care.
  • At age 78, after receiving $33,195 each year for 12 years and $66,391 for one, Mary’s annuity value becomes depleted. She continues to receive $33,195 each year until she passes away 9 years later.

This example is hypothetical and for illustrative purposes only. Actual results may vary.

Learn more about our annuity offerings to see if one is right for your financial strategies.

Consider your options

The uncertainty about your future health needs emphasizes the importance of planning for the unexpected. Comprehensive long-term strategies should consider various health scenarios, your personal preferences and financial resources. While uncertainty may present challenges in decision-making, you can help mitigate risks by exploring options like life insurance, annuities or a combination of both, to provide flexibility without using all your personal retirement savings. Consult with a financial professional to customize a strategy just right for you.

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Sources and References:
1The Henry J. Kaiser Family Foundation – The Burden of Medical Debt
2Fox News – Seniors Face Medicare Cost Barrier for Cancer Meds
3Loans and withdrawals will reduce the policy’s death benefit and available cash value. Excessive loans or withdrawals may cause the policy to lapse. Unpaid loans are treated as a distribution for tax purposes and may result in taxable income.
4Guarantees are based on the claims-paying ability of the issuing company.

Need help with your financial goals?

While you can learn more about our products on this website, this information is no substitute for the guidance of a qualified professional. If you’re serious about assessing your financial wellness, contact a financial professional.

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