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Whether your planning approach involves three, five or seven pillars, it is likely you are missing the top financial concern for Americans: health care.
Healthcare costs can have a profound impact on someone’s retirement goals, driving concern among clients that has accelerated in recent years and over the course of the pandemic. As such, health care is a critical consideration in the financial planning process.
In my experience working directly with clients of advisory firms, I have identified the major factors that contribute to this concern. I am sharing them to empower advisors to address these areas head-on rather than avoid them.
The cost of health care is increasing unpredictably
The cost of health care is rising in an unpredictable fashion. In my conversations with advisors, I’ve heard the increase will be 4-7% per year. Rates have increased above the rate of inflation and, if continued, may consume the majority of our GDP.
There is no crystal ball to predict whether this will in fact be the case, but I can guarantee you that this is scaring clients into thinking that most of their retirement savings will go towards health care or that they have to work longer to build a safety net. What if, instead of projections, we educated clients on the costs and the likelihood of various scenarios, like a new diagnosis or the need to live in a long-term care facility? Only a third of Americans are knowledgeable about how much they’ll need to cover healthcare costs in retirement. When a client identifies the cost of health care or long term care as their biggest financial worry, don’t just add extra money to an emergency fund. Take it as an opportunity to understand why they feel that way, to provide education, and to put a plan in place for the different scenarios that could happen.
Finding the right health insurance policy can be bewildering
The rise in healthcare costs has led health insurance premiums to increase at 4% annually, which is higher than the increase in workers’ wages (3.4%). But there’s a bigger problem in the fact that, according to UnitedHealthcare, only 9% of people understand the four basic health insurance terms: premium, deductible, out-of-pocket maximum and co-insurance.
A lack of understanding of this important terminology leaves clients exposed to higher costs. I’ve worked with clients who have said, “Well my neighbor has XYZ Medicare Advantage plan and loves it, so I’ll just go with what they have.” Health insurance is a very personalized decision that takes into account many factors like health status, geography, preferred medical providers, and more. Basic education about appropriate coverage is necessary not only for those clients who are approaching age 65, but also for those approaching retirement (more often before the age 65), experiencing a new diagnosis, or operating their own businesses. Decisions made in the realm of health insurance are often unchangeable for at least a year and should be made with diligence. Passing clients off to insurance brokers without first informing them of important considerations when making policy selections is risky, especially when brokers’ incentives in the form of commissions vary by plan. Brokers can steer clients in a direction that prioritizes their own interests over your clients.
In addition, supporting your clients’ enrollment in a health insurance plan is not a one-time event. Policies should be reviewed annually to look for changes in deductibles, provider networks, and something I like to call the “maximum annual exposure,” which is the sum of policy premiums and out-of-pocket maximum, giving you and your clients an estimate of the worst-case scenario for healthcare costs.
Clients are living longer with more disease and stress
Speaking of annual reviews, what is your approach to budgeting for healthcare expenses based on the various ages and health statuses of your clients? Clients’ health, as well as their expected healthcare costs, can change drastically from year to year, especially as they age.
More than half of your clients are living with a chronic disease – and 40% of them are living with more than just one. The healthcare needs of people with multiple chronic conditions are complex and costly, and will become a more pressing concern as the U.S. population ages and people live longer. Do your clients have a family history of disease? A parent who lived to 99 years of age? Take these factors into account to better represent the full scope of how your clients perceive their risk of higher healthcare costs in retirement. That exercise can alter your planning strategy in areas like Social Security and long-term care planning.
Beyond that, stress levels are soaring because of the pandemic. Close to 60% of people are more financially stressed than a year ago. Stress leads to a higher risk for disease, work absenteeism, higher healthcare costs and lower income-earning potential. Therefore, addressing topics that can add stress to your client’s lives, such as health care, is in your and your clients’ best interest.
The healthcare system is becoming more complex
Those managing a chronic condition will experience higher costs, but regardless of whether someone is sick, the healthcare system presents challenges. According to the Harvard Business Review, roughly 50% of Americans struggle to navigate the system on their own, triggering more costly care decisions that could be avoided. This includes trouble communicating with healthcare providers, acting improperly on health information, and misunderstanding the necessity of tests, prescriptions, and procedures. Similar to how advisors act as guides to the financial system, you can point clients to resources that have expertise in the ins and outs of the healthcare system.
Expand the breadth of the relationship and speak to clients about their health. A client and their spouse might be perfectly healthy, but there’s a 1 in 5 chance they are providing care to a family member, like an aging parent, sick sibling or disabled child. This impacts their stress level, reduces their income-earning potential by up to 15% in comparison to non-caregiving families, and increases their spending for care of their loved one, all of which needs to be reflected in your planning.
The trick to alleviating client concerns
Given the level of concern that clients have with health care, forecasting costs or facilitating an introduction to an insurance agent is not enough. Addressing the here and now will dramatically reduce the costs of health care and lead to better health outcomes.
A good healthcare planning strategy is personalized, reviewed frequently, and includes education. Embrace health care to engage clients in a discussion about their preferences and needs. The opportunity to extend the level of support and engagement on this topic has never been greater. Take advantage of it.
Christine Simone is a co-founder of Caribou, a healthcare planning and navigation solution for financial advisors. She often writes on the topics of healthcare and women in tech. Caribou is a proud sponsor of the upcoming ACP Conference in October 2021.
Read more articles by Christine Simone