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10 Reasons Critical Illnesses Pose Retirement Risk

Philip Moeller

Health care clearly has emerged as the greatest financial risk faced by retirees. The incidence of expensive chronic diseases is higher for today's retiring baby boomers than it was for their parents. Longevity gains have added years to average life spans, but these extra years may seem more curse than blessing if they are spent dealing with serious illness and unaffordable medical bills.

Doesn't insurance cover these things? Not exactly. Basic Medicare leaves retirees on the hook for a 20 percent co-pay with no cap. Supplemental Medicare policies can close much of this gap. But they don't cover most long-term care expenses, and neither does Medicare.

The Employee Benefit Research Institute says a 65-year-old couple with median drug expenses would need $283,000 to have a 90 percent chance of covering their out-of-pocket drug expenses during the remainder of their lives. And this total does not include long-term care.

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Health care expenses have always been an important retirement consideration, but they have become more of a concern in recent years. In 2003, 27 percent of people surveyed by EBRI said medical expenses were an extremely important aspect of retirement planning; that figure rose to 45 percent last year. During the same period, the percentage of workers saying they would retire earlier if they had guaranteed access to health insurance rose from 15 percent in 2003 to 27 percent last year.

Washington National Insurance Company sells what it calls critical illness insurance as well as disability and cancer policies. In January, the company published a survey of 1,001 middle-income consumers who were asked about their perspectives on critical illness and financial security. The facts represent a sobering assessment of the impact illness can have on our later years. They also add weight to the notion that baby boomers are likely to face difficult health and financial futures if they don't begin taking much better care of themselves.

Here's a top 10 list of the study's findings:

1. Between 2003 and 2009, health insurance premiums increased by an average of 41 percent.

2. The average cancer patient with health insurance incurs $712 in monthly out-of-pocket bills for physician co-payments, prescription drugs and other expenses related to treatment.

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3. About half of men and one-third of women will develop cancer at some point in their lifetime.

4. One in eight older Americans has Alzheimer's disease.

5. Many people find they must pay a surprising portion of the direct costs of treatment due to gaps in their medical insurance coverage. On top of these direct expenses, they may face large indirect costs that are not covered by medical insurance, including lost work time, transportation to and from treatments and extra required care. Middle-income Americans frequently omit these associated costs when they consider the financial impact of critical illnesses.

6. Americans believe the financial impact of a critical illness can be lasting. Thirty-eight percent are "very concerned" about a cancer diagnosis, compared to 30 percent for heart disease and stroke, and 25 percent for Alzheimer's disease/dementia.

7. On average, middle-income Americans believe they have a 1 in 5 chance of being diagnosed with a critical illness in the next three years. Consumers estimate they have a significantly higher probability - a 1 in 2 chance - of being diagnosed with a critical illness within the next 20 years.

8. Middle-income Americans generally have a modest level of savings. The average savings reserve is $30,000; one-fourth have no current savings and half have less than $2,000 in savings.

9. Despite these views, 6 in 10 people who were surveyed said they have not had a meaningful conversation with loved ones or advisers about caregiving options or financial preparations in case of a critical illness.

10. Three-fourths of those polled are not aware of critical illness insurance, and only 5 percent have purchased it. Two-thirds of people without critical illness insurance say they think it's expensive.

Historically, critical illness policies have often been viewed as an expensive product that provides modest protection compared with other types of insurance. It's not that anything has changed in judging the financial metrics of such products, but insurance often is evaluated on something close to humanitarian grounds.

The idea of insurance companies trying to make money, and especially a lot of money, does not sit well. An insurance company making even a third or half the profit margin of Apple, for example, would face enormous public scorn. Yet people love Apple, and people most definitely don't love insurance companies.

As Washington National President Barbara Stewart notes, her company's products aren't for everyone. "It really depends on what you're interested in and the unique needs of you and your family," she says.

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Most of Washington National's customers elect the company's return of premium feature when buying a policy, Stewart says. After paying premiums on a policy for periods ranging mostly from 10 to 20 years, policyholders can get back all their premiums, less any claims paid out on their policies.

The feature has common-sense appeal, and it helps convince lots of consumers to buy a policy. "That's one of the reasons we feel so strongly about the return of premium benefit," she says. "We hear this from policyholders over, and over and over again. It helps them make the decision to act."

Consumers should do their homework before buying one of her company's policies, or any other product, for that matter, Stewart says. Washington National products carry an average annual premium of less than $600, which Stewart says is designed to be "flexible and affordable" for middle-income consumers. If policyholder benefits were not judged to be adequate, she adds, "people are not going to come back to those products."

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