As a Medicare expert with over three decades of experience, I have worked closely with countless individuals, families and professionals navigating the complexities of Medicare. A recurring issue I've identified is the gap in understanding that many financial and estate planners have regarding Medicare costs and how they affect their clients' overall planning strategies. This disconnect can lead to significant financial consequences for clients who rely on their advisors for guidance.
The Medicare knowledge gap
Medicare, the federal health insurance program primarily for individuals 65 and older, is often misunderstood. Many assume that Medicare will cover all health care expenses in retirement, which is far from the truth. Medicare has several parts, each with its own premiums, deductibles, copayments, and coverage limits. Understanding these intricacies is essential for financial and estate planners to advise their clients effectively.
Medicare Basics
Medicare consists of many parts:
Part A (Hospital Insurance): Covers inpatient hospital stays, skilled nursing care, hospice care, and some home health care. Most people do not pay a premium for Part A if they or their spouse paid Medicare taxes while working.
Part B (Medical Insurance): Covers certain physician services, outpatient care, medical supplies and preventive services. It requires a monthly premium, which is adjusted based on income.
Part C (Medicare Advantage): An alternative to original Medicare, offered by private Medicare-approved companies. These plans usually include Part A and Part B coverage and may offer additional benefits such as vision, dental and prescription drugs.
Part D (Prescription Drug Coverage): It helps cover the cost of prescription drugs. Part D plans are offered by private insurers and require a monthly premium.
In addition to premiums, there are also out-of-pocket costs, such as deductibles, co-payments and co-insurance. For example, the standard Part B deductible in 2024 is $233, after which beneficiaries typically pay 20% of the Medicare-approved amount for most physician services.
Medigap: Supplemental Insurance. Many beneficiaries purchase Medigap (Medicare Supplemental Insurance) policies to cover costs not included in Original Medicare, such as copayments, coinsurance, and deductibles. Advisors must understand the nuances of the various Medigap plans to guide their clients in making informed choices.
Financial and estate planning
For financial and estate planners, failure to account for Medicare costs can lead to inadequate planning and unexpected out-of-pocket expenses for clients. Here are four key considerations:
1. Monthly income adjustment amount. High-income beneficiaries pay higher premiums for Part B and Part D. Planners should consider how income affects these premiums and adjust strategies accordingly. For example, managing withdrawals from retirement accounts to avoid exceeding income thresholds can result in significant savings.
2. Long-term care (LTC) planning. Medicare does not cover most LTC services, such as extended stays in nursing homes or assisted living facilities. Integrating Medicaid planning and LTC insurance into clients' strategies is vital to protecting their assets.
3. Estate planning documents. Including provisions for health care directives and powers of attorney ensures that clients' medical wishes are respected and that someone can decide on their behalf if they become incapacitated. Advisors should also discuss the implications of health care costs on the distribution of assets. For example, significant health care costs, especially those related to long-term care, can quickly deplete an estate's assets. This depletion can reduce the inheritance available to beneficiaries, potentially altering the client's intended distribution plan. Advisors should also consider the tax implications of health care expenses and estate planning strategies. For example, some medical expenses may be tax deductible, which may affect the overall estate tax liability.
4. Retirement Income Strategy. Planning for health care expenses in retirement involves more than just calculating expected premiums and out-of-pocket costs. Advisors should also consider the timing of Social Security and other sources of income to optimize clients' overall financial well-being. For example, delaying Social Security benefits past full retirement age (FRA) can result in higher monthly payments. Clients can receive an 8% increase in benefits for each year they delay until age 70. Also, delay benefits can provide greater lifetime income for longer-lived customers. Counselors should help clients assess their health, family history, and life expectancy when deciding on timing.
Educating clients and advisors
Addressing this knowledge gap starts with education. I recommend that financial and estate planners:
Stay informed. Regularly update your knowledge of Medicare rules, costs and coverage options by subscribing to industry newsletters, attending seminars and participating in continuing education courses focused on Medicare.
Collaborate with experts. Work with Medicare specialists to provide comprehensive advice to your clients. Referring clients to trusted Medicare advisors can improve your service and ensure they receive expert guidance.
Communicate proactively. Discuss Medicare costs and coverage options with clients long before they reach eligibility age. Early planning can help mitigate unexpected expenses and enable better decision-making.
Al Kushner is a leading authority on medical insurance, known for his extensive experience, which includes nearly four decades focused on Medicare.