Prepare for High Medicare Costs

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NEW YORK (MainStreet) –Democrats and Republicans are at loggerheads over how to reduce the enormous federal budget deficit, but one thing is virtually certain: Because the soaring cost of Medicare is a big part of the problem, tomorrow’s seniors will have to pay more, perhaps a lot more.

To cover that, you can plan to dig deeper into savings. But it’s also worth considering a little-known type of insurance called a longevity policy.

Also known as longevity annuities, they typically work like this: Sometime in your early or mid-60s, you pay an insurance company a lump sum for a policy that will begin paying you an annual income after you reach a certain age, typically 85.

Because many policy holders will not receive benefits for very long, if at all, longevity policies can be quite generous to those who do survive long enough to collect. For a non-refundable, one-time payment of $50,000 made at age 65, you might guarantee yourself an annual income of $40,000 after you turn 85. Of course, if you don’t live to 85 your $50,000 buys you nothing, other than peace of mind.

It’s too soon to know how the Medicare debate will play out, but Republicans have embraced a proposal by Rep. Paul Ryan, the chairman of the House Budget Committee, that would eventually scrap the current system in which the government pays the lion’s share of senior’s medical bills. Ryan would have seniors choose among private insurance plans, with the government paying a gradually shrinking share of the annual premium.

While his plan would require premiums to be the same for all seniors of a given age, regardless of individuals’ medical needs, it would allow insurers to charge older policy holders more. So although your premium costs might not be so bad at 65 or 70, they could be a serious burden at 85 or 90, when your resources might be running low.

Even under the existing Medicare system, beneficiaries’ out-of-pocket expenses can be steep, and are sure to go up in coming decades.

A longevity policy would be a relatively economical way to handle that problem, and if your Medicare expenses did not rise as much as feared, the policy’s annual payout could be used for ordinary expenses, or be saved to pass on to heirs. MetLife (Stock Quote: MET) is the best-known player in this industry, and you can find others by Googling “longevity insurance.”

As with many types of insurance, longevity policies can be modified. You could have payouts start earlier, and have them increase each year to offset inflation. Of course, these and other options make the policies more expensive.

Like all insurance, longevity policies are a bet against the unknown. If you’re healthy and people in your family tend to live well into their 80s and 90s, a policy is worth considering. Otherwise, perhaps it’s not.

Longevity policies are typically purchased by people in their 60s. If you wait until later, the price will be dramatically higher, because your payment, once invested by the insurer, will have less time to grow before you start receiving benefits.

Most experts think it does not make sense to buy a longevity policy in your 40s or 50s because you might get a bigger return with an ordinary investment in stocks or mutual funds. With an investment horizon of 30 or 40 years, you can weather the financial market’s routine dips.

For now, the Medicare situation is up in the air, and it’s possible – likely, in fact – that today’s 60-somethings would be grandfathered into the traditional Medicare system, even if Ryan's plan gets adopted.

But if you’re in your 60s, or will be in the next few years, a longevity policy may be a relatively economical way to assure you don’t outlive your money..

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