Mitigating “Caregiving Risk” – 3 Things You Can Control
1. Expect What You Inspect – Detail Out the Insurance Coverage
Get involved early in the financial plans of your parents (or the people you expect to look after). Learn and understand about what type of insurance plans they have and here are some clues on what to look out for:
a. Medical Insurance – What is their current coverage? Are there any exclusions? Are there any co-payments required?
b. Disability Insurance – Are they covered? If yes, how much is the payout? Is the payout in one lump sum or monthly over a period of time? When will the insurance terminate?
c. Critical Illness Insurance – Are they covered? What are the conditions/stages that are being covered? When will the insurance terminate?
d. Others – Do they have any other insurance plans that can provide funding should caregiving be necessary? Examples are annuity plans, life insurance policies with cash values…etc
This painful step will do 2 important things – it helps you “face the facts” early and gives you an opportunity to make adjustments which brings me to the next point.
2. Transfer out the Risks – Pay the small bills and let insurance pay for the big ones
After detailing out the insurance coverage, there are 2 possibilities. The first is that there are existing comprehensive insurance plans in place to pay for what has to be paid. In this case, you can then focus on tidying up the important legal documents such as Lasting Power of Attorney by having a discussion with your parents.
The second (and more likely situation) that you might find yourself in is that there are gaps such as co-payment for hospitalization, little or no disability/critical illness insurance, insufficient coverage or insurance coverage that terminates too early. In such a case, there is a need to have more cash savings or liquidity.
When I work through the calculations with clients, the final amount required can be quite daunting.
Here is an example of how the calculation might look like:
i. Funds required for medical co-payment (i.e. hospitalization) – $3,000 x 10 years = $30,000
ii. Funds required for Long Term Care (e.g. Nursing Home) – $40,000 x 10 years = $400,000
iii. Funds for other Expenses (e.g. on-going insurance premiums…etc) – $2,000 x 10 years = $20,000
If one parent could potentially need $450,000 for 10 years of care, both parents will need $900,000. When the amounts are calculated out, it can often be too overwhelming to think about. Yet, just because the amount seems huge does not mean that it should be ignored.
Work out your own numbers, budget for the amount in advance and explore where the sources of funds can come from. The funding may come from your parent’s exisiting savings or selling of assets such as downgrading of property. It may also come from the legacy fund that they have intended to leave to you.
If their health allows, you can explore enhancing their insurance coverage to transfer these risks to insurance companies. This may well be the most cost-effective way to provide for the financing required so that you can create more funds for yourself which brings me to the next point.
3. Create Income Earlier For Yourself
The majority of caregivers are between the ages of 45 to 59 years old. You can’t set up your retirement plans in the usual manner to provide income from age 60 or 65 onwards as you may have to completely stop work or reduce your workload earlier. The usual sources of retirement income such as CPF Withdrawal (at age 55) or income from CPF-Life (from age 65) may be too late to provide the financial relief required.
You will have to intentionally plan out and create your own income to start much earlier, perhaps from age 45 or 50 onwards. Here are examples of some options that you can consider:
a. Endowment plans that provides a lump sum of money (e.g. $100,000 at age 50)
b. Annuity plans that provides income for a limited number of years (e.g. 10 years)
c. Investment portfolio that you can draw down from without withdrawal penalties
Different options will be suitable for different people but the key is to have the money ready when you need it and intentionally building this flexibility into your plans well in advance. If you never had to shoulder the responsibility of being a caregiver, these funds can be easily redirected towards retirement with little negative impact.