Background

If you are 65 or older, there is a 70% chance of needing long-term care at some point in your lifetime. The cost of care will depend on where you live and what type of services are needed. The national average for the cost of in-home care is $54,912/year. The national average for a private room nursing home is $105,850/year. For those that need around the clock memory care, they will likely be in the private room nursing home. For those that might receive care from a family member, they might need some relief for a few hours a day at their home. This creates complexity when it comes to planning for care. Will you be part of the 70% that might need some form of care? How long will you need it and how much will it cost? There is no crystal ball, but I am writing this article so you can get a glimpse of the process we go through with our clients when they are approaching retirement and considering if they should self insure or buy Long-term Care insurance. 
 

Important considerations

Personal experience:

If you are approaching retirement, it’s always important to think about your personal experience dealing with a long-term care event. Have you seen a loved one or close friend go through it? How did it impact you?  I find that those who have personal experiences are more inclined to plan for it themselves. Additionally, I find they see value in having some form of insurance because of the peace of mind it provides.

Assets:

Someone’s financial assets are a big part of long-term care planning. Some might make the mistake of thinking, “I have enough to self-insure,” and by default never look at buying Long-term Care insurance. Here’s a question to consider.  Why do Oprah Winfrey, Warren Buffett, Suze Orman, and other extremely wealthy individuals own Long-term care insurance? It’s simple. Risk management and tax efficiency. Why would they want to liquidate high quality assets like real estate, stocks, equity ownership etc. to pay for long-term care? Their estate would likely forgo significant returns on those assets, as well as likely realize significant tax penalties. While everyone may not be Warren Buffett, you very well might have a net worth of $2mm-$5mm, and have assets on the balance sheet that have performed quite well.  Liquidating those assets at a high rate to pay for care might be extremely tax disadvantaged, particularly if most or all of your assets are in tax deferred vehicles (IRAs, 401ks, 403bs, Annuity).  These accounts are tax deferred until withdrawals are made, and if you are needing care, you need to consider the tax impact on those withdrawals. Would you want your spouse or children liquidate high quality assets, pay significant taxes and forgo future growth on those accounts in order to pay for a long-term care that you will likely need?  Alternatively, what if you leveraged a Long-term Care policy where the benefits are paid on a tax free basis so you could preserve your best investments?  When I am working with clients that are considering self-insuring vs. buying insurance, we certainly want to determine if they are financially able to self-insure, but we would also want to determine the tax and financial impact of doing so. 

Financial Goals:

From my experience, this is at the heart of important considerations when deciding to self-insure or buy insurance. Let’s say you have a burning desire to leave a financial legacy.  You have worked hard to accumulate your wealth and want to do all you can to preserve it for your heirs. Assuming you are still in good health, you might be a good candidate for buying long-term care insurance. If you had a long-term care event, which might cost upwards of $300,000 (after taxes), this could jeopardize your ability to leave that financial legacy. If you are married and your spouse survives you, that creates even more of a burden on not only leaving the financial legacy, but preserving your spouse’s financial independence by having fewer assets to live on. On the contrary, if there is no burning desire to leave a legacy or no concerns about leaving money to a spouse, self insuring could be a viable option.

Do you own permanent life insurance?

This is important for two reasons.

First, permanent life insurance is a great tool to provide a tax free benefit to beneficiaries. This could be for a spouse, for children, or a trust. The reason this is important is because if you needed long-term care services and used investment assets to pay for the care, the permanent death benefit could be used to replenish the assets used when you pass away. This works well if that legacy goal is important, and why permanent life insurance could be a great tool to utilize when planning for retirement, simply because you can use investments for income, and the life insurance for legacy.

Second, there could be sufficient cash value built up in the policy over the years of paying premiums. That cash value could be tapped into to help you pay for care later in life. Most policies, if structured properly, allow for loans on the cash values to be accessed on a tax advantaged basis. When you pass away, the loans would simply be subtracted from the death benefit. This provides another bucket to use for “self-insuring.” Furthermore, if you are still in the sweet spot age of buying long-term care insurance (50-65), you could use the cash value to pay for long-term care insurance premiums on a tax advantaged basis. This is done via what’s called a 1035 exchange. A 1035 exchange allows for transfers of funds from certain life insurance policies and annuities without paying taxes. Therefore, in addition to using cash value in life insurance, you might also be able to use cash built inside of annuities to pay long-term care premiums. Not all companies allow for this, and not all contracts are eligible, so be sure to consult with a professional to assist in this process so you can avoid any penalties.

Martial Status and Family Dynamics

59% of people who receive care in-home don’t pay for it. This is because a spouse or family member is providing the care. If you are not married or don’t have a family dynamic that would accommodate for this, you will need to have a plan for paid professional care. Even if you have children, you might want to avoid becoming a burden on them and have professional care. Women outlive men, and therefore, they also need care longer on average (3.7 years for women vs 2.2 years for men).

Health

Family history and current health status are important for obvious reasons. If you have family history of dementia, you have a higher likelihood of needing care for a longer period of time. However, if you are not currently healthy, you may not be able to qualify for insurance in the first place, so self insuring may be your only option. Longevity will also play a factor in how long your assets need to be in tact, which brings inflation risk into the picture. Most people need care in their final years of life, so you might be planning for an event that might not occur for another 20 or even 30 years.  The cost of care has gone up at a higher pace than the consumer price index, so ensuring your long-term care assets or Long-term Care insurance is inflation protected is critical. 

Types of Insurance

My firm is fee only, so we do not sell Long-term care insurance.  Before launching Imagine Financial Security, I did sell Long-term Care Insurance and was licensed and certified in Long-Term Care insurance.  Therefore, I have a solid foundation on the types of insurance products out there.  However, the landscape is constantly changing, so I consulted with the Co-Founder of BC Brokerage, Peter Ciravalo, to assist me with this section.  BC Brokerage is an independent insurance firm that represents multiple carriers for Long-term Care and other insurance products.  Peter explains that there are two primary forms of Long-term care insurance. The traditional, pay as you go policy and the newer hybrid Life/Long-term Care product. 

The traditional policy is fairly straightforward in the sense that you pay the premium until you cancel, pass away, or need long-term care. Insurance is triggered when you are unable to perform 2 out of 6 “ADLs,” or Activities of Daily Living. These six ADLs are; bathing, dressing, toileting, transferring (moving to and from a bed or a chair), eating, and continence. Typically you will have a waiting period anywhere from 0 days to 365 days. The shorter the waiting period, the higher the premium. You will also have a benefit period. In the early days of Long-term care insurance, you could buy a policy that would cover an unlimited benefit period. As you can imagine, the claims on these policies were much higher than expected, and it led to many insurance companies exiting the business or raising premiums on existing policy holders.  Peter explains this is a major drawback of these policies because insurance companies had no history of claims experience, and many of them couldn’t afford to pay the claims the way their premiums were structured.  The core component of a Long-term Care policy is the benefit amount.  For traditional policies, the benefit is paid as a monthly reimbursement. After paying for care, you inventory all of your receipts, and the insurance company will write you a check for the amount up to the monthly benefit on a tax free basis.  Your health, age, waiting period, benefit period and monthly benefit are all variables that contribute to what your premium might be. Longer benefit periods, higher benefit amounts, and shorter waiting periods all contribute to a higher premium. One component to keep in mind is there is something known as a “lifetime maximum benefit pool.” It’s calculated by simply multiplying your monthly benefit times the benefit period.

Example; let’s say you have a benefit period of 5 years (60 months) and your monthly benefit is $5,000/month. If you multiply 60 months x $5,000, you get $300,000, which would be your maximum benefit pool. Let’s say you start a claim and only need $3,000/month for 5 years. If you multiply $3,000 x 60 months, this means you claimed $180,000 of the $300,000 pool. Therefore, you still have another $120,000 left in your benefit pool that you have yet to tap into, and thus the policy could actually last longer than the benefit period of 5 years. Conversely, if you needed $10,000/month, the policy will only reimburse you the maximum monthly benefit of $5,000, meaning you would be out of pocket the difference. Peter likes to use a monthly benefit of $6,000/month for 3 years, which will provide a benefit pool of $216,000, as a minimum starting point.  The catch to the benefit pool for pay as you go policies is there is no survivor benefit.  Once the insured passes away, nothing is left to the beneficiaries. 

Earlier we discussed making sure your policy is relevant when you need a claim, and therefore protecting the benefit against inflation. Long-term care services have gone up at a rate of approximately 2.62% for the last 15 years.  Therefore, if you are buying insurance at 65, the likelihood of needing a claim won’t be for another 20+ years, so having an inflation option can keep the policy relevant for when/if you need a claim. Make sure to evaluate all of the inflation options the policy has to determine the pros and cons of each.

The second type of Long-term care insurance is known as a hybrid policy. This combines Long-term Care Insurance with Universal Life Insurance. Peter has seen the trend of hybrid policies taking over in popularity over the traditional policies.  The reason is simple, it’s not a “use it or lose it” product.  The premiums might be slightly higher, but they provide the death benefit so if you pass away and never need long-term care, at least something will be left to your beneficiary.  Additionally, many policies allow for you to surrender the cash value, which is ultimately a return of your premium.  If for some reason you change your mind about the insurance product or simply want to use the cash for something else, there is some flexibility on returning the premiums paid.  Another major advantage the hybrid policies have is most of them are considered “non-cancellable.”  This means the carrier cannot increase rates on existing customers.  On the contrary, 100% of insurance companies that are in the traditional Long-term care business (pay-as-you-go) have raised rates on existing customers at least once. 

Peter also explained to me that hybrid policies are mostly cash benefits, not reimbursement policies.  As we discussed earlier, most traditional policies will reimburse you after the care is paid for.  A cash policy will simply provide you the cash up front, based on the monthly benefit amount, and that money can be used for care.  This is a great option because this protects your assets on the balance sheet that are invested for other purposes. 

The final differentiator is the flexibility in premium schedules.  You can either pay a lump-sum or pay the policy up in a variety of different premium schedules (anywhere up to 20 years).  It’s nice to know you won’t be paying premiums for as long as you live.

There are many carriers out there with different flavors of policies, and it’s important to do your due diligence and get multiple opinions when you are looking at what product is right for you. You can get in touch with Peter and his partner, Broc, by visiting their firm’s website @ www.bc-brokerage.com.

Additional Thoughts

Tax benefits

Aside from the tax free benefits from the insurance claims, some insurance products allow for tax deductions on a portion of the premiums paid.  It depends on your age and what kind of product you are buying, but this helps offset some of the expense associated with paying premiums. Consult with your tax advisor to see if you qualify for these deductions and how it impacts your tax situation. 

Continuing Care Retirement Communities, or “CRCC,” are extremely popular for seniors as well. It allows you to buy into an independent living situation that best suits your needs and includes amenities that provide a relatively maintenance-free lifestyle. They offer onsite advanced medical care, such as custodial care or memory care. One thing to note is that some contracts provide custodial care as part of the up front fee and ongoing fee, and some do not. If the contract does not, it will require additional out of pocket expenses to pay for custodial care, should you need it down the road.  That care, if needed, could be funded by a Long-term care insurance policy.  A major downside to this option are the costs associated with them. Most require a significant up front fee that is non refundable, in addition to the monthly maintenance fee. However, I have several clients who live in CRCC’s and don’t regret it for one second. Be sure to consult with your attorney, tax advisor and financial planner before entering any contracts with a CRCC. Also, talk to friends or acquaintances that live at one you are interested in to get their perspective. This is a great resource if you are considering this route (CCRC’s).

Conclusion

As you can see, there are many considerations for long-term care planning and there is no right answer on how you plan. Your personal goals, circumstances, and financial situation all play a factor on whether you self-insure, buy insurance, or a combination of the two. Additionally, if you plan to buy insurance, there are different carriers that offer insurance with many flavors of the product. I always advise getting several options to consider, and of course fit that decision within the framework of your overall financial plan.

If you would like help planning for your retirement and have questions about protecting against the risk of long-term care, you can schedule a complimentary “Mutual Fit” meeting below.

 

Sources:

 

https://www.webmd.com/health-insurance/features/understanding-long-term-care

https://www.medicare.gov/coverage/long-term-care
https://www.aarp.org/caregiving/financial-legal/long-term-care-cost-calculator.html
https://www.forbes.com/sites/howardgleckman/2019/04/01/another-shock-to-the-long-term-care-insurance-industry/?sh=5c36b5ac385e
https://www.genworth.com/aging-and-you/finances/cost-of-care.html
https://pro.genworth.com/riiproweb/productinfo/pdf/131168.pdf
https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
https://www.dementiacarecentral.com/memory-care/florida
https://www.kitces.com/blog/a-new-way-to-pay-for-long-term-care-insurance-with-favorable-tax-treatment/