By Ed McCarthy, CFP, RICP
The widely held belief that wealthy persons don’t need long-term care insurance because they can self-fund the cost may be correct regarding out-of-pocket care expenses but it overlooks the risk of potential estate shrinkage.
“The amount of what’s left of your estate is going to be impacted if you and/or your spouse needed long-term care for any period of time and had to draw down your estate.”
William R. Borton, CLU with W.R. Borton in Marlton, NJ
“So, from a standpoint of long-term care planning, not only do you want to make sure you have all the [estate planning] documents in place, but you also want to make sure that you don't end up with estate shrinkage if you don't want it.”
Consider a simple example of LTC’s potential impact. The Genworth 2015 Cost of Care Survey reports that the current national median expense of a private nursing home room is $250 per day or $91,250 per year, an amount that’s been increasing by about 4 percent annually for the past five years. If the client is age 65 now and requires that level of care in 20 years, the first year’s cost will be about $200,000 (at 4 percent annual inflation). Assuming a four-year stay, the total outlay would exceed $850,000.
The cost of care has increased since the above 2015 numbers were released. The LTC NEWS Cost of Care Calculator will show you the current and future cost of long-term care services your area. Just click here.
Run the Numbers
Of course, an objective analysis would also consider the impact of paying Long-Term Care Insurance premiums should the client decide to purchase the insurance for ages 65 to 85. Sontag Advisory in New York City provides that type of analysis when it discusses LTC planning with wealthier clients. Kevin Couper, CFP, a financial advisor with the firm, said they run simulated scenarios to project the impact of buying and not buying LTCI.
“We can simulate that out and say, well, if you don't have any insurance at all, here’s what happens to your portfolio, is that a significant deal?”
“Also, the big thing to notice is how their portfolio is structured. Do they have a lot of liquidity or is a lot of it non-liquid like in real estate so in the event of a long-term care situation would they have to liquidate some things?” To date, their high net worth clients have been comfortable with LTC’s potential impact on retirement cash flow and portfolios and have decided to self-insure the risk, he said.Kevin Couper, CFP, a financial advisor
In cases where a wealthy client decides to purchase LTCI, buying and owning a life insurance policy with an LTC benefit through an irrevocable life insurance trust (ILIT) can leverage the financial benefits, said Kim Natovitz, CLTC with the Natovitz Group in Bethesda, MD. The strategy works when the policy’s LTCI benefit is paid on an indemnity basis versus a reimbursement plan. The mechanics are somewhat complicated but essentially the insured funds the trust with irrevocable gifts. In turn, the trust applies for and owns the life policy on the insured.
If the insured incurs LTC expenses, he or she pays them out-of-pocket but the trust files for and receives the benefit payments.
“The trustee can choose to file a claim and benefits are paid on an indemnity basis, which means that regardless of actual utilization, as long as that individual is receiving qualified long-term care services, then the trustee of the insurance policy can file a claim and long-term care benefits are paid into the trust at that point in time.”Kim Natovitz, CLTC with the Natovitz Group in Bethesda, MD
This arrangement provides flexibility. The trustee can distribute the insurance benefits to the trust beneficiaries, for example, or loan the proceeds to the insured and charge interest on the loan, she said. Outstanding loans reduce an estate’s value, which facilitates additional wealth transfer out of the estate and into the ILIT. Using an ILIT also provides asset protection, she notes. If the insured never files a claim or uses only part of the policy’s LTC benefit during his or her lifetime, the policy’s death benefit is paid into the trust.
An ILIT must be structured properly to reap these benefits but that’s not usually a problem, according to Natovitz.
“The good news is that most people who draft ILITs are very comfortable with creating the language and many of the insurance companies that offer these policies also provide a lot of the attorneys with some specimen language for drafting purposes,”
“So, they recognize that that could be a hurdle for some people so they are offering a lot of support from that standpoint.”Kim Natovitz
No matter which type of plan you purchase, Long-Term Care Insurance is easy, affordable and rate stable income and asset protection. These policies are custom designed. Be careful, however, since premiums can vary over 100% between companies for the exact same coverage. This is why you should seek the help of a qualified Long-Term Care Insurance specialist. Find a specialist by clicking here.
Items to Discuss with a Long-Term Care Specialist:
- Partnership – Most states offer special policies that provide dollar-for-dollar asset protection. The Long-Term Care Insurance Partnership Program might be one of the best-kept secrets in retirement planning. Make sure the specialist explains this program and how it might help you.
- Tax incentives – There are federal tax incentives available for some people. If you own your own business be sure to ask.
- Health Savings Accounts – If you have an HSA you can use the pre-tax money in your account to pay for the premium.
- Asset-Based or Hybrid policies – These are life insurance or annuities with a rider for long-term care. Careful, only a handful are actually a long-term care benefit. However, one of these policies can provide you with the flexibility of both a long-term care benefit or a death benefit. They are expensive but can be paid with a single premium.
- Health and Family History - Make sure the specialist asks you detailed questions about your health, family history, and retirement plans. Underwritingcriteria varies with each insurance company. If they are not asking you detailed questions then find another specialist.
Take a moment and find the current and future costs of long-term care in the area you live in. This will help you decide the amount of coverage is appropriate for you in your situation. For example, if you have a defined pension when you retire the amount of benefits you would need for long-term care would be less than an individual who will fund their future retirement with earnings off investments. In that case, protecting the principal is essential since that will produce your future income.
Find your state and use the LTC NEWS cost of care calculator by clicking here.
It is always best to start planning before you retire. Once you have your plan in place you will enjoy peace-of-mind and your family will thank you decades from now.