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,” said 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.
Run the Numbers
Of course, an objective analysis would also consider the impact of paying LTCI 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?” said Couper. “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.
In cases where a wealthy client decides to purchase LTCI, buying and owning a life insurance policy with a 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,” Natovitz said.
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,” she said. “So, they recognize that that could be a hurdle for some people so they are offering a lot of support from that standpoint.”
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