Long-term care (LTC) is hard to think about.
No one likes to talk about it, and not many people have properly planned to
safeguard their retirement.
I have found people don’t usually bring up
this topic unless they are dealing with aging parents who need long-term care
now (or if their doctor tells them their health isn’t looking great).
I call that kind of planning “crisis planning”
– not the best way to plan. After over 15 years as a licensed fiduciary and
advisor focused on long-term care strategies for many clients, I’ve realized
there are two issues that can disrupt a retirement plan.
The first: the stock market declining while
having too much money at risk. The second: failing to plan for long-term care
expenses. The good news is you can do something about both issues.
70% of people turning 65 can expect to
use some form of LTC during their lives. LTC is a huge piece of retirement
planning that often gets overlooked. A lack of a plan can expose you to massive
risk.
There are good options out there for
mitigating that risk, but you must put in the work and do some planning. Doing
nothing is a plan in itself – just a bad one, in my opinion!
Long-term care is a variety of services and
support that someone may need to meet their personal care needs. Most long-term
care is not medical care, but assistance with basic personal tasks of everyday
life, sometimes called activities of daily living (ADLs). There are five basic
ADLs: eating, bathing, getting dressed, toileting, and transference.
Long-term care is generally expensive. The 2019 national average cost of a
year’s care in a private room in a long-term care nursing home is $102,200. In
the beautiful state of Colorado, where I was born and raised, it’s closer to
$120,000 a year.
Assisted living facility costs approximately $48,000 a year, and having home
health care or someone coming to help you at your home costs around $50,000.
The bottom line is LTC is expensive.
Many people think Medicare is going to cover
their LTC expenses. It will not! Medicare may cover a maximum
of 100 days of service after a hospital stay, but typically nothing beyond
that.
So what can you do? Your first decision is
whether you want to self-insure or transfer some of that risk to an insurance
company. The average length of time that someone needs LTC is three years. In today’s dollars in Colorado,
that’s $360,000 for just one of you staying in a nursing home over that time
period. If you or your spouse need LTC, that could be $720K!
A lot of people can’t write that check, so
they can’t self-insure. Even if they could, it may drown them
financially.
In the past, the only option was buying a
traditional LTC insurance policy where the policyholder pays a monthly premium
to the insurer. In exchange, the insurer pays for some or all the costs if the
policyholder ever needs assistance with LTC.
If you purchase a traditional policy, you
choose how big the benefit is (how much the payout will be), the elimination
period (or how much you’re willing to pay out of pocket), if there is an
inflation rider, whether it is a joint or individual policy, and if you can get
benefits at home. LTC insurance has been a saving grace for many families by
helping cover what can end up being hundreds of thousands of dollars in bills
and preventing retirement nest eggs from diminishing.
However, traditional policies have had a
troubled history from premium spikes. In the ’90s, there were more than 100 insurers that sold policies.
Today there are closer to 15. Many people complain traditional
LTC policies have no death benefits (so you use it or lose it) and that nothing
goes to the beneficiaries if you pass away. Also, the insurance company can
increase your premiums, which are already expensive, and qualifying for LTC
through underwriting can be difficult.
No wonder people haven’t been rushing out to
these policies, unless they are going through it firsthand and watching their
inheritance drop because they are paying thousands a month for a parent.
Until recently, there were not a lot of
alternatives. However, there are new strategies that have completely changed
the game in LTC planning.
1. Hybrid
LTC policy
This is a strategy that combines life
insurance with long-term care coverage. The policy benefits the client by
offering coverage for long-term care costs if you need it OR as a death
benefit. You can pay monthly premiums, but typically you will pay a
one-time lump sum premium. If you need assistance with qualified LTC expenses,
then you can access the policy as a tax-free reimbursement to yourself. If you
pass away without ever needing to tap into the policy, then the FULL death
benefit generally passes tax-free to your beneficiaries.
A hybrid LTC policy is typically more
expensive than a traditional LTC policy, but you’re paying knowing that there
is a benefit: either you as a recipient of LTC coverage or your family as a
tax-free death benefit.
For example, if a 60-year-old male with
standard health put a one-time lump sum premium of $100,000 into this plan,
this could get him a bucket of approximately $300,000 with an A+ rated company.
If he needs long-term care, he has $300,000 to use. If he doesn’t, then
$300,000 goes to his family as a death benefit.
Or maybe he uses half of the sum, then passes
away. The other $150,000 will go to his family. You can leverage your money and
get a tax-free benefit at the same time.
2. Asset-based
LTC
Asset-based LTC is another innovative
insurance strategy that provides coverage for LTC without the risk of “wasting”
premiums. They can be structured with an annuity or a life insurance policy.
An option is to use an old annuity or life
insurance policy and do a rollover or 1035 exchange to start the new
asset-based LTC policy. The main difference between this strategy and the
hybrid policy is that the hybrid policy is one policy for one bucket of money.
Asset-based LTC has separate values.
For example, if a 60-year-old male with
standard health put a one-time premium or rollover into an asset-based policy,
the premium of $100,000 would get two “buckets”: one bucket for LTC that is
$453,000 and the other bucket for a death benefit of $151,000. If he needs
care, he has $453,000 to draw down from to help with LTC expenses. If he passes
away, there is a death benefit of $151,000 for the family.
You don’t get both buckets, however, if you
never use the LTC bucket. In that case, it reverts to either the annuity or the
life insurance policy, depending on how it was set up.
If you are wanting more LTC benefits and less
death benefit, this could be the way to go. If estate planning and passing
money on to beneficiaries is of equal importance, then hybrid plans are
preferable because it could leave a potentially larger legacy in the tax-free
death benefit.
3. Fixed
index annuity with optional LTC rider
Annuities sometimes get a bad rap because of
the variable annuity and the immediate annuity. However, the fixed indexed
annuity can be an effective retirement vehicle. If you have an LTC rider and
are receiving a lifetime income stream from the annuity, some insurance
carriers will double your monthly income payment for a certain period of time
if you should need LTC and meet the qualifier.
For example, if you were receiving $5,000 a
month in income, and then qualified for LTC, they would send you $10,000 a
month typically for a five-year period.
There is a cost to this, and typically there
is a 1% rider charge. But what I like most about this rider is that many people
can qualify. There is less stringent medical underwriting than a
traditional long-term care policy. A typical requirement is you can’t
be currently living in a nursing home.
The LTC rider can also cover a husband and
wife on one annuity. If you have an old 401(k) or IRA, this is a very creative
way to get LTC benefits for both individuals on one plan.
There are many LTC options out there where you
can customize a policy depending on your age, health, goals, and where the
premiums are coming from. Get educated and get this taken care of now while
you’re at your youngest and healthiest.
This content was brought to you by Impact
PartnersVoice. A long-term care
rider or benefit is an additional feature available with some annuities or life
insurance policies and generally comes with additional cost. Benefits paid
under this rider may be taxable. As with all tax matters, you should consult
your tax professional to assess the impact of this benefit. Investment advisory
services offered through Foundations Investment Advisors LLC, a registered
investment adviser. Insurance products and annuities offered through Adam Jon
Moeller, CO insurance license #188195. DT1053333-0121
https://www.forbes.com/sites/impactpartners/2020/01/23/long-term-care-planning-is-changing/#25a2f87b4120
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