Mar 21st, 2018
Longevity has become a key part of retirement planning. The costs and burdens of aging impact high net-worth families as well as those with minimal savings. Long-Term Care planning is prudent for both.
The public's interest in long-term care planning increases as more people realize how longevity will impact their loved ones and their financial position.
Aging is real, and the consequences of declining health and frailty affect more than just the pocketbook. When a family member needs help with daily living activities or supervision due to dementia, the whole family is involved, and lives are changed.
Long-Term Care Insurance may not yet be a household word, yet in 2021 the major insurance companies paid over $12.3 Billion in benefits to American families. That money protects savings and income and gives people independence and control. Much of those benefits are paying for in-home care keeping people in an environment that they are comfortable living in.
According to the government, half of us will need care, but when you might need care is unknown.
We have seen many unexpected events that can adversely impact your savings and investments, even in a good economy. The 2008 market crash is still fresh in many people's heads. Market losses due to the coronavirus and the shacky economic environment following were unexpected until COVID-19 was forced into our lives. Inflation, including higher energy prices and the economic uncertainty driven, in part, to the Russian invasion of Ukraine, make many people wonder if they can maintain their lifestyles, especially once they retire.
These unexpected events and normal downturns in the economy have many Americans, including those with substantial assets, wondering as their 401(k), IRA, SEP, and other accounts drop in value.
It is impossible to predict the market, and you never know when political events can affect the economy and the markets.
If a need for long-term care forces a family to sell assets during these market corrections, the actual cost of care services cost more expensive when you factor the market losses into the equation. You may have planned that once you retire, your investments will produce the income you will need that hopefully cannot be outlived.
Part of the issue is that you don't know when you will need long-term health care or for how long. You also don't know the economic environment when you or your spouse needs this care. If you need care during a downturn, like in 2008, one of your children will be forced to liquidate assets to pay for the care. They will also decide the type of care you will receive and the location. In a downturn, they will be selling assets at a loss. That "loss" could still be a taxable gain. Not only are you using your own money - it costs you more, and you lost control.
With an aging society, many families see firsthand the consequences of long-term care. Many people ages 30 to 65 have seen their parent's health decline—many of them needing care paid for from income and assets or provided by the family.
Is the issue of long-term health care on your mind?
“It has been my experience that nearly 75% of the individuals that purchase Long-Term Care Insurance are pre-disposed to long-term care due to family history.”
George Mellendorf, President of LTC Solutions
Mellendorf explains that when an adult son or daughter sees how aging has impacted their parent's health and experiences the impact paying for professional care services has on savings, they want to ensure they don't go through the same issues as they get older.
As medical science continues to advance, so does our lifespan. The result, even for high net-worth families, can be problematic. Having enough cash flow over and above other continuing obligations during a long-term care event can change your lifestyle, not to mention your legacy.
“The main concern is always an emotionally driven one, I don’t want this to happen to me but if it does I don’t want to be a burden to anyone else.”
Mark Goldberg, President of FPS Insurance Agency
Many experts say high-net-worth consumers have a choice, although some financial planners recommend keeping money in investments.
“25% of my clients are in a position to self-insure but choose to apply for a solution, whether it be traditional Long-Term Care Insurance or a Hybrid plan because they simply can’t invest their money and get the same return they will realize from coverage.”
Mark Goldberg, President of FPS Insurance Agency
Nobody can "self-insure," but you can perhaps self-fund potential long-term health care costs. One of the problems of self-funding and using your own money is that you don't know what the risk is and when you will be faced with the risk.
When you own a Long-Term Care Insurance policy, you have guaranteed tax-free benefits from day one even though you only paid one premium. If you attempt to self-fund future long-term health care, you would have to set aside a large amount of money starting on day one and place it in an entirely safe account that could never drop in value.
Experts differ in the amount of money you need even to consider self-insuring. It ranges from as low as $1 million to $5 million or more. For high-net-worth consumers, one of the concerns would be a very long and costly extended care situation, which could be devastating to even those with substantial assets.
Many people fully invested in the market saw 27 to 45% or more losses during the 2008 downturn. These losses are only losses if you sell the asset at the wrong time. Imagine if your family was forced to drain your savings during some future market correction?
According to the American Association for Long-Term Care Insurance (AALTCI), a national consumer advocacy and education group, 13.9 percent of all Long-Term Care Insurance claims are expected to last more than five years.
Those with considerable assets are also concerned about the tax consequences of selling assets to pay for future extended care. Even selling at a loss could create a taxable gain. If you have a longer care event, the cost of that care could drain even large estates.
Don't forget, wealthy or not, families face many challenges when a parent suffers a long-term health care event. An LTC policy will reduce the stress and burden on loved ones and give them time to be family instead of being caregivers or managing professional care.
If a long-term care need happens sooner than later, you may not have the ready cash to pay for care and maintain the lifestyle of the healthy, independent spouse who will be dependent on income from investments for many years to come.
"The latest data I have seen regarding care need duration comes from a report issued in 2017 by Credit Suisse," said Jesse Slome, executive director of the AALTCI. The report shared that 18.9 percent of care need was less than one year, 7.8 percent was between one and two years, 11.7 percent was between two and five years and 13.9 percent of claims could be expected to last more than five years."
"It is important for consumers to understand the need to plan but also that there isn't a one-size-fits all approach to long-term care planning."
Jesse Slome, AALTCI Director
Most Long-Term Care Insurance plans are “pool of money” products, which can grow with some inflation benefit. Decades ago, insurance companies offered “unlimited benefits.” These are very rare to find today, and available ones are expensive.
Two well-known unlimited options are from National Guardian Life (NGL) and One America. Both meet federal guidelines and offer consumer protections under Section 7702(b) of federal law. The NGL is a traditional Long-Term Care Insurance policy, while One America offers a “hybrid” policy. A hybrid policy is an asset-based plan that features a life insurance policy that provides benefits for long-term health care. Since it is a life insurance policy, it offers a death benefit.
The NGL traditional plan does offer a return of premium option. They can be expensive since they provide unlimited long-term care benefits in both cases. The question is: do consumers need an unlimited benefit?
“Great Question, without a simple answer. If pushed I would say no lifetime is not really needed. A shared care policy where both partners can dip into each other pool of money that has a designed duration of 6.5 years is going to cover most combined risk and allow for enough time for some estate or Medicaid planning in case a claim were to last longer. There are exceptions to this rule but not enough to matter.”
Mark Goldberg, President of FPS Insurance Agency
Slome offers an approach which may remind some people of the old Sears catalog.
“We continue to encourage what we call the Good-Better-Best approach to long-term care planning, where coverage for even as little as one or two years can be better than having no coverage at all."
Jesse Slome, AALTCI Director
Unlike the markets, affordable Long-Term Care Insurance provides a safe haven for your money. The policyholder has guaranteed tax-free benefits. Most policies offer inflation benefits that increase those benefits every year by a guaranteed percentage. No matter what is happening with the markets and the economy, your Long-Term Care Insurance policy grows each year.
The policies are also non-cancelable. The insurance company can never cancel the policy as long as you pay the premium - that's the law. This gives you and your family additional peace of mind.
If a person doesn't purchase an unlimited benefit, they can still leverage substantial asset protection with an affordable Partnership Long-Term Care policy.
Partnership plans provide additional dollar-for-dollar asset protection but are more geared for those under $1,000,000 in assets and ideal for protecting smaller savings to prevent a family from losing everything.
Can a high net-worth consumer get substantial asset protection without unlimited? The answer, as Goldberg suggested, is yes.
Consider this example. A couple, both age 54, purchase a Partnership Long-Term Care policy with an initial $250,000 pool of money for each of them. They include a shared care rider that connects the two policies together. Since they are young, they purchase a 3% compound inflation rider, which means their benefits – not the premium – increase 3% every year on a compound basis. This couple would have a combined $1,078,296 in long-term care benefits at age 80.
Since this is a partnership policy, the couple would enjoy dollar-for-dollar asset protection in the event they were to spend through all the benefits. If they were to exhaust the benefits, they would enjoy the ability to shelter over a million dollars and still qualify for the Medicaid long-term care benefit.
Experts suggest that you should seek the assistance of an experienced Long-Term Care Insurance specialist who can provide you with accurate quotes and professional recommendations based on your situation. This way, you can obtain suitable coverage without over-insuring and spending more money than they need to.
“I don’t care to you have saved $150,000, $1,500,000 or $15,000,000. In all cases that person has worked very hard to save and plan for their family’s future. Everyone wants to have peace-of-mind and value. This is why a consumer should speak with a specialist who understands policy design and claims usage. Specialists know how these plans work and how they get underwritten. They can match you with the best company with the appropriate plan based on your needs.”
Brent Donarski, a Long-Term Care Specialist who operates MyLTCSpecialist
Considering the likelihood of needing some type of extended long-term health care before death, the idea of an advance plan to address these costs and burdens makes sense - dollars, and sense.
No matter the size of your estate you are attempting to protect, you can find a plan to safeguard your assets and reduce the burdens placed on your family. Not placing the burdens of caregiving or managing care on their families is a primary concern for many people.
But what about the articles talking about industry problems and rate increases? Donarski says the increases were primarily on legacy products sold before rate stabilization and the interest rate crash. In addition, the industry discovered that once a person gets a policy, they never lapse it. Donarski points out that even with increases on the older plans, they are still affordable.
Today, policies are priced based on the low lapse rates, the low-interest-rate environment, and much more conservative underwriting. Rate stability makes it less likely to see repeats of premium increases in the future.
Hybrid plans can never have an increase in premiums. While many people pay for hybrid policies with on single premium, even if you annualize the premiums of a period of years - or your lifetime - the premium cannot increase.
“Long-Term Care Insurance has a voluntary lapse ratio of less than .5%, Yes, ½% let their polies lapse.”
George Mellendorf, President of LTC Solutions
Premiums for today’s plans are still very affordable. Many consumers in their 50s, for example, can get outstanding coverage for less than $150 a month. Depending on the total amount of benefits you purchase, the premium could be lower or higher. Factors like your health and family history could affect the premium.
All experts agree that you should have a plan for the financial costs and burdens of aging. The plan might be insurance or some other type of plan, but an advance plan is prudent for everyone, from a high net-worth person to those with minimal savings.
Experts suggest that that plan should be put in place well before you retire.