In my opinion, one of the hardest parts of financial planning is planning for the possibility that you will eventually end up in an assisted living facility and very quickly deplete your remaining assets. Even if you’ve done everything right such as worked hard, saved, invested and planned, you just don’t know if you will have to spend time in an assisted living facility or not. Your health, family history and assets can generally help a financial advisor determine if a long term care policy is worth pursuing or not and if so, what kind. In our planning meetings, it’s sometimes an uncomfortable conversation. Most people refuse to believe they will ever end up in a nursing home or assisted living facility. Most people also don’t realize how much it costs to be in one of those places or how fast their nest egg can disappear to cover the costs. If you assume you’ll never have to go to one, then we can’t plan for it.
Truthfully, the LTC industry did themselves no favors and did a great job of creating a bad reputation. When LTC first came out, many companies rushed to jump on the bandwagon and came out with policies that eventually proved to not be profitable due to the rising costs of health care, which they clearly underestimated. They eventually stopped offering them all together. Some companies simply closed shop and the policies became worthless. The more reputable ones honored their policies but with rising annual premiums. Today, there are only two or three companies that still offer traditional LTC policies and I would be very hesitant to ever offer those to my clients again.
The next step in the evolution of LTC came via traditional life insurance policies. Basically, you buy life insurance and add a long term care rider to the policy. If you end up in an assisted living facility, the LTC rider allows for early access to the death benefit. The duration for most stays at nursing home/assisted living facilities is typically three years or less. The life insurance companies know they’ll be paying a death benefit soon so the rider allows for early access to that death benefit to help cover the costs of the facility. It’s actually a good concept in my opinion and because it’s a life insurance policy first, (depending on the type of policy), your premiums will not rise over time…unlike what’s happened with traditional LTC policies. That means you can factor that known cost into a financial plan. However, these policies come with their own set of problems. First, the LTC rider isn’t something you can attach to a lower cost term policy so that means you will be buying some form of permanent life insurance. Permanent policies can be very expensive when you are older and that’s even assuming you’re in good health. Second, because it’s life insurance first and LTC second, the underwriting process is exactly the same as just applying for life insurance. That means lab work, a full review of your medical records, and possibly even an EKG. If those results come back with issues, it’s possible that your premium could be so high that it simply doesn’t make financial sense. However, if the primary need is life insurance first and the client is in relatively good health, this is an option I often recommend.
That leads to next step in the evolution of LTC and it is something I am very excited about. It’s called Hybrid LTC. Again, it combines life insurance and LTC, but it flips the purpose of the policy. It’s LTC first and life insurance second. Because of that, underwriting is generally just done with a phone call. In most cases no exam or lab work is required. Another reason I am excited about it is because there are many ways of setting up a policy so that it best fits your needs and there are also different ways of funding it.
Let’s go over a few examples. We’ll keep this very general. I just want to give you the basic premise of how these policies work.
Example 1. You are a person over 59 1/2 who has accumulated a lot of qualified assets. Qualified assets are assets that haven’t been taxed yet such as an IRA. Take $100k of your qualified assets and transfer it to an annuity. This particular annuity immediately adds a 20% bonus. Now you have $120,000.00. It then begins to pay $12k per year for 10 years. The $12k will be reported on a 1099R so you will have to pay taxes on it. The full $12k is used to pay the premiums for the Hybrid LTC for 10 years (called 10 pay). Just because it pays for 10 years doesn’t mean the policy ends after 10 years. The premiums are spread out over time to make it more affordable. The total amount of premium is calculated to figure out how much LTC coverage you will have and how much the death benefit would be. If you die without ever using the LTC coverage, your beneficiary receives the death benefit (tax-free). You can also redeem the policy for the cash surrender value if you choose to walk away. The policy can be single or joint (second to die). A Lifetime benefit option is also available on this solution instead of choosing a benefit period of 3 or 5 years, (the estimated amount of time you may be in the facility). A side benefit to this is that by using some of your qualified assets to fund this policy, you’ll be reducing the amount that you’ll need to take required minimum distributions from later on. The numbers above are for illustration purposes only but the annuity used in this example does actually add a 20% bonus to the amount you transfer to it.
Example 2. In this example we’ll use a single premium. Let’s say you have non-qualified assets, (money that’s already been taxed) sitting in a brokerage account or a bank account. Then let’s say you take $100,000 of it and use it as a one time premium to fund the policy. That might provide $400,000 in LTC coverage that will pay a certain amount each month to the assisted living facility until the $400k is used up. Again, if you never use the LTC benefit and you pass away, the beneficiary receives the death benefit usually equal to or slightly greater than the premium paid into the policy which is called “return of premium”. You can also walk away from the policy with the cash surrender value if you so choose. Again, the numbers in this example are hypothetical to illustrate how it works.
Example 3. This final scenario is a bit more complex and I would highly recommend that your advisor work closely with your CPA if pursuing this kind of policy. If you are a business owner, you can pay the premiums for the policy from your business and then be able to deduct them. I’m not going to go any deeper than that because I want to keep this very general. Just know, this scenario is possible. If you want to pursue this kind of policy through Integrity Wealth Services, please note that our partner firm, Integrity Taxes and Accounting, can assist us if you are not currently using a CPA or if your CPA is unaware of this scenario.
So there you have it. Three different scenarios for Hybrid LTC all of which I am excited about. If you wonder whether you need a LTC policy or not, pay attention to how many new assisted living facilities are being built. It seems like there’s a new one under construction every day. We are living longer and assisted living facilities are not cheap. Don’t let everything you worked and planned for disappear in just a few short years because you thought you would never end up in one of them.
We have provided a Long Term Care calculator on our website to help determine your needs. If you would like to discuss any of these options, please call our office at 865-342-7766.