Two issues tend to dominate the conversations I have with my clients and their families as they age: housing and the cost and access to quality care. While we can plan for various scenarios in retirement, taking into consideration different levels of spending and market returns, the costs associated with long term care can throw a financial curveball into any well-constructed plan. Continuing care retirement communities (CCRCs) are not a new concept, but one gaining interest and adoption in helping clients build predictability into their senior years.
A CCRC (also know as a “life plan community”) is a retirement community that provides independent living, assisted living and skilled nursing services to residents under one roof or on a single campus. According to Leading Age, there are more than 2,000 CCRCs in the U.S., and over 80% of them are operated by non-profit organizations.
It is common to have a sizable entry fee that may be refundable to a certain percentage depending on the residency contract. Some communities offer “fee-for-service” contracts, which means that residents will pay more in monthly service fees as higher levels of care are needed, but they will only pay for what they use. Other communities offer a “lifecare” contract that provides protection from costs as more care is needed.
The Predictable Option
If a prospective resident is looking to have predictable community costs through their remaining retirement years, then a lifecare contract may be a good tool in their planning toolkit. Essentially, the lifecare feature means that a resident (or couple) will continue to pay the lower monthly fee associated with their independent living unit, regardless of whether they need a higher level of care. Comparable to a long-term care insurance policy, this provides financial protections against the highest monthly costs associated with skilled nursing or memory care.
While not technically an insurance policy, the lifecare contract does provide similar protections. Communities actuarily determine what portion of their population may remain in independent living to life expectancy, and what portion will most likely need higher levels of care. Unlike insurance, communities can (and do) invest in wellness programs that can actually reduce the probability within their population of graduating to higher levels of high-cost care. Amenities that retirees seek out such as fitness activities, nutritious meal plans and social engagement have a positive impact on health outcomes.
Lifecare contracts can further reduce risk in a client’s portfolio in two ways. First, the contract reduces the need for a resident to make sizable withdrawals to pay for higher, more expensive levels of care should it be needed in the future (similar to the premium investment in a traditional or hybrid long-term care insurance policy.) Some residents and advisors miss the potential tax deductions embedded in the entry fees and monthly fees. The IRS allows for an itemized medical deduction for the non-refundable portion of entry fees and monthly fees associated with pre-payment of future medical care. These deductions can be calculated as a percentage of the entry fee or capped as dollar amount to certain limits.
Let’s say an older client is tax-locked into a concentrated stock position and is reluctant to sell it to avoid a capital gain. The deductions associated with the lifecare contract fees may allow for an advisor to trim the client’s concentrated position and offset taxable gains in the portfolio.
Second, traditional and hybrid long term care insurance (LTCi) policies provide a valuable financial reserve should care costs arise. Lately, the unpredictability of traditional policy premium increases has clients modifying coverage or looking for alternatives. LTCi policies are helpful because premiums are typically waived when a policy holder is on claim.
Lifecare contracts within a CCRC will always have a monthly fee regardless of the level of care being provided. The nice benefit of the lifecare contract is that residents can not only maintain predictability in costs, but also know who will be providing the care and where it will be received. Care coordination can be a valuable asset particularly during a medical crisis.
When Fee-For-Service Makes More Sense
There are instances when a client may want to maintain their long-term care insurance when making the move to a CCRC and opt out of the lifecare contract in favor of a fee-for-service contract. One example from personal experience was a widowed client who had an old LTCi policy with a spousal survivorship rider. When her husband passes, the rider effectively left her with a “paid up” policy — no future premiums, lifetime benefit period and a robust daily benefit. In this instance, it did not make a lot of financial sense to pay more for a lifecare feature at the community she chose to move to.
While CCRCs may not be optimal for all clients (when polled, most retirees prefer maintaining independence in their home), it can be suitable for those who value the social amenities and lifestyles the communities provide. The lifecare contract offered within many communities should also be considered during the planning process relative to its ability to manage risks our clients face. This can be done in comparison to, or in conjunction with, existing or new long-term care insurance policies. Planning ahead, as always, can provide for optimal outcomes should our clients incur costs associated with long-term care.
Jim Ciprich, CFP, is a partner and wealth advisor with RegentAtlantic, a fee-only registered investment advisor headquartered in Morristown, N.J. He is a former adjunct professor at Fairleigh Dickinson University’s CFP professional studies program. He founded and co-chairs the “Senior Solutions” practice specialty group at his firm that serves the needs of high-net-worth seniors and their families. He is often asked to speak at continuing care communities throughout the country on financial planning topics for seniors in transition. Jim also serves on an advisory council to the MIT AgeLab and is frequently quoted in national media on financial planning topics.