As a financial planner, I’m getting asked more and more about long-term care, its implications and the choices on how to plan for it. I assume my fellow advisors are getting the same questions.
I prefer not to use statistics, so I will just use a few: On average, someone turning 65 today has about an 80% chance of needing long-term-care services, and many will need them for about three years.
Long-term-care is not covered by health insurance and Medicare. So, personally and philosophically, I believe that everyone should have some form of long-term-care protection.
I have heard too often from clients and other advisors that self-insurance is the optimal or better strategy, but it may fall short of giving clients and their families the multiple levels of support they need.
Many carriers have withdrawn from the long-term-care market over the past few years due to low interest rates, high persistency of claims, and extended claim periods. Thankfully, there are still some very attractive options to plan for and protect your clients if they get into a long-term care situation.
When Can LTC Coverage Kick In?
For insurance purposes, the need for long-term care is triggered when an individual loses the ability to handle two of these six activities of daily living (ADL) without assistance:
- Bathing
- Dressing
- Toileting
- Transferring
- Eating
- Continence
When two of these six limitations are present, a policyholder can typically start submitting claims on their long-term care insurance policy. What exactly is covered is subject to the type and size of their policy.
Emotional Trauma is Significant
In the absence of insurance protection, two main things occur that people oftentimes don’t think out clearly enough in their earlier years: financial and emotional hardship. Based on what I’ve seen clients go through, I split the impact of inadequate long-term care protection roughly 50/50 — 50% financial, and 50% emotional.
While the financial implications can be dire, all too often the emotional aspect more largely impacts the family. The person needing assistance with ADLs often relies upon family members – their spouse, children, grandchildren or other relatives — who are either willingly or unwillingly to provide care for which they are not trained. This can cause emotional trauma in rifts in the family.
Additional Reading: The Wake-up Call Clients Desperately Need
All too often, clients tell me they are in a long-term care situation with their parents or they went through a long-term care situation with their parents and it caused emotional and financial stress in the family.
What Now?
The question becomes, what options do my clients have, or what options can I offer my clients to help plan for and protect themselves against a long-term care event?
After 15 years of being in these discussions, I have distilled it down into a very simple and digestible format that people understand and respond to very well. It helps them make an informed decision.
There are two types of long-term care insurance:
- Reimbursement. This requires the policyowner or someone assisting them to collect every invoice and submit claims accordingly. This can be administratively difficult and time-consuming.
- Indemnity. The policyowner only needs to incur one expense for the day, and their full benefit is paid out.
Indemnity is always my preference if it’s available, because it’s easier to manage and nothing falls through the cracks. But both serve a very important purpose in the planning. Reimbursement is better than not having anything and is oftentimes less expensive.
Three Policy Options
These options may be available with indemnity or reimbursement policies, depending on the carrier you use:
- Use it or lose it
- Use it or lose the time value of money
- Use it or use it
Use It or Lose It
This is the traditional form of long-term care insurance. Very few carriers remain that offer this. Essentially, your client buys a policy, pay premiums, and then the policy expires when the policyholder passes away. Thus, the policyholder loses the money spent on the premiums and the time value of the money if the benefit is never used or needed.
There is nothing wrong with owning this type of policy. After all, having some protection is better than nothing. It has been my experience that most people in the 50s and 60s find it distasteful to commit to premiums for such a long period of time with the potential of never using the policy.
The other challenge is that long-term-care premiums can and usually do increase. Insurance carriers are allowed to apply to the state insurance commissioners for increases based on a variety of factors like interest rates and claims experience.
Use It or Lose the Time Value of Money
To make long-term-care policies more appealing to the public, carriers got more creative by creating an annuity chassis with long term care benefits. In brief, the policyholder puts down a lump sum of money upfront or over a few years for an annuity that offers a long-term care benefit.
If the policyholder never uses the long-term-care protection, the carrier refunds most if not all of the original investment. But since the investment has either a very low interest rate or no interest rate, the policyholder loses the time value of money. Again, there is nothing wrong if a client wants protection and to absorb the cost. Every family has a different priority set, and these policies have turned out to be extremely popular in the marketplace.
Some carriers offering investment and income annuities have added LTC income doublers. This can be a very valuable option for someone who is uninsurable because there is no health underwriting. In addition, it can be purchased with existing IRA funds, so no new money has to be allocated. The buyer also picks up income for life that can never run out and is able to participate in the market with protection.
Use It or Use It
The insurance carriers then decided to add a long-term care rider to life insurance policies. These policies come in various forms and structures. Some accumulate very little cash value over time, while others build up a significantly larger amount within the policy. Also, the rider fee is significantly lower than what a stand-alone LTC premium would be.
I prefer a whole-life policy with an indemnity rider attached because it enables the policyholder to participate in the company’s profits via the dividend. The death benefit grows as premiums and dividends are added to the policy. And if the buyer does not use the protection, then the money comes back onto the family balance sheet tax-free with a rate of return.
The point is, by redirecting some savings and investment dollars into a whole-life policy with a long-term care rider, a client should not be giving anything up and also getting protected. In fact, owning whole life has many benefits.
Avoiding a Savings ‘Death Spiral’
One of the biggest risks of not having protection — despite the potential cost — is being completely unprotected. If a couple incurs a claim or multiple claims, this can trigger a financial downward spiral for the family.
This is amplified in the cases where clients have oversaved in tax-deferred accounts like IRAs and 401(k)s. Any withdrawal from these accounts is fully taxable as income. An individual who needs care may have to excessively withdraw funds from these accounts, creating an enormous tax burden that they likely didn’t think about 10, 15 or 20 years in advance.
In contrast, the cash that builds up in the “use it or use it option” is tax-deferred and can be withdraw tax-free.
Don’t Ignore This
This very sad article about a murder-suicide by an ailing 89-year-old caregiver who no longer was able to care for his 85-year-old wife, published in January in the Wall Street Journal, reinforces how dire caregiving can become late in life.
If your clients aren’t asking about long-term care, I strongly recommend that you reach out and discuss it with them. Most people want to age in place (stay in their homes), which makes the protection even more valuable. Long-term-care insurers offer a tremendous amount of support and information to help policyholders and their families navigate care.
Martin F. Lowenthal, AEP®, MSIM, CLU®, ChFC®, WMCP®, RICP®, CAS®, CLTC, is a financial advisor in Needham, Mass. This article is intended for financial professional use only and not for the general public. This material is educational in nature and should not be interpreted as a recommendation or advertisement.
