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.
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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.