By Gary R. Smith – CFP®, ChFC®, AIF®
When I started offering Long Term Care insurance in 1993, it was pretty simple. I knew my product well and was able to offer customers good service and honest advice. But the world has changed a lot since then.
Buying Long Term Care insurance isn’t as simple as going to the grocery store and picking out your favorite brand of jelly. The regulations, tax implications, elder law issues, and insurance company policies surrounding these products are increasingly complex — and they affect different people in different ways.
Today, I spend a lot more time finding the right coverage options for each client than I did 23 years ago. Finding out all the relevant details for a particular financial planning situation takes time and a lot of conversation, but it’s worth it: with 70% of seniors expected to use Long Term Care at some point in their lives, you just can’t afford not to be careful. (1)
Are you thinking about Long Term Care and how it could impact your retirement? Before you do anything, take some time to familiarize yourself with the following issues. These are the kinds of questions your advisor should be asking you — and if he or she doesn’t, look elsewhere. The stakes are too high to pay for the wrong insurance or, even worse, to have no plan in place at all.
Do you understand the potential costs of Long Term Care?
Back in 1993, the cost of a nursing home or assisted living facility in my area was about $100 per day. I probably don’t need to tell you that it’s quite a lot more that that these days. Here in Maine, I just toured a nursing home facility for a client which could cost her over $300 per day.
On average, the median annual cost of a semi-private room in a nursing home is $80,300, with a 4% annual growth rate over the past 5 years. (2)
The inflation rate of healthcare costs doesn’t look to be slowing down. In short, without a plan in place, you could be significantly endangering your family’s financial future.
Do you have the financial means to pay for Long Term Care?
Some people choose to prepare by essentially insuring themselves, meaning that they plan to use their own assets for Long Term Care if and when the need arises.
It’s important to think through this carefully. If you’re very wealthy with a high level of liquid assets, self-insuring might make sense. However, if you’re planning on dipping into your retirement savings or selling your house pay for Long Term Care you could be setting yourself up for disaster. Using Long Term Care is not just costly, it’s often unexpected — the last thing you want is to be in a nursing home and forced to rethink your spouse’s living expenses or place of residence.
For those who don’t have the liquid assets to cover the need for Long Term Care, it’s important to consider the alternatives. Namely, insurance.
When should you start thinking about Long Term Care insurance?
In my opinion, the “sweet spot” for buying Long Term Care insurance is in your early 50s. Most people are still quite healthy at that age, and you’re still young enough to benefit from lower rates. But not all experts agree — some say that 35 is a more appropriate time to start!
However, at the end of the day, the most important factor in applying for Long Term Care insurance is that you are in good health. (4)
The challenge is in striking a balance between the risk of overpaying because you got coverage too soon and the risk that your rates will skyrocket because you got coverage too late. The longer you wait, the higher the chance that you won’t qualify for the same amount of coverage. For example, you might get disqualified due to a pre-existing condition or you might find that the only policies available to you are unaffordable or unattractive.
Do you understand the details of your policy?
Unfortunately, I’ve seen many Long Term Care insurance policies that are inadequate or sold with the false belief that “any coverage is better than nothing.” This is just not the case when it comes to Long Term Care. Inadequate coverage can cripple you financially at a time when stability matters most and leave you feeling like your policy was a complete waste of money.
That’s why it’s so important for your financial advisor to understand all the ins and outs of your financial and health situation. This is the first step in ensuring that your policy provides the right balance of cost and coverage, without leaving you exposed to an unbearable and unexpected financial burden.
Do you understand the tax consequences of different kinds of policies?
There are two kinds of Long Term Care insurance policies available: tax-qualified or non-qualified. If you own a tax-qualified plan, your insurance premiums are deductible as medical expenses on your tax return, but the barrier to receiving benefits is stricter. Non-qualified policies don’t allow for a tax deduction, but they can make it easier to get benefits. (3)
There is no right answer when choosing between the two: The right plan for you depends on your personal tax situation, your other medical expenses, and the level of benefits you’re looking for in a policy. However, you need to be sure you understand the risks and costs so that the policy you choose is the right one for your situation.
Should I factor in Medicare or Medicare Advantage to pay for Long Term Care?
Many people who sign up for Medicare or Medicare Advantage at retirement mistakenly believe that it will help cover the cost of Long Term Care. Unfortunately, this is not the case.
Medicare is a great program that helps a lot of retirees, but it only provides Long Term Care coverage in certain limited circumstances. If you require ongoing or non-specialized custodial care, for example, Medicare will not be able to help. (5)
This is a serious issue because more and more seniors will need ongoing Long Term Care at some point in their lives. It’s not worth risking your financial future on the hope that your condition will qualify you for Medicare coverage.
Are you familiar with the Long Term Care “riders” on new life insurance and annuity products?
One of the biggest concerns my clients have when it comes to Long Term Care insurance is the risk of spending a lot of money on coverage that never gets used. To mitigate this risk, some life insurance and annuity products offer “riders” that cover Long Term Care within the auspices of another policy.
These can be less expensive than a standalone Long Term Care policy, but there are drawbacks. A Long Term Care rider in an annuity, for example, can lower your annuity’s monthly income. You might also face more inflation risk in the future. (6)
However, in the right scenario, covering Long Term Care with a rider can be a cost-effective move. As with everything in financial planning, it depends on the particulars of your financial situation.
Are you familiar with grandfathered Long Term Care policies?
If you have a policy that was issued before 1997, think long and hard before replacing it. These policies generally have more flexible rules around benefits claims, and you might be able to qualify for tax deductions on premium payments. (7)
An advisor who encourages you to replace a grandfathered policy without asking detailed questions about it might just be trying to make a sale — at your expense.
If you have a policy already, do you understand your insurer’s track record?
It’s important to have an understanding of how your insurance company operates. What do you do if your carrier has a poor track record of paying claims or has been sued for denying too many?
There has been quite a lot of press lately about Long Term Care insurers operating unfairly towards their policyholders, and some of the stories are truly awful (one that springs to my mind is the claims department employee who threw a patient’s records down an elevator shaft, just so that his family would have to resubmit them).
If your insurer has a bad reputation, it might be wise to reconsider your policy. Similarly, before buying a new policy, take a few minutes to research the carrier. You might uncover something that sends you running in another direction.
Do you understand the rules regarding State Assistance? What about Medicare Compliant Annuities?
Back when I started out, it was common to buy “lifetime” Long Term Care policies that provided coverage for as long as the patient needed it. Today, those policies are few and far between.
The result is that you might find yourself in a situation where your policy runs out of benefits. What then? Unless you have significant assets set aside (and even if you do!) you might need to turn to public assistance to cover costs.
To protect yourself in this situation, it can be useful to set up a special trust. Otherwise, you could be liable for Long Term Care costs even if you can’t afford them. However, the type of trust, what assets to put in it and when to set it up are not easy questions to answer. While any financial professional you deal with should have a working knowledge of trusts as they relate to elder law, it’s usually best to speak to an expert.
This also applies to situations involving the purchase of Medicare compliant annuities — most people start off thinking its simple, only to find that the regulations and rules are extremely complex.
An elder law attorney can help you complement your Long Term Care goals with wise estate planning. I believe in the importance of this issue so much that I’ve developed relationships with more than half a dozen elder law attorneys — that way, I know that each of my clients has an expert nearby who can help.
Most importantly, don’t be afraid to ask!
Understanding Long Term Care and balancing insurance coverage with assets and estate planning is complicated.
When I was first starting out, I thought it was just about matching the product to the customer, but over time and with experience I learned that it is so much more. You need to prioritize and understand multiple areas of financial planning to tackle this issue properly, especially in an environment of rising costs, uncertain benefits, and a lot of regulation.
That’s why it’s important to work with someone who understands all the moving parts involved with Long Term Care and who is willing to help you understand them, too. There’s no such thing as a dumb question when it comes to financial planning — and anyone who makes you feel that way probably doesn’t know the answer themselves.
Long Term Care is difficult, but with good advice you have the power to plan ahead and help ensure your family’s financial future. Don’t delay.
About the Author:
Gary R. Smith is the founder of New England Retirement Advisors, and he has been helping clients plan for their Long Term Care and financial planning needs for 23 years. His broad knowledge in the financial planning, estate planning, and elder law issues involved with Long Term Care make him a trusted advisor to clients looking to navigate an increasingly-complex universe of options. He is also sought out by the national media for his insights into Long Term Care issues, recently providing expert comment for articles on CNBC.com and in Financial Advisor Magazine.
As a wealth manager and investment advisor representative, Gary provides comprehensive financial and retirement plans for his diverse clientele, taking into account the myriad financial, regulatory, and tax issues relevant to individual financial planning. Utilizing a broad network of specialized attorneys and accountants, he offers a “team” approach that emphasizes holistic services tailored to the needs of each client.
Gary is a Certified Financial Planning Professional and a Chartered Financial Consultant. You can reach out to him with questions or inquiries at email@example.com or (207) 850-0075. His office is located at 75 Pearl Street, Suite 216; Portland, ME 04101. Learn more about New England Retirement Advisors at http://www.neretirementadvisors.com.
(1) US Department of Health and Human Services, LongTermCare.gov. http://longtermcare.gov/the-basics/
(2) Genworth 2015 Cost of Care Survey. https://www.genworth.com/corporate/about-genworth/industry-expertise/cost-of-care.html
(3) The Federal Long Term Care Insurance Program. https://www.ltcfeds.com/start/aboutltci_taxqual.html
(4) The Federal Long Term Care Insurance Program. https://www.ltcfeds.com/start/aboutltci_whenbuy.html
(5) Medicare.gov. https://www.medicare.gov/coverage/long-term-care.html
(6) LongTermCare.gov. http://longtermcare.gov/costs-how-to-pay/paying-privately/annuities/
(7) Cornell University Law School Legal Information Institute. https://www.law.cornell.edu/cfr/text/26/1.7702B-2