By 2020, approximately one out of six Americans will be 65 or older, according to the American Association for Long-Term Care Insurance, Westlake Village, Calif.
Statistics show that roughly one-third of those men and one-half of those women will need some form of custodial care during those years. So if a client should become seriously sick or injured, unless his retirement plans include going broke and relying on Medicaid, without long-term-care insurance, he can watch his life savings and his heirs' inheritance go down the commode he may one day need at his bedside.
As a result, many financial planners are making long-term-care insurance (LTCI) an integral part of their estate-planning discussions.
“The whole point of financial planning is to never go broke,” says Herb Daroff, a CFP at Baystate Financial Services in Boston. He currently has a client spending $185,000 a year to care for herself in old age. If paying for some extra insurance now can help protect a client's money later, then it should be considered. Especially since long-term-care benefits are tax-free.
Besides, everyone needs insurance — even the affluent. And clients who want to preserve wealth and safeguard against catastrophe will find LTCI does both, says Arthur Stein, long-term-care specialist with First Financial Group, Bethesda, Md. But if a client has the money to self-insure and has no interest in incurring any more out-of-pocket expenses, LTCI may not be for him.
So What is Long-Term Care?
Long-term care is needed when a person can no longer perform the activities of daily living, says Pam Delaney, vice president and COO of MassMutual Long Term Care. That means if a client can no longer bathe himself, cook for himself or care for his house, as the result of an accident, illness or a chronic condition, he will need long-term care.
No surprise, this kind of care can be expensive. And the costs have no place to go but up.
The cost of home-care with five health aide visits per week was about $18,720 in 2003, according to the AALTCI. That same care will hit $35,299 in 2015. A semiprivate room in a nursing home ran $56,964 in 2003 but will hit $102,299 by 2015.
By using his own wealth to pay these bills, a client is eating away at his heirs' inheritance. That's where long-term-care insurance can be useful. For a fraction of the price, that client can move the long-term-care burden to the insurance company and keep his estate untouched for future generations.
There are numerous plans available to fit a client's needs. Many insurance companies offer inflation protection, which most people under 62 should consider. The industry standard is 5 percent inflation protection, with unlimited compounding every year. In addition, many plans now offer a return of premium rider, which means that at a client's death, if no benefits were used, the premiums he paid over the years will be returned to his estate. A few companies offer the full return of premium even if benefits were used.
An advisor should be knowledgeable of the many nuances of LTCI before approaching a client. Fortunately, there are resources out there to help. For instance, notaburden.com, a MassMutual site, is designed to educate planners on what exactly long-term-care insurance is and how to include it as part of overall services.
The LTCI conversation typically comes up with clients who are in their early 50s. But more people in their 40s are considering purchasing it these days, says MassMutual's Delaney. Especially if they have a parent who currently needs care and is using his or her life savings to pay for it. Clients don't want the same thing to happen to their estate, so many are preparing earlier.
That prudent foresight can keep costs down.
According to a 2003 study done by HIAA, a national trade association that represents the private sector in health care, a four-year comprehensive policy with inflation protection and a $100/day benefit cost a 40-year old approximately $641 a year. For the same policy, a 50-year old paid $849 and a 65-year old paid $1,726.
Tax-Planning Ideas and Options
In addition to receiving LTCI benefits tax-free, there are other tax-planning options with long-term care.
To help transfer a client's wealth to the next generation, consider putting a LTCI policy in an irrevocable trust, says Lawrence Jones, director of estate and business planning at MassMutual. A client then gifts the premiums to the trust and thereby gets the money out of his estate. The trust will pay the premiums and, in turn, receive the benefits. As long as the trust is properly constructed, a client can receive those benefits tax-free. But some insurance companies do not allow a third party to hold a policy, so an advisor should always check with the carrier, as well as an attorney, before setting up the trust.
If a client chooses to purchase a return of premium rider, those premiums will be returned to the trust at his death, and the money will not be included in his estate.
That's why many people use this technique strictly for wealth transfer, says Jones.
Clients who own C-corporations that have an employer-employee relationship can have the business pay for the policy and then take a full deduction for it, says Stein. In addition, the owner would not have to include the premiums in income and, of course, the benefits will be received tax-free. The rules are less beneficial for S-corporations and LLCs.
While LTCI might not be something a client wants to talk about, bring up the subject anyway. Not only could it save a client money, it will help eliminate family struggles. Does a client want Junior deciding how the family is going to pay for Dad's care and which of the hard-earned assets is going to be spent first?
No thank you.
Tracy Byrnes is a former accountant and freelance writer. She has worked at TheStreet.com, and has written for Forbes, SmartMoney and the Sunday New York Post.