More than 55 million Americans are expected to require some form of long term care (LTC) in the next 30 years. From a planning standpoint, the issue is critical: many savers are at risk of outliving their savings as a result of high LTC costs. The national median cost of nursing home care is $108,405 per year for a private room. By 2030, that figure is expected to surpass $141,000.
However, rising premium costs and fewer available options for purchasing traditional LTC insurance have left thousands of retirement savers worried about how to pay for care. LTC insurance, which covers the costs of a nursing home or home health services, was provided as a standalone product by an estimated 100 carriers in the 1990s. Today less than a dozen carriers still offer the same product—and premiums have skyrocketed in price—leaving advisors and their clients searching for a solution to fill the gap in planning for the expense.
Helping clients understand and plan for LTC costs is an increasingly important part of comprehensive financial planning. Advisors play an indispensable role in helping clients navigate these challenges in a rapidly shifting market.
Regulators Step In
Regulators are trying to address the increasing cost burden. In an effort to help more savers offset the cost of long term care, the IRS allows savers to deduct a portion of their LTC insurance premiums in excess of 7.5% of their adjusted gross income (AGI). LTC insurance benefits are also generally tax-free.
The federal government recently included a provision in the SECURE Act 2.0 that allows savers to use up to $2,500 per year of qualified dollars to pay for LTC insurance premiums. But the provision, while helping to offset the cost of insurance, may only cover part of the premium, which many savers are learning may also increase over time.
Local lawmakers have joined the effort. In Washington state, legislators passed, then delayed, a payroll tax that funded long-term care coverage for workers. California is exploring its own version of legislation, with lawmakers debating a tax increase to pay for benefits ranging from home care to “higher-range comprehensive” coverage. More than a dozen other states are exploring tax increases or mandates for LTC insurance. With more lawmakers exploring the topic, clients are likely to have ongoing questions about LTC.
A New Solution Gains Popularity
Few but the most affluent clients can afford to pay annual care costs approaching $100,000, for almost any length of time, without hurting their retirement plans. But with traditional LTC insurance premiums continuing to rise, planning for this level of financial uncertainty requires specialized tools.
To meet this need, modern advisors have a powerful, effective solution at their disposal: linking long term care insurance to clients’ life insurance coverage. Combining LTC with a life insurance policy, either through a dedicated hybrid LTC-focused life insurance product or by adding it as a rider to a stand-alone product, can be a much more cost-effective way to address the need.
At its most basic level, this provision allows the policyholder to accelerate the product’s death benefit to pay for long term care expenses, usually at a set amount every month. If a policyholder doesn’t use the long term care benefit, the death benefit remains intact.
This also gives clients access to the traditional benefits of life insurance, including protection and tax benefits. Moreover, by accelerating a policy’s death benefit, clients will not be subject to taxes on payments for qualified long term care expenses. Other provisions can be added to provide more flexibility, such as returning a portion of premiums back if policyholders don’t use the long term care benefit.
Linking benefits can be more affordable than buying separate life and long term care insurance policies. Some policies offer reduced premiums for policyholders in good health, in addition to a number of tax benefits. Portions of LTC premium payments are generally tax deductible - a benefit that has historically escaped owners of linked benefits. In recent years, innovations in the space have led to partially deductible premiums for hybrid policies, in a structure similar to traditional LTC insurance.
Technology Expedites Benefit Linking
Recognizing that advisors and their clients need both life and long term care insurance solutions, brokerages are expanding their offerings and using technology to expedite underwriting and coverage. Different policy options can quickly become complex and cumbersome, so brokerage experts and comparison tools can help advisors and clients compare the relative benefits of policies and carriers.
We believe there is a huge opportunity for technology to help advisors understand coverage options, assist their clients in self-disclosing their health information, and streamline the entire quoting and application process. At Modern Life, we believe in the potential for technology and analytics to empower advisors and provide cost-effective, flexible and customized protection for their clients.
As client demand for long-term care grows, advisors have an opportunity to differentiate themselves and deepen their client relationships by leveraging contemporary approaches to meeting long term planning needs.
Michael Konialian is the co-founder & CEO of Modern Life, tech-enabled life insurance brokerage. Konialian built and scaled several InsureTech businesses as part of the leadership team at CoverWallet prior to its acquisition by Aon.