Whistling in the Dark – Do Something or Not?

Long Term Care Options

By Gary Bottoms, CLU, CHFC 

Chief Executive Officer

Many of our clients want to be prepared for the possibility of having to pay for long-term care. Most everyone likes the idea of having long-term care insurance. It’s great to have but it can be a tad confusing and premium payments are required. In addition, it may never be needed. Before I get into some financing concepts for long-term care expenses, below are some high-level thoughts:

Many of us have personal experience around being a caregiver for aging family members.

My mother was in an assisted care facility for three years and my dad was there for eight years. I am familiar with the psychology involved as the need for professional help begins to emerge. There is an undercurrent of not wanting to acknowledge that life as we have known it is about to end. Experiences like mine are not uncommon and they motivate the younger generation to be as prepared as possible.

In my experience, most younger family members do all they can to help, and as time progresses, they are faced with decisions about who to approach for help, inserting themselves into the financial affairs of parents and a general overall feeling of “what are we going to do and who can help?” As the saying goes, sometimes the children must become the parents, and this may not be an easy transition. Sometimes interventions are required. Adding to the complexity for many, is the fact that the younger generation may not necessarily live near the older generation.

The need for extended professional help late in life cannot be precisely predicted, and if needed, the cost or extent of care is unknown.

Some of our clients can afford to build out their home to accommodate whatever need emerges along with paying for 24-hour professional on-site help. Others have limited resources and options. Most of our clients fall in the vast middle range. They have assets, they are accustomed to quality services and many, even with substantial assets, still worry about running out of money while at the same time wanting to pass along their earthly possessions to their offspring. Shifting from a comfortable retirement with possibly no debt to take on a monthly cost that may be in the $5,000 to $7,000 range, or more, can give pause to even an affluent retiree.  

On a high level, there are a few basic steps that need to be taken.

First, we do not give legal advice, but we encourage clients to have all the legal documentation in place so that those who follow can manage, as needed, to be caregivers and ultimately facilitate the transfer of assets. This planning needs to be done while the aging family members are competent to understand and execute documents. Secondly, communication is needed so that at least someone in the family knows the location of documents and the heirs are in the loop on the estate plan. It is okay to go ahead and talk about money because there will ultimately be a family communication event, or a meeting – no matter what. It is best to have the older generation present while they can speak for themselves. Missing this opportunity can have the effect of playing a great game and losing it on the last play – by leaving a field of complexity, disappointment and possibly hurt feelings. Third, having an advisory team on board early on to help is best for everyone involved. The team would consist of an attorney, CPA, wealth manager, insurance advisor, and possibly more.

Since insurance is what we have done for a few decades, here are some high-level thoughts: 

  • Individual long-term care insurance has been available for over 30 years, but the product has evolved. As it turned out, many of the products were initially under priced given the volume of claims that were on the way. The premiums were not guaranteed, so the insurance carriers requested rate increases from state regulators, and premiums have increased. The market has stabilized somewhat. Nevertheless, at this point there are only a few companies that offer new individual long-term care policies. A deterrent to the growth of individual long term care policies is that paying the premiums may never create value because a claim for long term care expenses may never occur.
  • Over the years, we have seen a shift to long-term care protection being offered as a rider connected to permanent life insurance policies. The cost of the rider is minimal because the life insurance policy has already been priced for mortality risk. And, if someone qualifies for long-term care benefits, their shortened life expectancy allows the insurance company to begin monthly payments which technically are an acceleration of the ultimate death benefit – paid early. The benefit may be a percentage, such as 2% of the initial death benefit. The downside is that the ultimate death benefit is being reduced dollar for dollar because of the monthly payments for long term care. The upside is that no matter what happens, the family will eventually receive the total death benefit, one way or the other.
  • For the life insurance and long-term care combination, the numbers can work well for those who are healthy enough to secure the coverage. To illustrate the high-level concept, let’s assume a 55-year-old male wants to accumulate $250,000 by age 80 that can be used to fund long-term care expenses, if needed. If he begins to set aside $500 per month into some sort of accumulation account and assumes he can earn 4% net after taxes annually he will have accumulated an amount close to the $250,000 goal by age 80. Or, if he can qualify medically, he could secure a $400,000 life insurance policy with a monthly premium that may be in the range of $500 per month depending upon the type policy chosen. The premium payable for females is slightly less. This way, for long term care expenses, if needed, he can receive monthly payments which are an acceleration of a portion of the ultimate death benefit. Whatever is left of the $400,000 initial policy amount will be paid to his beneficiary as a death claim. For example, if $200,000 is paid prior to death, the remaining $200,000 will be paid as a death claim. So, one way or another, the $400,000 arrives to the family. Furthermore, if death occurs along the way, prior to any long-term care expenses, the $400,000 life insurance death will be paid to the beneficiaries. The policy details are important and vary among the insurance companies.
  • Generally, there are two types of riders that can be attached to new permanent life insurance policies. One is a critical illness rider, and the other is a long-term care rider. Many insurance companies include the critical illness rider automatically as a standard feature. Qualification for benefits include the inability to perform two of six activities of daily living, or the presence of a severe cognitive impairment. A licensed healthcare practitioner must certify that continuous care will be required for the remainder of the insured’s life. The optional long-term care rider is somewhat more liberal with the definitions and an additional premium is required. The long-term care rider is available with a relatively small number of major insurance carriers.

This month, my family moved a third member to an assisted living facility. The facilities we considered were different and ranged in basic cost from about $3,500 per month to around $6,500 per month. Memory care was needed and there is a menu of add-ons coming depending upon the amount of care and attention that is required. Thanks to the plans that were in place, we chose the higher cost facility because of the atmosphere and our perception of the more competent and caring staff. 

Please let us know when we may be helpful in any way.

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