WHAT LONG-TERM CARE STRATEGY WORKS FOR ME?

SUMMARY

With the advent of greater medical technology and practices, people are living longer and better than at any other time in history. When long-term care is needed, however, costs can quickly add up. Protecting the quality of an individual’s life along with any desired legacy can become challenging. This article presents three types of strategies to consider when planning for the possibility of long-term care needs.

WHY LONG-TERM CARE?

At Day Hagan, we routinely help clients benefit from long-term care planning. After all, medical advancements are helping people to live longer than ever before. While this is great news, any needed specialized care can be a huge strain on your finances if you aren’t prepared.

According to Genworth, the monthly median cost of a semi-private room in North Port, Florida, is $9,338. Over time, the costs can take a toll on and possibly jeopardize your goals, such as leaving a legacy to family or charity. Even if you don’t think you will spend many years in a nursing home[i], it might be prudent to consider options other than self-funding. Fortunately, long-term care (LTC) planning strategies can minimize the impact such expenses might have on your finances.

LONG-TERM CARE INSURANCE

One well-known option is purchasing traditional long-term care insurance. In these policies, you pay a premium during the policy’s life for an agreed-upon maximum benefit value and activate that benefit if and when you meet the conditions necessary. Usually, this means being unable to complete two of the six Activities of Daily Living (ADLs). Once you have activated the benefit, you will have to wait through a 30-, 60-, or 90-day “elimination period” before you are reimbursed for LTC costs.

For example, a 60-year-old client watched her parents’ assets diminish significantly after paying for LTC expenses out of pocket. Her concern was that she or her husband could suffer financially if one of them ends up needing long-term care and they have to pay out of pocket. The bulk of their assets are in retirement savings and their residence. This would make self-funding such an event difficult, especially since, in this scenario, they would need to fund two households simultaneously (the home where one stays while the other is in assisted living). Their combined income and cash flow, however, make the LTC insurance premiums affordable. Having the insurance has given them peace of mind.

For some people, LTC insurance can be an appropriate strategy, fitting well with the goals, resources, and risk factors of the individual. If long-term care is needed, having insurance can save your family and estate thousands of dollars in expenses for services at nursing and assisted living facilities, adult daycare, and qualified home care. Furthermore, LTC benefits are generally tax-free, and premiums paid to purchase the insurance can be tax-deductible.

An obvious downside of this vehicle, however, is its “use-it-or-lose-it” setup. If you never use the benefits, you won’t receive anything back, including premiums. Medical history when you apply may also affect whether you’re qualified for the insurance or not. In some cases, the cost of the premiums can themselves be prohibitive.

LONG-TERM CARE ANNUITIES

Hybrid, non-qualified long-term care annuities permit tax-free withdrawals for LTC expenses. You make a single payment into the product, which provides you with a balance to use for LTC expenses per the terms in the contract. In many contracts, when benefits are activated, the annuity will pay out a set amount from your principal cash value each month for two years to cover LTC expenses, called the Acceleration of Cash Value Benefits. Once the principal has been exhausted, that monthly payout will continue for 3-6 more years per your policy conditions—this is the Extension of LTC Benefits Rider.

Besides potentially increasing the funds you have available to use for LTC expenses, these hybrid products have several other advantages. One benefit is that distributions for qualifying LTC expenses are tax-free, even if they surpass your initial principal and come from the Extension of LTC Benefits Rider. Furthermore, hybrid annuities don’t require extensive health underwriting. That means your application is less likely to be declined due to health reasons. If you don’t use all of your principal for LTC expenses, your beneficiaries will receive what remains of the principal cash value as a non-taxable death benefit. These policies can be adjusted with riders, such as inflation protection, to personalize them to your situation. Some also come with a small death benefit for funeral expenses even if the principal is exhausted.

To demonstrate, a client, age 68, had $200,000 he didn’t need for his retirement income, but he was concerned that potential future long-term care expenses would diminish the legacy he wanted to leave to his children. Because he recently suffered two small strokes, however, he was unlikely to qualify for long-term care insurance. In addition, he didn’t want to pay premiums into a policy that he wasn’t sure he would ever use.

He elected to purchase a long-term care annuity. If he turns it on, he will receive payments of about $8,000 per month for two years, which will come from his cash principal. After the second year, he will continue to receive that $8,000 payment each month for up to another four years. That’s potentially $400,000 of tax-free funding to cover his long-term care expenses. If he never needs long-term care, his heirs will receive the original principal as a death benefit. If he does activate the LTC benefits but does not use all of his principal, his heirs will still receive a death benefit of the remaining principal cash value.

LIFE INSURANCE WITH A LONG-TERM CARE RIDER

Some hybrid life insurance policies will offer a long-term care rider you can turn on in the event you need it. A single premium funds these policies, or in some cases payments can be spread out over an agreed-upon period of time. Similarly, the benefits for qualifying LTC expenses are tax-free. When the LTC rider is activated, a portion of the death benefit is used to cover LTC expenses, up to an agreed-upon amount. If the LTC rider is never activated, the death benefit will go to your heirs.

To illustrate, a 65-year-old client had $250,000 of investable assets not needed for retirement income. Like the example of the hybrid annuity, she wanted to leave a legacy for her heirs and mitigate the impact potential LTC expenses might have on her estate. She elected to pay a single premium into a life insurance policy with an LTC rider, which gave her a life insurance death benefit of $800,000.

If, however, she needs to activate the LTC rider, she can use up to $600,000 of her death benefit value for long-term care expenses, likely tax-free and leveraging her initial premium 2.4x. The $600,000 would, like a typical life insurance loan, proportionately diminish her death benefit. If she never turns on the rider, her heirs would receive the full death benefit. If she does turn it on but doesn’t use the total LTC rider amount, her heirs might still receive what remained of the death benefit.

THE BOTTOM LINE

When it comes to funding long-term care expenses, there are strategies beyond hope and self-funding. Long-term care insurance, non-qualified long-term care annuities, and hybrid life insurance policies with an LTC rider are not the only options, but they are worth considering if you worry about the impact potential long-term care expenses can have on your household and legacy. Feel free to reach out to us at Day Hagan to review your financial picture and discuss what could work for you.

Sincerely,

Natalie Brown, CFP®
Director of Client Services Advisor
Day Hagan Private Wealth

—Written 06.18.2020.

A printable copy of the article: Day Hagan Private Wealth Insights: What Long-Term Care Strategy Works For Me? (PDF)

Disclosure: The data and analysis contained herein are provided “as is” and without warranty of any kind, either express or implied. Day Hagan Private Wealth (DHPW), any of its affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Private Wealth literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing.

Investment advisory services offered through Donald L. Hagan, LLC, a SEC registered investment advisory firm. Accounts held at Raymond James and Associates, Inc. (member FINRA, SIPC) and Charles Schwab & Co., Inc. (member FINRA, SIPC). Day Hagan Asset Management and Day Hagan Private Wealth are both dba’s of Donald L. Hagan, LLC.

[i] The American Association for Long-Term Care Insurance noted in 2008 that only 24% of nursing home residents live for over three years in a nursing home facility.