Long-term care costs have been rising at roughly the same rate as medical services, and prices aren't likely to slow down any time soon. Assisted living workers, home health aides and nurses' assistants are in short supply, yet the already retiring Baby Boomers are creating a never-before-seen demand for long-term care. Given the increase in the average lifespan, and the resultant likelihood of dementia and other degenerative conditions, most retiring clients should plan to face hefty bills for in-home care and assisted living.
Fortunately, there are several ways retirees and even middle-aged planners can curb these future costs. From asset-based insurance plans to tax-qualified annuities, there are plenty of options that don't require clients to gamble on the likelihood that they'll actually need care. While any option will divert funds away from other investments, long-term care planning is critical for clients who want to protect their assets for themselves and their heirs.
Quite a few retirees still believe they'll be able to self-insure, but relying on savings alone is a losing strategy in today's market. “Trying to save for long-term care is like trying to outrun a forest fire, and 99 percent of people can't do it,” said Phyllis Shelton, president, LTC Consultants and author of Protecting Your Family with Long-Term Care Insurance. Even for well-to-do clients, paying purely out of pocket is a surefire way to quickly eat away at a nest egg.
Still, many Boomers are hesitant to gamble on use-it-or-lose it insurance for long-term care. Even though a majority of seniors will need some sort of assistive service, needs and costs vary wildly from one family to the next. Because of the high likelihood of utilization, insurance companies are also increasingly hesitant to underwrite traditional policies. To offset risks, maximize reward and create win-win scenarios for clients and insurers, LTC advisers often recommend the following plans.
Single Premium Long-Term Care Insurance: “For clients who have assets, we like single premium insurance plans,” said Keith Friedman, principal at FBO Strategies. By contributing a large, often six-figure lump sum, retirees can double, triple or even quadruple their money if they use it for long-term care. If they die before they use the money, the death benefit may still yield a 50 to 75 percent return on investment. And, since single premium plans are typically liquid, buyers can usually withdraw their contributions dollar-for-dollar if they decide to use the funds elsewhere.
Tax-qualified Life Insurance Riders: For clients who can't afford such a large lump sum, and who don't want to gamble on a dedicated long-term care policy, there are also life insurance riders that allow customers to draw upon their death benefits tax-free when they use the money for long-term care. “It's an asset protection tool,” said Friedman. “You either give your kids that money directly, or you protect that much money.”
Partnership Long-Term Care Insurance Plans: “My number one strategy is to buy a partnership long-term care insurance plan,” says Shelton. A combination of private and public coverage, these partnership plans are currently available in 40 states. Customers pay monthly premiums and inflation factors to reach their desired payouts, and Medicaid picks up the tab if those funds run out. Unlike normal Medicaid coverage, however, partnership plan customers are able to retain assets equal in value to the payouts they receive from their private insurers. Save for California, these plans are also reciprocal among participating states.
Combination Plans: Finally, retirees with old, non-qualified annuities can convert them into tax-qualified long-term care policies via a 1035 exchange. “What's cool about these policies is that they don't just accelerate the annuity value or death benefit,” said Shelton. Rather, they can be structured so that even when the benefits of the original annuity are exhausted, customers will continue to receive payouts should they need long-term care. Clients can also manipulate their premiums and inflation factors to ensure they'll receive adequate monthly payouts far into the future, when assisted living and in-home care are sure to be even more expensive than they are now.
Aside from the Medicaid-supported hybrid plans, public programs have little to offer most retirees in the way of long-term care coverage. The Affordable Care Act originally included a voluntary long-term care insurance program called the Community Living Assistance Services and Supports Act, but it was repealed during January's fiscal cliff negotiations. A few states—most notably New York—are offering tax incentives for privately purchased long-term care coverage, though none have created a purely public option. And, as Social Security statements have made clear since 2008, Medicare offers no long-term care coverage at all.
While Medicaid does cover certain long-term services, it's not practical for people with assets to protect. “What a lot of people think is that they'll qualify for Medicaid and depend upon that. If you're someone who legitimately doesn't have assets, then it's fine,” says Friedman. “But if you're someone with even modest assets, there are far better ways to plan.” Some seniors just assume they'll voluntary impoverish themselves in the event they need care, but even a small investment in an insurance plan or annuity can allow for both asset protection and long-term care coverage.
Although employers aren't offering long-term care coverage as commonly as they negotiate group rates for life and health insurance, a large portion of long-term policies are purchased through the workplace. “If you look at the actual sales data since 2008, almost half of the policies were written at work,” said Shelton. That number has dipped slightly over the last couple of years as major insurers have left the long-term care market, but the nation's largest employers still account for roughly 42 percent of all policies. They do typically require traditional, use-it-or-lose-it premium payments, but these premiums are still significantly cheaper than individually purchased insurance.
For clients who can't qualify for tax-qualified policies, there are also non-qualified annuities that offer higher payouts to cover long-term care. While this option isn't ideal for every client, it may be the best bet for retirees with obesity, diabetes or other health issues that make it difficult to obtain underwriting for a qualified policy.
Finally, a life settlement can be a great way for older and unprepared clients to obtain the funds for long-term care. “It's a very valid way to find money,” said Shelton. “There's a big market for people 72 and up.” Although the sale may be taxed, and although it will likely yield less than the policy's death benefit, a settlement can keep families from dipping into other assets they want to leave to their heirs.
Ultimately, the best way for clients to curb their long-term care costs is to start planning as early as possible. “People need to be looking at long-term care insurance when they're 50, not 60,” Shelton said. “The sooner the better, and advisers need to know that.” What used to be the premium 10 years ago for a 60-year-old couple is now the average premium for a 50-year-old couple, and this trend is likely to continue as more Boomers retire.