Many baby boomers who are planning for retirement with financial advisors would benefit if the advisor were to initiate discussion about alternatives for paying for long term care needs.
Having confronted the emotional and financial difficulties of LTC with their parents and having seen what lack of planning and choices actually costs, many will be interested in learning about those alternatives, including LTC insurance.
To help clients decide if LTC insurance is suitable, advisors need to review the clients’ income and assets owned, ability to pay premiums, and age and health status. Also, advisors can help clients determine whether they have other alternatives to LTC insurance for paying for the care.
Income and Assets Owned. How much income a client has now or is projected to have in retirement is a factor in the decision to purchase LTC insurance.
Some experts have suggested that if a retiree collecting Social Security has more than $30,000 of individual annual income, she would need to purchase LTC insurance–because her income would make her ineligible for Medicaid coverage of LTC expenses.
Of course, the higher the annual income, the more likely it would be that the client would be able to pay her own LTC expenses. However, most people do not have an income level that would allow them to pay today’s average annual nursing home cost of $70,000. That is especially so for clients with family or other financial responsibilities, since the income would need to cover both the nursing home costs and those other expenses.
The assets a person owns also would affect eligibility for Medicaid coverage of LTC expenses. Most states exclude $500,000 to $750,000 of the value of a person’s home from assets considered for Medicaid eligibility. However, the total of other assets allowed typically is very low, for example $2,000 to $3,000. Therefore, to qualify for Medicaid, someone with more assets than that would have to “spend down” those assets first.
Since many clients prefer to leave their assets intact, they would be prime candidates for purchasing LTC insurance.
Ability to Pay Premiums. Most LTC insurance policies are issued with a level fixed premium based on the insured’s age. However, insurance companies are allowed to increase premiums at some point in the future for an entire class of insured persons in order to cover the risk of all insureds in that class.
Because it is possible that the insurer will raise the premium later on, a client who purchases LTC insurance must be able to afford any increase in premium.
Some experts feel a person should assume that the premiums may increase by 20% to 30%. If it appears that the client is unable to afford the premiums, the advisor should determine if the client’s child or children can buy the policy for the parent.
Age and Health Status. The earlier a person purchases LTC insurance, the likelier it is that the premiums will be affordable. In addition, people in very poor health or with poor health histories (depending on the conditions) are generally rejected for LTC coverage, as the risk of encountering serious health problems increases with age. Those delaying the LTC insurance purchase run the risk of becoming uninsurable, and having no coverage at all.
Alternatives to LTC Insurance. This is where the alternatives come in.
Advisors can point out that several alternatives to purchasing LTC insurance do exist. These include reverse mortgages, annuities and life insurance policies, all of which can be used to fund the care directly.
To be eligible for most reverse mortgages, a person must own his home and be 62 years of age or older. The person does not have to pay anything back until he dies, sells his home, or permanently moves out of his home.
Reverse mortgages provide a stream of income for an older person who has most of his equity tied up in a house and who needs cash for day-to-day expenses. That stream of income can be used to pay for LTC expenses. However, some reverse mortgages say the homeowner must live in the home while the reverse mortgage payments are being made; this might prevent the owner from using a reverse mortgage to pay for a stay in a LTC facility.
If a client doesn’t qualify for LTC insurance because of age or poor health, the person can still purchase an immediate annuity to provide the funds for LTC. Some annuity companies consider bad health as a reason to make higher payouts. Since annuity payouts are calculated on life expectancy, an insurance company may issue an impaired health annuity that uses the insured’s individual life expectancy instead of normal annuity mortality tables. This higher monthly payment may be sufficient to cover LTC costs.
For younger clients who are in the process of purchasing life insurance, an alternative that could also provide funds for LTC would be to purchase a whole life insurance policy that builds cash value. Whole life insurance policies typically contain many provisions that make them suitable for funding LTC. For example, a policy-owner could take out a loan against the policy’s cash value or surrender the policy for the cash value.
For clients who are not able to obtain LTC insurance, knowing that they have one or more of these alternatives available may provide some peace of mind.
Kristen L. Falk, FLMI, AAPA, ACS, AIAA, AIRC, ARA, is a senior writer with LOMA in Atlanta. Here e-mail address is firstname.lastname@example.org.