The market’s decline highlighted a potential risk in clients’ retirement income plans. In a common scenario, clients planned on withdrawing a specified percentage of their assets each year for retirement income. Wealthier clients (and their advisors) usually assumed they could cover the cost of long-term care with their available cash flows.
But if the client’s assets are worth considerably less, can they still cover the expense of long-term care without depleting those assets too rapidly? If they can’t, it might make sense to consider adding long-term care insurance (LTC) to the retirement income plan. Although LTC has been around for years, it’s still an underdeveloped market: the American Association for Long-Term Care reports in its 2009 LTCI Sourcebook that only 8.25 million Americans — out of 78 million boomers — have LTC coverage.
Sunny Kurman, CLU, ChFC is a regional vice president and LTC specialist with Genworth Financial in Chicago, who works with LTC insurance producers. She believes LTC is the piece that holds the retirement plan together. “Those things that used to kill us, we survive now, so we are living longer,” she says. “What happens is that we save someone money for retirement and then assume that money will go to support our lifestyle. What we never anticipate is that we have a long-term care incident, and because those things that used to kill us we now survive, the only thing that’s going to pay for this extended health care incident, since it’s not covered by any other insurance, is either assets or income, which we’ve saved to pay for our lifestyle in retirement.”
Instead of approaching LTCI as a commodity, Kurman believes that financial advisors need to do long-term care planning for clients in the same manner they perform other planning. For example, if the average monthly cost of care in the advisor’s area is $6,000, it’s not sufficient to tell the client they should buy $6,000 of monthly benefits, she argues. “I want to know all kinds of thing such as how does the client deal with their risks?” she says.
“Do they have a $50 deductible on their homeowner’s policy or do they have a $5,000 deductible on their homeowner’s policy? This is no different. The consequences of not having this planned are devastating to my family, but how do I want to deal with the risk of it? So if it’s $6,000 a month, maybe I only want to cover half because I already have my own investments. Or perhaps I have a $50 deductible on my homeowner’s insurance and I don’t want to use any of my own money, so I’m going to buy $6,000 of monthly coverage. You still have to find out what’s important to the client and then put a plan together around that,” she explains.
Cynthia Gurley, CLTC and owner of Gurley Long-term Care Insurance in Scottsdale, Ariz., is a LTC specialist who works with numerous financial planners. She reports seeing more advisors include LTC in their planning processes due to the downturn in the economy. “Many clients who previously had planned to self-fund care are no longer in a position to do so,” she says. “Or, they no longer think that self-funding is a prudent strategy as they review their financial goals.”
Even when prospective LTC buyers agree on the need for the coverage, a policy’s premiums can still be an obstacle. Gurley says that customizing the coverage for the client and recognizing trade-offs is critical. “LTC insurance is expensive,” she says.” We explain that LTC can be designed based on the benefits a client desires and/or on the budget the client defines. We frequently design coverage based on a defined budget. It may not provide the coverage that we’d like all of our clients to have, but some coverage is better than none.”
Creative funding can also help clients get the coverage they need, says Gurley, who tries to find funds outside the household budget. Among the possible solutions she considers: “For clients in their 70s, if not already using the required minimum distribution (or RMD) as an income source, the RMD becomes an easy way to fund the annual premium. Clients in their 60s often have substantial cash value in a permanent life insurance policy. The original intended use, perhaps income replacement, may no longer be necessary and we can use a 1035 exchange to fund a tax qualified LTC-life insurance based product. Clients in their 50s often have substantial assets in an IRA. There are products that allow the use of qualified funds and are specially designed to mitigate the tax liability.”