It’s tempting to think of LTCI primarily in terms of the “hard” factors: the applicant’s insurability and need for the coverage, the policy-specific benefits to include or omit, where to place the business, etc. Ultimately, though, clients are likely to base their coverage decisions largely on the desire to protect their families.
Role of family in discussion
Vincent Barbera, CFP with TGS Financial Advisors in Radnor, Pa., says questions about the family are one of the more important elements when discussing LTCI with clients. In his experience, the long-term risk of LTC-exposure and the large expense, which might not arise for 10 to 15 years, extend beyond the clients. “The impact that it’s going to have on the entire family needs to be accounted for,” he says.
That impact may require selling a home, depleting assets, etc., actions that also deplete the potential inheritance parents might hope to leave. Consequently, Barbera works to understand why the clients are considering LTC: “Is it just an insurance product to protect each other or is there a more important reason?”
“Every time we talk with a perspective insured, we’re asking about their family and whether they have children,” says Patricia Bennett, LUTCF, CLTC, president of Longevity Planning in Newington, N.H. “If they have children, chances are the children work and they very well may live out of state. Or, if they don’t have family, that just means that this person is even more likely to need care perhaps sooner because there is no informal caregiver. There’s no daughter that’s going to stop by twice a week to deliver groceries and make some meals and do things like that.”
Meeting with children who live locally can head off the children’s potential objection to their parents payment of LTCI premiums, Bennett notes. If she learns an adult child works full-time, for example, she asks how that child would feel about becoming an informal but possibly full-time caregiver. “Would you quit your job if you needed to take care of Mom and Dad?” she asks. “They start thinking of it in those terms as opposed to just mom’s going to pay $2,000 or $3,000 a year for a premium.”
Bennett also finds that many of her clients are caring for their own parents, who are in their 90s or older. Asking prospects about these older family members reveals valuable information that can determine what type of LTCI works best for the client. “It’s important to get to know whether their parents have passed or are still living, if they’ve needed long-term care, and what that experience was,” she says.
According to the 2010 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services and Home Care Costs, average rates for a private nursing home room were $83,585 annually in 2010; average rates for a semi-private room reached $74,825. If both spouses required a two-year stay under either arrangement, the costs would likely exceed $300,000, so it’s understandable why parents would consider LTCI for estate preservation.
However, some adult children who are well off might not share their parents’ concern about estate depletion and that attitude will influence the LTCI-buying decision. In J. David Lewis’s experience, approximately four or five clients approach him each year to ask about the value of buying LTCI for estate preservation.
Davis, president of Resource Advisory Services in Knoxville, Tenn., often suggests clients ask their adult children to pay for the coverage because it is the children who ultimately benefit from the insurance. This will show the parents how much or little the issue concerns their children, he says. “You’re reducing the estate by the premiums or you’re saving the estate by the benefits,” he tells clients. “Don’t you think that’s a decision that affects them (the children) more than it affects you personally?”
LTCI and the estate plan
Most insureds, including those who can afford the premiums, don’t like paying for LTCI because they might not use the coverage. One way to avoid that argument is to reposition the cost by having clients view the premiums as a gift to their children, Barbera suggests. “You’re gifting $5,000 to $6,000 (for annual premiums) in a way to your kids,” he says. “They’re going to receive a much bigger ‘bucket’ at death than they would have if you had to use it. So, in that sense, you’re actually providing for their future or even for your grandkids’ future by taking this on yourself.”
For wealthier clients who can afford to self-insure, making formal gifts to fund an irrevocable trust that owns the LTCI policies is a strategy worth considering. (My thanks to Anthony Stratidis and Karen Mellon of Marsh & McLennan Cos. for bringing this approach to my attention.)
The technique is similar to that behind an irrevocable life insurance trust. The parents create and fund an irrevocable trust that applies for and owns LTCI on the trust’s grantors–e.g., the parents–with an insurer that allows third-party policy ownership. The insureds’ children and grandchildren typically are named as the trust’s beneficiaries.
Each year, the insureds make annual gifts to the trust to pay the policy premiums. Assuming the trust is structured properly, those premiums qualify under the annual gift-tax exclusion, which is $13,000 per recipient in 2011.
How the strategy pays off
Assume the couple incurs $300,000 in LTC costs during their lifetimes. They pay those expenses out-of-pocket, which reduces their taxable estates. The trust files for and collects the policy’s benefits. Those benefits can then remain in the trust where they can be invested and avoid inclusion in the insureds’ estates when they die. Essentially, the LTCI is replenishing the family’s wealth on an estate tax-favored basis.
Irrevocable trusts are complex and require expert guidance when recommending one to clients. But for those clients who are familiar with irrevocable life insurance trusts or dynasty trusts, buying LTCI through an irrevocable trust can provide multiple benefits.