Curbing the Costs of Long-Term Care

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voluntary long-term care insurance program called the Community Living Assistance Services and Supports Act, but it was repealed during January’s fiscal cliff negotiations.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.