With thousands of boomers retiring every day, long term care may become a reality for more and more clients are going to face.
Roughly 70 percent of people 65 and older will need some form of long-term care in their lifetimes, and that figure will only grow as people live longer — but not necessarily more able-bodied — lives.
Home health, skilled nursing and other long term care services aren’t getting any cheaper, either. As of 2016, the national monthly medians were $3,861 for home health aides, $3,628 for assisted living and $6,844 for a semi-private nursing home room – not exactly affordable for retirees with modest assets, fixed incomes and average lifetime earnings.
Still, few advisors are well-versed in the available funding options, and even fewer clients are eager to tackle the touchy subject. As a result, retirees all too often find themselves depleting their assets, lowering their living standards and burdening their families to cover the costs.
For advisors, the situation presents a great opportunity to grow a practice by protecting the assets clients have accumulated over lifetimes of work. From long term care experts who tackle these issues every day, here are five funding strategies for different time horizons, needs and goals.
1. Traditional long-term care insurance
“For those who plan ahead and can afford a high level of protection, today’s long-term care insurance options are the best the market has seen,” says Chris Orestis, CEO of Life Care Funding. “The industry has had over two decades of experience, and companies have learned how to put together the best coverage and underwrite and price it correctly.”
Most LTCI plans are customizable, inflation-protected and pay-as-you-go, and benefits may be paid daily or monthly. They’re not cheap, though, with plans ranging from $2,000 to $5,000 per year for couples aged 55 at the time of purchase.
Those premiums can also vary. While newer, higher-priced plans may be more predictable, there’s no guarantee those rates won’t rise with increased utilization.
“You could be holding a ticking time bomb,” says Jackie Clark, long term care planning specialist with Farmington River Financial Group. “I’ll still quote traditional, but for those costs, I can usually get clients a comparable, asset-based product that can pay out in life insurance, long term care or even cash back if they change their mind.”
Given the high costs and potential for an investment “wasted” on unutilized LTC services, then, why would a client ever want a traditional LTCI policy?
“A traditional policy gives you more options and more money specifically for long term care, and they’re great for people who already have life insurance coverage,” says Orestis. While traditional LTCI can be expensive, it also tends to be cheaper than hybrid insurance, its premiums are paid over longer time periods, and it’s tax-qualified. All in all, it’s a solid consideration for people with lots of other assets to protect who can afford the potential premium increases.
2. Life insurance
For clients who can’t stomach the “use-it-or-lose-it” nature of traditional LTCI, hybrid life insurance policies can flexibly convert death benefits to LTC benefits.
“Say you purchase life insurance with a $500,000 death benefit,” says Clark. “Needing LTC would accelerate the death benefit, but the rest would still be there for your beneficiaries once you pass.” Hybrid plans also feature fixed premiums, and unlike traditional LTCI, premium payments stop once the benefits are triggered.
The trade-off is that hybrid policies require larger premium payments upfront – in some cases, a one-time lump sum. While many policies can be cancelled for a refund, that refund may not be 100 percent, either. Overall, what hybrid policies offer in flexibility they lack in potential value and cash-flow friendliness, and a choice between the two will come down to a client’s risk tolerance, goals and other assets.
And if a client is going to pursue a long-term funding strategy, they need to start early.
“The key to both standalone and hybrid long-term care insurance is buying it as early as possible, when you’re young and healthy and can get the best premiums,” says Orestis.
3. Short-term strategies
In a perfect world, everyone would plan at least a decade in advance. But accidents, illnesses and rapidly progressing dementia often create immediate, unfunded needs for long-term care, and many retirees seek funding within months or days.
Fortunately, there are a few ways for clients to quickly fund care services without raiding their retirement accounts.
“A growing strategy is to exchange a life insurance policy for more liquid assets,” says Orestis. “There are only 7.5 million LTC policies in the United States, while there are 150 million enforced life insurance policies, and those policyholders have options.”
Families can settle their policies for lump sum cash payments, exchange them for immediate annuities or convert them into tax-free LTC benefits plans. While these options require policyholders to sacrifice a sometimes significant portion of their death benefits, they’re usually a better bet than drawing down other assets or letting relatives foot the bill.
For retired military clients, there’s also the little-known Aid and Attendance benefit, which offers $1,788 month to single beneficiaries and $2,120 per month to married veterans. These funds can be used to pay for in-home care or a stay in a nursing home or assisted living facility, and a portion of the benefit remains for veterans’ surviving spouses.
4. Reverse mortgages
Reverse mortgages are another short-term strategy. This is a popular option for retirees with paid-off homes and little to no LTCI coverage. Essentially, a client takes a loan against their home’s equity; the lending bank may make payments in a lump sum, monthly installments or a line of credit. The loan doesn’t have to be paid back until the borrower dies or leaves the home for a full year, at which point the sale of the home will more than cover the principal and interest. Homeowners can’t owe more than their homes’ values, and 20 too 70 percent of that value can be borrowed.
“It’s a good tool to pay for home care, but since you have to live in the home, it probably won’t work to pay for assisted living,” says Orestis.
Because there are no restrictions on how the money can be used, it can be a good option to fund care from family members and other non-qualified caregivers, who may need to leave their jobs or drop to part-time hours.
5. Continuing care retirement communities
A reverse mortgage isn’t the only way to leverage a paid-off house and other sizeable assets — continuing care retirement communities (CCRC) guarantee lifetime housing and offer independent living, assisted living and skilled nursing care under one contract.
“People typically sell their homes and put forth an entry fee, along with a monthly fee,” says Jim Ciprich, Wealth Advisor with Regent Atlantic. “Whatever you pay on a monthly basis will stay about the same if you have to advance to skilled nursing or memory care.”
While the entry fees are prohibitive for many clients – often ranging from $100,000 to $1 million – CCRCs offer predictability and security that not even LTCI can match. Not only do buyers know how much their care will cost, they know where they’ll receive it – a piece of mind some clients find invaluable.
“CCRCs also offer socialization and a focus on health and wellness, and they can be great for people with deceased spouses,” adds Ciprich.
Keeping clients’ goals in mind
Ultimately, the best long term care funding strategy is the one that suits the client’s needs, means and goals.
“The goal with long term care planning is to be able to choose where and how you live in retirement,” says Orestis. “Start with the needs of the client and work your way backwards into the specific products.”
While a hybrid life policy provides extensive coverage and flexibility, in other words, it may not be the best choice for a couple with life insurance and a paid-off, high-dollar home.
No matter which strategy a client eventually chooses, however, planning early is always better than planning late.
“Being reactive is always going to be more expensive than being proactive,” says Ciprich.
By educating yourself on the available options and tackling tough conversations with clients early on, you can offer far greater protection for the assets you help them accumulate.