5 Reasons Affluent Clients Might Need Long-Term Care Insurance

Here’s a common question from financial planners: Should they be recommending long-term care insurance to high-net-worth clients, or should their clients self-fund long-term care risk?

The decision to consider long-term care protection is often based on the value of the client’s assets.

However, there are other risk factors that need to be considered, because those factors will affect the client’s portfolio and may have tax implications.

In many situations, long-term care protection may provide a solution for portfolio risk management and legacy planning issues in the most cost-effective and efficient manner currently available.

Working with two long-term care planning specialists, Leni Webber and David Katz, we prepared a summary of five important factors for financial planners to consider when advising clients, based in part on a OneAmerica whitepaper — “Efficient Long-Term Care Risk Coverage for the Affluent.”

Of course, as always, it is recommended that you get advice from a tax professional before discussing these ideas with clients.

1. Sequence of Return Risk

A client can’t choose when an extended care event occurs.

If negative market returns occur in a year when self-funded long-term care expenses occur, the lost portfolio assets may never be recovered.

This leaves the surviving spouse with a compromised lifestyle and depletes the assets under management.

2. Tax Exposure Risk

The true cost of self-funding LTC risk is not best judged by a client’s marginal tax bracket, but rather by assessing the true cost on the next dollar taken from a portfolio to pay the expense.

Taking distributions from qualified money not only increases ordinary income, but the distribution may also place your client in a higher marginal income tax bracket. This can further increase the cost of the distribution.