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Life Health > Long-Term Care Planning

5 Reasons Affluent Clients Might Need Long-Term Care Insurance

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What You Need to Know

  • Timing matters.
  • Pulling cash from the wrong places could lead to extra types of taxes.
  • Long-term care bills could also disrupt estate planning.

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.

As taxable income increases, exposure to tax on capital gains increases. The client may end up owing net investment income tax and alternative minimum tax payments.

Distributions can also cause Medicare Part B and Part D premiums to increase.

Individuals will owe additional taxes if they have NII and have modified adjusted gross income, or MAGI, above certain thresholds.

3. Loss of Step-Up in Basis

Liquidating a portfolio to pay long-term care expenses may negatively affect the step-up basis and affect the net after-tax wealth passed to the next generation.

4. Business Succession Plans

If business assets need to be sold to pay LTC expenses, this can prevent the next generation from receiving the business or maintaining majority control of the business.

5. Building a Relationship With Your Client’s Spouse and Children

“Money in Motion” typically happens when a client passes away and the estate is distributed to the spouse or family.

If you put a long-term care policy in place to protect assets under management, it not only protects the portfolio, but also gives you an opportunity to build a relationship with a spouse and other family members.

Thus, it gives you the opportunity to continue working with family members once your client passes.


Margie BarrieMargie Barrie, an agent with ACSIA, has been writing the LTC Insider column since 2000. She is blogging about long-term care planning with Chris Petillo, and preparing to launch an LTC podcast series, at Faegre Drinker’s LTCi Summit website.

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.(Image: iStock)


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