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Aug 27

Outside-of-the-Box Thinking About Long-Term Care Planning–One Size Does Not Fit All

If you love shoes like I do, this post will speak to you. My favorite t-shirt says “If the shoe fits, buy it in three colors”. But not only does one SIZE not fit all, one STYLE does not fit all. Are you into stilettos, sandals, conservative low heels, flashy semi-high heels, flip flops, comfortable flats, boots?  Men, how about you? Boat shoes, sandals, flip flops, shiny dress shoes, rich leather shoes with those adorable tassels? You get the picture. Of course, the current year is relevant. Remember earth shoes? They were so ugly. I couldn’t believe my mother bought me a pair, and soon they were all I wore. One of Jeff Foxworthy’s famous lines is “Gotta love a man in a Dingo boot”… (What are Dingo boots anyway?”)

As a shoe aficionado, I have observed that long-term care insurance is quickly starting to resemble my closet of 100 pairs of shoes. 

For example, a 2017 LTC insurance survey reports that the number of life insurance policies with long-term care benefits is now more than twice the number of traditional stand-alone policies sold! That disturbs me somewhat because I know that many are sold by focusing on the benefit account and death benefit, rather than on how much the policy will pay out per day or month at claim time. I do sell life/ltc policies, but I do the same benefit consultation process with everyone that I’ve mentioned in a number of my articles. Here are the steps I take:

  1. Determine their benefit target in 20-30 years, depending on their age, by focusing on the cost of a “country-club” assisted living facility (ALF) rather than a nursing home. The cost of home care is growing slower than that of ALFs in most places, so I know that a target based on ALF future costs will buy a lot of home care. I don’t base anything on nursing home costs, because most people don’t wind up there.
  2. Look at the median cost of an assisted living facility in their area or where they plan to retire and bump it up by $1,500 to estimate the price of a “country-club” assisted living facility, then inflate it by 5% compound for 20-30 years, based on their age and longevity. Why 5% compound? Because baby boomers love ALFs and claims are lasting longer now because people live longer when they are happier.  They look nothing like a nursing home. Couples can stay together without having to pay double.They cook for you, clean for you, do your laundry and there’s no yardwork. What’s not to love? An added bonus is you might meet a cute guy or gal…
  3. Obtain information about their before and after tax savings and current and retirement income to see if the insurance needs to fund the entire target or a certain percentage of it. Ideally, we will fund the entire target based on ALF costs. If they do wind up in a nursing home as a last resort, they can either use their savings to pay the difference and remain private-pay, or turn to Medicaid and protect assets equal to the benefits paid out if they live in or move to a Long-Term Care Partnership state. [Caveat: their degree of disability has to match their state’s requirement for Medicaid; e.g. many states require help with four Activities of Daily Living instead of just two like LTC insurance. The second disclosure is that most of their income goes toward the cost of their care, unless some of it is needed for the spouse at home.]  
  4. Choose a daily or monthly benefit that will arrive at the benefit target in the desired time frame.
  5. It doesn’t work anymore to choose the country-club ALF current cost and choose 5% compound inflation. Carriers still offer it, but they don’t want to sell it because it makes the benefits grow so fast. They would much rather sell 3% compound because it takes 24 years for a number to double instead of only 15 years like 5% compound. So I have to bump up the initial daily or monthly benefit to what will reach the target in the desired time frame at 3% compound. For example, $150 a day ($4,500 a month) at 5% compound grows to $650 a day in 30 years ($19,500 a month). Bumping the daily benefit to $250 a day ($7,500 monthly) using 3% compound will get close to the target and can be as much as $1,000 less expensive than a policy that inflates the current cost at 5% compound.
  6. Fit the benefit account; e.g.. 2, 3, 4, 5, 6 years to their budget, influenced by longevity and especially by a family history of dementia. The insurance companies call this a benefit maximum. I call it a benefit minimum if it’s a reimbursement policy, and explain that the only way they will use it up in the selected number of years is if they use the entire daily or monthly benefit every day or month. Most people start out with a few hours of home care, a few days a week, not seven days a week, or the policy might offer a 30%-40% cash alternative instead of taking the entire daily/monthly benefit. Either way, they wouldn’t use the entire daily or monthly benefit up in the early phases of the claim.

It’s way more important to have an adequate daily/monthly benefit than it is to have a long benefit period. If the benefit is too low, they can spend their savings down trying to make up the difference. 

7. I add Restoration of Benefits if the policy offers it to anyone under 65. It costs almost nothing and restores the benefits paid out if the person has an accident or perhaps a moderate stroke from which they recover in a few months.

Many people come to me for help with long-term care planning, with many different needs that require out-of-the-box thinking.   Here is a recent case so you can see what I mean, and maybe see a different solution that might work for you.

Elise is a single 50-year-old woman who lives in a high-cost area. The current cost for a really nice assisted living facility is $5,800, which will grow to $25,000 a month at 5% compound. She would have to buy a $10,000 monthly benefit ($330 daily benefit) to reach that target with 3% compound inflation. She doesn’t have a family history of Alzheimer’s, so she is fine with a three-year benefit period. She was not fine with the annual premium of $4,303. She liked the idea of leaving money to a beneficiary if she doesn’t ever need long-term care. Designing a life/ltc policy to provide that high level of coverage was also expensive.

So why not combine both solutions? This worked beautifully. She went with a $160 daily benefit that will provide her with almost $400/day ($12,000 a month) and a benefit account of $425,000 in 30 years. We added Restoration of Benefits since she is so young. This plan only cost her $2,086 in annual premium. She went with a Mass Mutual policy, as Mass Mutual is the only traditional policy available to everyone that is not gender-rated and charging women more. (The Federal LTC Insurance Program is not gender-rated but you have to be eligible for it.)

Then we were able to find a universal life policy with North American Company for Life and Health Insurance for $4000 annual premium that is projected to provide about $350,000 in cash value in 30 years. She can take out up to about 90% ($315,000) tax-free as long as she doesn’t terminate the policy. That can provide her with the additional $13,000 a month she needs for a full 24 months [$315,000 / $13,000]. However, a cash benefit has more purchasing power since she can use the money however it is needed, so she can likely stretch it to three years to match her traditional policy. This plan has an increasing death benefit. It starts at $88,000 and grows to over $400,000 in 30 years at age 80. At age 85, she could have $500,000 in cash value and a death benefit of over $600,000. Her beneficiary will receive the excess death benefit above the cash value that she takes out for her LTC, and the premiums will remain level at $4,000 a year for her life. To make sure this works, the life/ltc policy has an overloan protection benefit that won’t allow her to take out too much cash value and terminate the policy.   It also has a death benefit protection feature.

What is different about this solution for Elise is that she doesn’t have to satisfy the 2 ADL or severe cognitive impairment to tap the cash value. She does however have to remember to not access it until she needs care so that the cash value and the death benefit are allowed to grow without interruption. If she does access it like for a business loan, she has to pay it back as soon as she can. That gives her a total premium of $6,086. Yes, it’s more than the premium for a traditional, standalone LTC insurance policy, but she feels better about it because she will build value she can pass on to a beneficiary if she doesn’t use the life insurance policy for her LTC.

Both companies have been in business since the 1800’s.

But wait, there’s more good news! As a business owner with an LLC, she can deduct $1,530 of the Mass Mutual premium in 2017. This is the amount for a 51-year-old this year, since she turns 51 on December 3rd. So whatever tax she would pay on $1,530 becomes a discount on her traditional LTC insurance premium of $2,086. This tax incentive increases each January and soon she will be able to deduct the entire Mass Mutual premium as part of her self-employed health insurance deduction.

To get this kind of “boutique” long-term care planning, all you have to do is complete the short questionnaire on this website at https://www.gotltci.com/contact-us/. You will receive an email with a link to our online calendar to book a convenient time for a personal no-obligation consultation. Please watch the 17-minute educational video while you are there. If you are married or have a partner, both of you should participate as planning for LTC affects both of you equally! You will also want to be at a computer so we can do a screen share as we customize a plan for you.

Well, I can’t sign off without answering the Dingo boot question.  Ummm, definitely something about a Dingo guy or gal…..

 

 

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