Oftentimes, the biggest hurdle to helping people plan for their future needs is to start talking about it.
That’s never more true than with long term care. Financial professionals are no stranger to difficult conversations—about death, family, businesses—but long term care can be an especially tough topic. But with the average cost for a one-year stay in a private nursing home room estimated to be $83,580 per year,1 the bigger conversation about planning for the future isn’t complete until long term care is considered.
For many clients, the risks of needing long term care are easy to ignore. People are generally aware that the possibility of needing long term care at some point exists, but are unwilling to acknowledge they might need protection for that possibility. And the risk isn’t limited to the retirement years—40 percent of those needing care are between the ages of 40 and 64.2
“People tell themselves about bad things, ‘I know it could happen, but it’s probably not going to happen to me,’” says Dean Harder of The OYRI Group in Zionsville, IN. “About good things, we tell ourselves, ‘I know it could happen, and it probably will happen to me.’”
The Truth of Consequences
With long term care, the conversation is best focused on consequences rather than probability—what happens to the people someone has promised to protect if there’s an unexpected need for long term care? By the time a client needs long term care it’s usually too late to make plans, either because they are mentally unable or because the need came on too quickly to make plans ahead of time. In these cases, long term care insurance may be unavailable or prohibitively expensive.
Often, for those without long term care plans in place, care falls to family members who are forced to make decisions about their parents. If a spouse or child becomes the caregiver, their own physical and mental health is imperiled. In addition, these discussions and the resulting plans can cause friction in the best of families.
Clients already rely on their financial professionals for retirement guidance, so long term care can be part of that discussion. They’ve planned carefully to have enough income to live their desired lifestyle in retirement and possibly leave a legacy for the next generation or a charity. Talking about the effect of an unexpected long term care need on that income points out the need to protect that income.
“What disability insurance is to a working person, long term care insurance is to a retired person,” as Harder says. “People don’t want to lose their income while they’re working if they get sick or hurt. That same mindset comes into play with long term care during retirement.”
Once people realize the need to protect their retirement income and the legacy they plan to leave, the discussion about long term care protection can begin. For each client, needs are different.
LTC to protect assets
Every case where wealth transfer, asset protection and supporting a family or charity is an issue presents an opportunity for a conversation about long term care. The ability to self-fund doesn’t necessarily mean that’s the best option in the context of a client’s overall plan.
The liquidation of assets to pay for care can begin a cycle of increased taxation, exposure to market volatility and loss of ability to spend on discretionary items—and many times valued discretionary activities are really non-discretionary spending.
The true liquidity of assets should also be considered. If assets are tied to the market, such as mutual funds, stocks and other securities, they can experience the double hit of loss in worth when a down period in the market occurs at the same time as increased taxation. The loss of principal also means reduced income from that principal in the future.
Tax consequences should be considered. Qualifying long term care products offer significant advantages in this area. For retirees, there are only four tax neutral investment withdrawal activities: HSA withdrawal for qualifying medical expenses; LTCI payment for qualifying long term care expenses; qualified Roth IRA distributions; and cash value life insurance surrenders switching to loans at basis. The income from or the liquidation of any other asset in a gain position increases provisional income and adjusted gross income. This increased income creates potential exposure to taxation of Social Security benefits, alternative minimum tax, phase-out of personal exemptions, loss of itemized deductions and increased premiums for Medicare parts B and D. The result is far harsher tax consequences and a much less efficient spending pattern than most retirees anticipate.
In the small business setting, often the lifestyles of the family matriarch and patriarch are inextricably woven into the fabric of the family. Would family property, otherwise intended to be left as a legacy, have to be sold to cover long term care expenses?
Other business owners may need to consider the effect a long term care event would have on the business partner and on the business itself. Long term care protection could permit cash to remain in the business that could be used to bring on additional resources to the business if needed.
Often, supporting a treasured cause is a central component of legacy planning–these causes might not be considered discretionary. Every dollar used to pay for care is a dollar less that a charity receives, and every dollar used to pay for care deprives the individual of a charitable deduction.
Medicaid planning vs. legacy planning
Those clients not focused on legacy planning may be candidates for Medicaid planning but, with the many variables offered by long term care products and premium options, protection shouldn’t be automatically ruled out.
As I mentioned in my last article, Medicaid carries strict guidelines and eligibility requirements—my statements on this may have caused confusion as rules vary widely by state. The resource test for Medicaid looks at the assets of both spouses when one of them is applying for Medicaid. Certain assets aren’t counted against the applicant’s eligibility in this situation. For instance, a home isn’t counted if a spouse or dependent child is living in the home. When the Medicaid recipient dies, states vary on whether a lien to recover benefits paid is attached to previously not-counted property.
As a financial professional it’s important to be familiar with these rules, but given the complexity of the regulations it’s in your clients’ interest to talk about considering other options. Some couples and families who may think they’ll pursue the Medicaid option may be better poised to talk about legacy planning than they know.
Whatever a client’s situation and eventual long term care plan, the most important resource financial professionals can provide is the opportunity to have that conversation and stress the importance of long term care planning before the event occurs.
“Costs of Care,” www.longtermcare.gov/costs-how-to-pay/costs-of-care
Carol Einhorn and Steve Leimberg: Long-Term Care 2017” , Leimberg Information Services, Inc., Elder Care Law Planning Newsletter Archive Message #19, 2.14.17
For use with financial professionals only. Not for public distribution. Provided content is for overview and informational purposes only and is not intended as tax, legal, fiduciary, or investment advice. The OYRI Group is not an affiliate of the companies of OneAmerica.
Patrick M. Foley
CLU, ChFC, is the president of Individual Insurance and Retirement Services for the companies of OneAmerica. In his role, Foley oversees all sales, service, marketing, product development and profitability for OneAmerica’s life, annuity, and asset-based long term care products. In addition Foley is responsible for OneAmerica’s retail general agency system and its broker dealer, OneAmerica Securities. Earlier in his career, Foley built and grew a top 10 general agency and has served in senior executive roles at Genworth Financial, Allianz Life of North America and Prudential. An avid supporter of the industry, he has also enjoyed leadership roles in GAMA and the CLU Society, as well as having been an international board member for LIMRA. Foley earned a Bachelor of Business Administration in Finance & Insurance from the University of Iowa and is a Chartered Life Underwriter and Chartered Financial Consultant. Foley may be reached at One America, One American Square, P.O. Box 368, Indianapolis, IN 46206-0368. Telephone: (317) 285-4927. Email: firstname.lastname@example.org.