How much time have you spent thinking about paying for your long-term care needs? If you’re like two-thirds of Americans, this is a serious cause of worry for you. The good news is that there is a solution through repositioning your assets into relatively new long-term care insurance solutions.
What does this look like? You may have the opportunity to leverage “sleepy” assets such as cash, certificates of deposit, old annuities, and the cash value of life insurance and transfer them to higher dollar solutions which would then provide for an extended care event. If it turns out that you don’t need long-term care, a cash payout is made to your heirs. In the end, you gain peace of mind and financial security when it comes to future medical choices you may need to make.
A New Era of Long-Term Care Insurance
The long-term care insurance industry is currently going through a transformation. The typical “use it or lose it” approach is being revisited by carriers who have chosen to offer hybrid solutions, combining life insurance and annuities with long-term care benefits. Many of these approaches offer guaranteed premiums as opposed to the substantial premium increases that some policyholders face with traditional policies.
The real benefits of the new approach are that it sometimes provides more lenient medical underwriting, can have little to no effect on your net worth, and most importantly, it gives you increased financial security with solutions that were not available years ago.
Planning For Long-Term Care
First, let’s address the issue of long-term care. As a society, most of us feel we are in the minority that will not require extended care. However, experts tell us 60-70% of those over age 65 will need assistance with custodial care such as bathing, continence, dressing, eating, toileting, and mobility. If you may need help with two out of those six activities of daily living, you should know the answers to these questions:
- Who would you like to provide you with the assistance? Spouse? Child(ren)? Relative? Friend? Paid Professional?
- Where would you like to receive the care? In your home? In your child’s home? Adult Day Care? Assisted Living Facility? Nursing Home?
- How will you pay for your care? Which of your assets would you spend down first? Your cash? CD? Investment portfolio? Retirement plan? Home equity? Reverse Mortgage?
You may never need custodial care, but just in case, let’s take a look at a few examples of how some have addressed how they’d pay for the care by repositioning their assets.
Policy Exchange
Tom is 57 years old and has a $100,000 Universal Life insurance policy purchased 20 years ago with a $1,200 annual premium. The policy is projected to lapse for no value sometime between age 84-90. He has heard of long-term care riders that are attached to life insurance policies and allow advanced disbursements of the death benefit to pay for extended care. But, his insurance carrier does not offer this rider.
He decides to take advantage of a Section 1035 tax-free exchange to trade his policy for a new one. The new one has a guaranteed death benefit of $117,000, long-term care benefits of $4,600/month for 72 months, increasing with a 5% inflation rider. The annual premium is $2,900, guaranteed for 10 years. By the time he’s 80, the long-term care benefit will have increased to $9,100/month. If he experiences an extended care event, he is eligible to receive $9,100 per month for 72 months for a total of over $650,000! And, if he is lucky enough to have never needed the long-term care benefits, he can cash the policy in and receive 100% of premiums paid, or let the policy mature as a $117,000 death benefit for his heirs. It’s a win-win situation for Tom.
Annuity Trade
Greg is 74 and widowed and has two primary financial objectives for this stage of his life. He wants to be financially secure and make sure there is sufficient lifetime cash flow, as well as protect and preserve his assets for his children and grandchildren if he needs extended custodial care. Greg applied for traditional long-term care insurance. He was trying to secure a policy that provided a $6,000 monthly benefit for five years and was turned down. After evaluating Greg’s situation, it was determined that if Greg qualified, he may be able to do a partial 1035 exchange of his annuity and leverage $140,000 of it into a Pension Protection Act approved annuity that would provide $5,000 per month for 60 months, for a total of $360,000 income tax free flow for long-term care expenses. This is a two-and-a-half times multiple. He applied, was approved, and is content with the outcome.
Certificate of Deposit Transfer
In this last example, 65-year-olds Marshal and Liz have a $250,000 certificate of deposit (CD) earmarked for emergencies. They also have $6,500 of traditional long-term care insurance on each of them, paying about $5,000 in an annual premium. Luckily, they have yet to experience a premium rate increase. Assuming they never do and never have a custodial care claim, over a 30-year period they will have paid $150,000. They like the peace of mind of having the coverage, but they don’t like the fact that if they never need it, they’re out a lot of money.
After exploring their options, they decide to take $200,000 of their CD funds and leverage that into a $350,000 life insurance/long-term care policy that pays $7,000 per month for 50 months. The cash surrender value of this type of policy on day one is $200,000, which leaves their net worth intact. Their cost is the lost opportunity cost of not receiving the CD interest payments. They could also extend the long-term care benefit period to lifetime benefits by either paying 20 annual payments of $5,000 per year, or a single premium lump sum payment of $71,000. This buys them $7,000 per month benefit increasing at 3% simple interest each year.
If their long-term care event happened 20 years from now, the policy would first pay $7,000 per month for 50 months, and after that is exhausted, the lifetime benefit component of the policy would pay over $14,000 per month for each of them for the rest of their life.
They opted to pursue the $71,000 lump sum payment for the lifetime coverage, which is half the cost of their current policies over time. Also, if they never need it over that 30-year period, they could either let the policy mature as a death benefit of $350,000 or cash it in for about $300,000. By choosing this option they have freed up some cash flow, don’t have to worry about future premium increases, and have substantial lifetime coverage for custodial care, not to mention the residual cash value or death benefits available.
Funds tied up in IRA or Qualified Retirement Plans?
Some clients have the bulk of their liquid wealth tied up in IRA and other retirement plans. While taking taxable distributions to pay for long term care insurance doesn’t seem too attractive, it’s better than accelerating taxable distributions to pay for the care! But, there is a better approach. We have access to strategies to efficiently leverage qualified plan money into similar hybrid long term care solutions where someone will benefit at some time.
What Next?
There are multiple ways to reposition your assets to pay your future custodial care expenses. And rather than having an annual expense to fund the coverage, you may create an asset that will pay a benefit to someone, sometime, if you don’t end up using it. The real benefit is the peace of mind knowing that you have protected the downside if you do and have made smart decisions with your money if you don’t. If you have questions about repositioning your assets or want to know how this opportunity applies to you, give us a call today at 715-241-6763 or e-mail info@myfamilycfo.net.
About Patrick Bradley
Patrick Bradley is a financial consultant with more than 30 years of experience specializing in risk management, legacy planning and business continuity strategies. His commitment to helping others extends beyond his work and into his community where he is actively involved with multiple organizations. Learn more by visiting www.myFamilyCFO.net or connecting with Patrick on LinkedIn.
Note: My intent is to not give legal or tax advice. If legal advice or other expert assistance is required the services of a competent professional should be sought.