Protecting Your Retirement Income and Legacy with Long-Term-Care Insurance

Longevity does not mean immunity

By Arthea J. S. Reed, Ph. D., CLTC

Ms Reed is a financial representative and long-term-care Insurance specialist in Asheville, NC. with Northwestern Mutual Financial Network and owner/president of Long-Term-Care Insurance Connection, Inc.

The time of our nation’s baby boomers reaching retirement age is upon us. Talking with clients about the need for long-term-care insurance (LTCI) is critically important for any advisor doing retirement income/distribution and legacy planning. For many of our clients, this is a sensitive subject; no one wants to think about the possibility of being dependent on others to aid with basic daily tasks. Even in this day and age, when people are living longer and healthier lives, no one is immune to health issues that could result in reduced mental capacity or chronic illness. Denial of the potential need for care causes many people to fail to plan for what they want for their care and how to fund it until it’s too late. As advisors it is important for us to review with our clients the wide array of LTCI options available, how much they cost and how best to fund them.

Need for Long-Term-Care Insurance

Helping clients assess whether they need LTCI is an important step when setting up a retirement plan. LTCI can provide the financial resources needed for quality care for individuals with physical needs or cognitive impairments over an extended period of time. Most of us take for granted daily activities such as walking, bathing and dressing. However, when we are no longer able to do these on our own, care becomes essential and LTCI can fund care at home, in assisted living facilities or in nursing homes. When I ask clients what they think of when I say ‘long-term care,’ they typically respond, ‘nursing homes.’ They are surprised to learn most people using the benefits provided by their LTCI policies receive their care at home. A much smaller percentage of claims are for nursing-home care. The benefits provided by LTCI policies allow many of my clients to remain at home and relatively independent for a much longer period of time. An additional benefit of owning LTCI is family members aren’t burdened, or have to give up their work and personal lives in order to provide care. Many of my clients are grateful they are still able to leave a legacy to their children and grandchildren, because insurance is paying for their care.

Unfortunately, many of our clients have not included a funding source for long-term care (LTC) in their retirement plans. With the cost of care expected to double every 14 years, even a short chronic care need could deplete a couple’s assets. As advisors, we need to illustrate for our clients what LTC could do to their retirement income and assets. We can’t predict when LTC will be required, or how long the care need will last but we can plan for its eventuality.

Pre-Funding Long-Term Care as a Part of Retirement Planning

The cost of LTC can be a burden not only for the individual needing care, but for the entire family. Clients can fund this future need in one of two ways:

The first way is by creating a ‘pool of money’ out of their personal assets, which will grow at five percent compounded per annum after taxes. That pool of money must be totally dedicated to future care costs, and not be touched for anything else while the client is living. I tell clients the ‘pool of money’ needs to equal what care would cost today, and last for as long as they believe care will be needed. For example, if a client needs $8,000 a month, in today’s dollars, to fund care, the cost will initially be $96,000 per year and will grow to $149,000 in 10 years. Hence, if they want to cover 10 years of care for significant risks such as; Alzheimer’s, stroke, or Parkinson’s disease, they need a dedicated ‘pool of money’ of more than $1.2 million for each person. I tell my clients, ‘The good news is if there is any money left when you die that has not been used for your care, it becomes part of your legacy.’

I tell clients the 'pool of money' needs to equal what care would cost today, and last for as long as they believe care will be needed.

Another option clients have is to let the insurance company assume the risk and pay for their care for as long as they need it. If they purchase LTCI over a 10-year period, taking their age into account, it could cost one person between $15,000 and $20,000 per year for an $8,000 monthly benefit, a lifetime benefit period and unlimited pool of money. Since I work primarily with high-net-worth clients, many of them are able to deduct the full premium they pay each year as a business expense. Benefits of course will come to them tax-free when they need care. Even if a tax deduction is not available, their net outlay for the LTCI may be considerably less than the ‘lost opportunity cost’ of a dedicated ‘pool of money’ of more than $1.2 million per person to fund the future cost of LTC.

Benefits of Long-Term-Care Insurance

One of the major advantages of purchasing a LTC policy is its lifetime coverage guarantee (not available from all companies). There is no way to create that guarantee with a dedicated ‘pool of money’ approach. If a care need were to occur ‘sooner rather than later’ – such as an accident, stroke or early-onset Alzheimer’s, the policy could cover the full cost of care for many years. This product could fully protect an individual or couple from using their personal assets, reducing their retirement income or depleting their legacy to pay for the cost of care. For many, the LTC premium is tax-deductible, and even if the premiums have been deducted, the benefits are received 100 percent tax-free. Of course, taxes would have to be paid on any earnings in the dedicated ‘pool of money’ approach.

Risks of Long-Term Care

The high cost of a LTC need is one of the challenges faced by everyone who is approaching retirement. Without planning for a future LTC need, an advisor cannot predict with reliability, or assurance our client’s assets will last for a lifetime or be able to fund the full cost of future care need. Fortunately, seniors are becoming increasingly aware of how LTC can deplete a lifetime’s savings. When I do retirement planning for my clients I use a software program that allows me to illustrate what a LTC need is in the future, as well as what it will do to their retirement and legacy assets. In running such an illustration for a couple who were both retiring at age 65, with $4 million in assets they could devote to retirement income and legacy planning, I showed them the need for LTC for one of them beginning at age 80 and lasting to assumed life expectancy at 90. This couple asked me to illustrate an annual income for them of $200,000, and a LTC cost of $7,600, both in today’s dollars. We also assumed a three percent inflation rate, LTC increase rate of five percent, a 30 percent effective income tax rate and a rate of return on investments of seven percent. If this LTC scenario were to occur this couple would deplete $4 million of assets by age 87. It is very beneficial to my clients to see an illustration of what the cost of care could do to their assets through the software program I use. The current economy has made retirees very fearful about whether their personal assets are going to provide the income they need for their lifetime and for the legacy they want to leave. If they want any reliability or assurance that their money will last until they die and that there will be some to leave as a legacy, they must plan for a long-term-care need.

Many people believe that ‘long-term-care insurance is too expensive,’ or they ‘can self-fund the care.’ Indeed, for some the cost of the insurance may be more than they can afford, and very few of us may be able to fund the care need from our personal wealth. However, it is every advisor’s responsibility to educate their clients about what care is likely to cost in the future. As people are living longer, it is critically important we illustrate for them what a care need could do to the assets that most of them have worked a lifetime to accumulate.