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Planning for long-term care is about choosing what works best for your clients and their family. Most often, that won’t be a state-mandated plan. But as long-term care costs continue to rise? States are likely to look for ways to shift expenses back to the consumer. What happened in Washington State is a good example.
In 2022, the state started requiring that employers deduct a percentage of paychecks to cover employees’ future long-term benefits. Leading up to the mandate’s deadline, many advisors helped clients consider alternative options by looking into private plans. Unfortunately, carriers became overwhelmed with applications, and many clients couldn’t secure coverage in time to be exempt.
As other states consider similar mandates and the need for planning for long-term care persists for everyone, you may want to adopt a plan that can be customized to fit different clients’ needs and would allow them to opt out of state mandates.
Traditional long-term care insurance. Due to higher-than-expected claims costs, the traditional long-term care space has seen a steady erosion of available products and a sharp increase in pricing for both new and existing coverage. Lifetime benefits, once an option on most policies, have been replaced by much shorter benefit durations. The financial risks of extended long-term care events can certainly be mitigated with these plans, but no longer can they be eliminated. Even well-covered individuals may have to self-fund to a degree.
Life insurance policy with a long-term care rider. For clients who want to self-fund for long-term care but don’t want to reposition a large sum of assets, life insurance is a good alternative. A life insurance policy allows for annual premiums rather than single premiums. Plus, because the policy is underwritten, the death benefits tend to exceed those from linked-benefit products.
Linked-benefit products. These products combine the features of long-term care insurance and universal life insurance, making them attractive for clients who are concerned about paying premiums and then never needing long-term care. By repositioning an existing asset, they can leverage that money for long-term care benefits, a death benefit (if long-term care is never needed), or both. The policyholder maintains control of the assets, freeing up retirement assets for other uses. Here’s a hypothetical example of how this might work:
Nicole is an HNW client. She’s 65 and married, and she previously declined long-term care insurance because she feels that she has enough money to self-fund, including $200,000 in CDs that she calls her “emergency long-term care fund.” You know, of course, that if she ever needs long-term care, this $200,000 won’t go far, and she may have to make up the shortfall with other assets.
Based on what we know about available products, their average benefits, and if Nicole is eligible for coverage, here is what she could gain if she repositions $100,000 to purchase a linked-benefit policy:
- A death benefit of $180,000 (income tax-free)
- A total long-term care fund of $540,000 (leveraging her $100,000 more than fivefold)
- A monthly long-term care benefit of $7,500 (which would last for a minimum of 72 months)
- A residual death benefit of $18,000 if she uses her entire long-term care fund
Care coordinators. Home care is often viewed as ideal by many clients but setting it up presents challenges. Both traditional long-term care insurance and linked-benefit insurance provide policyholders with care coordinators who can help facilitate this transition. These coordinators offer a very high-level concierge service, which can make a difficult time a little less stressful.
Self-funding for long-term care involves using personal savings, investments, and other financial resources to cover the costs associated with extended care needs in the later stages of life. Here are some considerations and steps for individuals considering the self-funding approach:
- Evaluate Financial Capacity:
- Assess the adequacy of your financial resources, including savings, investments, and other assets, to cover potential long-term care costs. Consider both current assets and the expected growth of those assets over time.
- Budgeting and Planning:
- Develop a comprehensive budget that accounts for your living expenses, healthcare needs, and potential long-term care costs. Factor in inflation and any other financial considerations that may impact your budget.
- Emergency Fund:
- Ensure you have a robust emergency fund in place to handle unexpected expenses. This fund can act as a financial buffer in case of sudden health issues or other unforeseen circumstances.
- Health Insurance:
- Maintain adequate health insurance coverage to address immediate medical needs. While health insurance may not cover long-term care, having comprehensive coverage is essential for managing overall healthcare expenses.
- Investment Strategy:
- Work with a financial advisor to develop an investment strategy that aligns with your long-term financial goals. Diversify your investment portfolio to help manage risks and potentially generate returns that can contribute to covering future care costs.
- Regular Financial Checkups:
- Periodically review and reassess your financial situation, goals, and risk tolerance. Regular financial checkups with a professional advisor can help ensure that your strategy remains aligned with your evolving needs.
- Legal and Estate Planning:
- Consult with legal professionals to address estate planning considerations. Ensure that your financial and legal documents are in order, and explore options for protecting your assets in the event of long-term care needs.
- Stay Informed about Healthcare Costs:
- Stay updated on the current and projected costs of long-term care in your area. Understanding the potential expenses can help you make informed decisions about your financial strategy.
- Consider Long-Term Care Annuities or Hybrid Policies:
- Some individuals opt for financial products like long-term care annuities or hybrid insurance policies that combine life insurance or annuities with long-term care benefits. These products provide a way to potentially mitigate some long-term care costs.
- Monitor Health and Lifestyle:
- Proactively manage your health through a healthy lifestyle and regular medical check-ups. Taking steps to stay healthy can potentially reduce the likelihood and severity of future care needs.
It’s crucial to note that self-funding for long-term care requires careful planning, and individuals should continually reassess their strategy based on changing circumstances. Consulting with financial professionals and legal advisors can provide personalized guidance tailored to your specific situation.
Deciding whether to self-fund for long-term care depends on various factors, including an individual’s financial situation, risk tolerance, and specific needs. Here are some considerations:
- Financial Situation:
- Sufficient Assets: If a client has substantial assets and income, they may choose to self-fund their long-term care needs. This approach allows them to use their own resources without relying on insurance or government assistance.
- Limited Resources: Clients with limited financial resources may find it challenging to self-fund long-term care. In such cases, alternative solutions like insurance or government programs may be more suitable.
- Risk Tolerance:
- Risk Aversion: Some individuals are risk-averse and prefer the security of knowing they have coverage for potential long-term care expenses. Long-term care insurance can provide this peace of mind.
- Risk Tolerance: Others may be comfortable taking on the risk and believe that self-funding is a viable option. They may prefer to retain control over their assets and not pay premiums for insurance they may never use.
- Insurance Options:
- Long-Term Care Insurance: Purchasing long-term care insurance can help cover the costs of care, protecting the client’s assets and providing financial assistance when needed.
- Hybrid Policies: Some clients may consider hybrid policies that combine life insurance or an annuity with long-term care benefits. These policies offer a death benefit or annuity payout if long-term care is not needed.
- Government Programs:
- Medicaid: Medicaid is a government program that provides long-term care coverage for individuals with limited financial resources. However, eligibility requirements vary by state, and not everyone may qualify.
- Veterans Benefits: Veterans and their spouses may be eligible for long-term care benefits through the Department of Veterans Affairs (VA).
- Health and Family History:
- Health Status: A client’s current health and potential future health issues should be considered. Those with a family history of certain conditions may be more inclined to secure long-term care coverage.
- Family Support: The availability of family support can also impact the decision. If family members are willing and able to provide care, this may influence the need for additional coverage.
- Inflation and Rising Costs:
- Inflation Protection: Consideration should be given to the potential impact of inflation on long-term care costs. Some insurance policies offer inflation protection to help keep coverage in line with rising expenses.
Ultimately, there is no one-size-fits-all answer, and the decision to self-fund or seek insurance depends on the unique circumstances of each client. It’s advisable for individuals to consult with financial advisors, insurance professionals, and legal experts to make well-informed decisions based on their specific needs and goals.