In previous articles, we explored the possibility of needing long-term care and the way the large population of aging baby boomers may change the landscape of Medicaid and the nursing industry. Today, let’s take a look at three basic techniques to protect from nursing care: legal planning, self-pay out of pocket or insuring.
Right or wrong, an individual’s plan can range from implementing just one of these solutions, none of them or a combination of all three. There isn’t always a perfect solution, and there are pros and cons of each avenue you take. In future articles, we can explore all of the options more in-depth.
For now, with spring upon us and instilling a renewed sense of energy, let’s take a fresh look at an option for protection we may not like to talk about: long-term care insurance.
I know what you’re thinking. Insurance is almost a swear word in your vocabulary (especially with low milk prices). Just mentioning it, you envision a cheesy insurance salesperson knocking on your door unannounced, telling horror stories and trying to convince you right then and there that you need this insurance.
You may be smiling right now because we’ve all been there. While the coverage may have great benefits, it’s irresponsible for anyone to make a blanket statement to any individual or married couple that they do or do not need it – especially without gathering information about you.
This is why it’s tough to seek out information or answers to long-term care insurance – because it can feel like the people who probably know the most about it are the ones selling it, right? Rest assured, this is one of the many reasons I have a license in this area – to bring you some straight facts and empower you with knowledge.
For starters, the three most popular long-term care insurance options are: life insurance with long-term care riders or accelerated death benefit options, long-term care annuities and traditional long-term care insurance. We will dive into all of these at a future date as well, but today, let’s just explore traditional long-term care insurance.
Do I need it?
I often get questions from folks: “Do I really need it?” and “Does it pay to have it?” These are valid questions. Ask yourself: Is it better not to have it and wish you did or have it and never need to use it? That’s a question only you can answer once your professional team has laid out the options and possibilities.
“I know someone who had it and never used it.” Using this example is equivalent to saying you don’t need homeowner’s insurance because your neighbor had it and their house never burned down. It doesn’t really apply to your situation.
If it is a concern of yours that you may pay for it and never use it, there are options for that.
Return of premium
If you are concerned that you will pay in for many years and never have any benefit, consider the option (or rider) “return of premium.” This option is pretty self-explanatory: If you and your spouse never need extended care and pass away, this option will provide cash back to the beneficiary of your choice. If you only utilize a small amount of the benefit, it has potential to pay back the difference of what you paid in minus claims paid.
However, some insurance companies place age restrictions for new policies, meaning that the return of premium is not available if you are applying over a certain age; some restrict those as young as early 60s. Looking into your estate, retirement and financial planning at an early enough age will give you more options.
Tax benefits: Deductible premiums, tax-free benefits and life insurance cash value
Something that often goes overlooked is the additional benefits of long-term care insurance to potentially help lower your tax liability. In short, a portion of your long-term care insurance premiums can be deductible as long as your total qualified medical expenses for the year exceed 10 percent of your adjusted gross income (or only 7.5 percent if older than 65).
Don’t try to be an expert in this area; just be sure to let your professional team and tax preparer know about your long-term care insurance premiums, and they will let you know what you can deduct.
Here’s more good news: The benefits you receive if or when you use it are federal tax-free. Deductible premiums and tax-free benefits seem a little “too good to be true,” but remember the potential problems Uncle Sam will face if there are an enormous number of individuals on Medicaid. The government implemented these tax benefits to give extra incentive for folks to cover themselves.
Lastly, there are some tax-planning benefits with regards to your life insurance. Do you have an old life insurance policy with some significant cash value built up? If you just simply surrendered the life policy and put the cash value in your checking account, you may trigger a tax liability on the gains.
But did you know that you can use the cash value with the tax-deferred gains to pay long-term care insurance premiums annually, and it’s federal income tax-free? Pretty cool, right? It’s considered a 1035 exchange and applies to “tax-qualified long-term care policies,” so make sure your insurance policy will allow this before exercising this option.
A word of caution: Be sure this option is right for you and consider the role your life insurance was, and can, play in your overall financial plan. You don’t want to put your life insurance policy at risk if it is needed for other reasons, such as replacing income to dependents upon your death, using the cash value for supplemental retirement income, to assist in “equalizing” your estate for non-farm heirs upon your death, etc.
Shared care option and inflation protection
The cost of long-term care insurance can be significant due to the possibility of the substantial benefits payable in the event you need care. One way to help lower the premiums or add significant value is to look into what’s called a “shared care” option. In short, this option allows you and your spouse to “share” the benefits of each other’s policies if you use up all of your own benefits.
As an example, let’s assume Mom and Dad want long-term care insurance to protect each other’s lifestyle, and you look into policies that would pay a five-year benefit for each person. If the shared care option was included, and let’s say Dad ended up needing 10 years of care, he could use all of his five years but then be able to use additional years from Mom’s benefit.
What if Dad passed away and never needed any care? Now Mom will be able to use all of Dad’s benefits.
In a different strategy, if five years of benefit for each was too costly but you still wanted protection, some consider a three-year benefit for each with the shared care option. This would give some nice protection for each other and your estate plan.
Consider another example in which Dad would need extended care; he would get six years of total benefit if it were needed. This tailoring of your plan would significantly lower the potential price compared to a straight five years of benefit for each person. Additionally, this extra benefit time window would give flexibility to adjust or enhance some legal planning from an attorney or other professionals.
Lastly, be sure you have some sort of inflation protection on your policy, meaning the policy’s daily/monthly benefits increase over time to keep pace with the rising costs of care. It’s not enough to just say you have long-term care insurance and think everything is good. Too often, I find folks who took responsible steps to purchase the insurance, but the inflation protection was not included.
Unfortunately, we come to realize 20 years later their $1,000 per month payment may have been enough when it was originally purchased but hardly makes a dent in the cost of care today. When included, the option to increase with inflation over time will obviously cost more, so don’t just look to buy the cheapest coverage out there – because it may be missing from the policy.
In closing, we have really just covered the tip of the iceberg when it comes to options to include and the tailoring available for the best-fit plan. Long-term care insurance may not always be advisable or affordable for some, but having exposure to some of the pros can allow you to balance the con (cost).
Like always, I encourage you to seek trusted professionals when developing your specific plan. In the near future, we can expand more on the other options available for protecting against nursing care risk and gain some insight on the point of view of other professionals who may be part of your strategic team. PD
- Financial Planner/Owner
- Holthaus Financial Group
- Email Jon Holthaus