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October 7, 2011

Strategies for Long Term Care

A Smarter Alternative to Self Insuring… Recognizing the need for long-term care preparation. Long-term care (LTC) costs are on the rise.  LTC expense is a financial risk that could affect retirement and wealth transfer goals.  Many clients may believe they have saved sufficiently, but in reality, they may not be financially prepared.  In a recent…

Strategies for Long Term Care

A Smarter Alternative to Self Insuring… Recognizing the need for long-term care preparation.

Long-term care (LTC) costs are on the rise.  LTC expense is a financial risk that could affect retirement and wealth transfer goals.  Many clients may believe they have saved sufficiently, but in reality, they may not be financially prepared.  In a recent survey, 70% of those age 50 and older who chose not to buy protection for long-term care expense underestimated the cost of care.

Traditional long-term care insurance covers future LTC expenses, but if care is not needed, the client receives no benefits.  Premiums can be expensive, may increase, and vary based on benefits and time period.


  • Medicare typically offers coverage or limited coverage only for medically necessary nursing facilities or home healthcare.  It does not pay for custodial care or support services for daily living, such as dressing, bathing, and sometimes diabetes monitoring.  Clients must meet specific requirements to qualify for Medicare payment of long-term care.
  • Medicaid is a government program that can pay for certain nursing home and healthcare services for older individuals with limited means.  Even though, in most states, Medicaid pays for LTC services at home, eligibility and services covered vary from state to state.  Eligibility is usually based on the individual’s financial resources.
  • Family can assume the burden of long-term care management or expenses.  This can cause emotional and financial stress.
  • Self-Insuring requires setting aside potentially significant liquid assets.  If long-term care is needed, these assets could be depleted relatively quickly, putting the rest of the portfolio at risk.
  • Life Insurance with an LTC Rider links life insurance and protection for long-term care expenses in one policy, offering a death benefit and a money back guarantee in some cases, depending on the insurance company.

Life Insurance with LTC Rider Hypothetical:

Nancy, Age 65, Non-smoker in good health.

Nancy’s objective is protection for the potential need for long-term care in the near future.  Her advisor tells her to purchase a single premium life insurance policy with a LTC rider with a portion of her savings for $100,000 that she had set aside for LTC.  This policy will allow her to leverage her premium to provide $499,017 of income tax-free long term care reimbursements for up to 6 years in a home, or a monthly maximum of $6,931 for qualified long-term care reimbursements.  If she does not need long term care, upon death, her heirs will receive $166,339 income tax-free death benefit.  Or if she decides that she would like to have her money back, she is able to receive $100,000 or 100% of her initial premium back.

A client can avoid taking on all the risks of self-insuring and having to decide which assets to sell first should the need for long term care arise by leveraging a portion of their cash reserves designated for long-term care costs.  These reserves would be reallocated to purchase a single premium universal life policy with a long term care rider and guaranteed return of principal rider.  The client would maintain control of their assets, get much more for their LTC dollars, and enjoy these advantages:

The policy is purchased with a portion of cash reserves.  The policy remains an asset in the client portfolio, and it offers:

  1. A money back guarantee.  At any time, the client can request a return of premium upon full surrender of the policy. The amount received will be adjusted for any benefits paid and any loans and cash withdrawals, and it may have tax implications. The money back guarantee is included in the policy cost, through a specific rider, which is only available from certain insurance companies.
  2. An income tax-free death benefit.  When the client dies, the policy pays an income tax-free death benefit to their beneficiaries.
  3. Long term care benefits.  If the client needs long-term care, the policy can provide income tax free reimbursements for qualified long-term care expenses.

Right now, the largest growing demographic in the US are people 85 years old and up…

The United States is getting older.  More Baby Boomers are at or nearing retirement.  By 2026, the population of Americans ages 65 and older will double to 71.5 million.  Between 2007 and 2015, the number of Americans ages 85 and older is expected to increase by 40 percent; this demographic shift has been coined The Graying of America.

Unfortunately, the older we get, the more trips we’ll be taking to the doctor’s office.  Many of us will eventually need someone to take care of us at some point. Among people turning 65 today, 69 percent will need some form of long-term care, whether in the community or in a residential care facility.  Women are also 3 times more likely to live in nursing homes than men.

Because the costs of long term care can drastically affect retirement, one of the areas that advisors are paying much closer attention to is ways to protect clients in case long term care is needed.  Most people don’t think they will end up in a home or they will be able to self insure if they do.  But with the average cost of staying in a nursing home for a year being between $55,000 and $100,000, depending upon where you live, few things can decimate an estate faster.

If you are not covered by LTC insurance, you will need to pay for your nursing home and long term care expenses directly or rely on your family to cover the costs. You can qualify for some long term care coverage through Medicaid, but only after you and your spouse have “spent down” almost all of your assets.  I had a client tell me once that one of the best things he ever did for his children was buy long term care insurance, so that the roles would never be reversed with his kids having to take care of him one day.

So why is it that since 1987, fewer than 10 million Americans have bought long-term care insurance, and only about 7 million of those policies remain in force today?  LTC insurance is notoriously complicated. There are coverage, inflation protection, benefit periods, daily benefit, trigger, and elimination periods that all need to be taken into consideration.

Policies are getting better and more competitive.  Recently there has been a push by several insurance companies to link long term care to life insurance policies as a rider.  The client is able to use the death benefit if long term care is needed and any of the death benefit not used goes to the estate at death.

Talk to anyone who has had a relative in a home and they will tell you it is one of the toughest experiences to deal with, especially if it wasn’t planned for.  There are several long term care strategies out there, it is important to find the one that best fits your family’s needs.

For more information on Strategies for Long Term Care or to schedule a free consultation, please contact the South Coast Office.

– Posted by Chris

Disclosures: Beneficiaries receive an income tax-free death benefit under IRC Section 101(a)(1).  Long-term care reimbursements are generally income tax-free under IRC Section 104(a)(3).

All investments and tax strategies have risks–see risk factors in PPM. Past performance and/or forward looking statements are never an assurance of future results. This is neither an offer to sell nor a solicitation of an offer to buy any security. Such an offer may only be made by means of a private placement memorandum that must accompany or precede this information. Offering facts and terms are controlled by final PPM only.


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