I’ve been a licensed financial advisor for nearly 20 years and conversations with clients about long-termcare are some of the most difficult with which I am faced. Nobody wants to talk about it. It’s scary andexpensive and completely contrary to topics like RV road trips and wintering in sunny climates and spending time with grandchildren upon which clients want to focus. But it’s the “elephant in the room” that could de-rail all those dreams in a relatively short period of time. According to a Genworth Insurance study in 2021, 7 out of 10 American seniors will need long-term care at some point during their lifetime. That’s a sobering thought. Additionally, based on 2021 rates, a year of 40 hour per week long-term care will run you approximately $62,000.00 on a national level while the cost of assisted living and a private room at a nursing home will set you back $54,000.00 and $108,500.00, respectively. You may be retiring with a respectable 401k balance, but if you are a married couple and you look at those numbers, it’s hard not to see that your hard-earned savings can be wiped out.
There are a lot of misconceptions about long-term care and who pays for it. Some people think Medicare will cover their care needs. In fact, Medicare will only cover a relatively short number of days after you have been hospitalized; “true” long-term care is not covered. And every month, I am asked how to “hide money” so that Medicaid will pick up the tab. Number one, that’s against the law. Number two, Medicaid will “look back” 5 years to see if the care recipient or their spouse transferred assets to other parties like children to qualify for Medicaid and will disallow payment of benefits. Drawing down assets so you or your spouse can qualify for Medicaid is no joke. Your healthy spouse can keep their home and their car, but must spend down other accounts and assets to a practically destitute state. And the drawbacks don’t stop there. With 10,000 Baby Boomers turning 65 years old every day and that number increasing to 13,000 per day in a few years, there will not be enough Medicaid beds to house all those patients. If you and your spouse live in the Quad-Cities, it is not out of the question that the nearest Medicaid bed could be in Chicago or St. Louis when that becomes necessary for your loved one. Please know too that the cold, hard truth is that not all Medicaid beds are created equal and that the quality of care may not be what you would choose for your family member.
Long-term care insurance is expensive, but it could be the answer to protecting your retirement assets. Back in the day, many insurance companies sold such policies, but, with time, many have exited the space as they have experienced insured parties living longer, impacting their bottom-line results. There are three popular options in securing coverage and we will touch on all three.
The first alternative is traditional long-term care insurance. The insurance company underwrites your policy based on your health (both cognitive and physical) and chooses whether to insure you or not at a cost determined by them. You can choose a deductible period (amount of time you will pay full-freight before benefits kick in), the monthly benefit amount, what is covered (home health care in addition to institutional care or just institutional care) and whether or not you want an inflation rider which will increase the amount of the monthly benefit over time as it rises with inflation. Many people shy away from this type of policy as it is “use it or lose it”. If you are one of the 3 of 10 folks that never need nursing care, there is no residual value to all you have paid in. If you have this type of insurance, pay your up-front deductible amount from your savings and then use it! Check with your tax preparer, but policy premiums may be all or partially tax-deductible.
“Asset-based” long-term care policies are a hybrid policy offered by some insurance companies whereby long-term care costs are covered in some fashion like traditional long term care insurance, but they offer some kind of death benefit if long-term care is not necessary. Premiums on this type of policy are not deductible.
The last option is a true life insurance policy with what is called a long-term care “rider”. A rider is an extra benefit attached to the insurance contract for which you pay extra. An example would be a $1 million life insurance policy with a long-term care rider. If you choose to have this policy pay long-term care costs, the total amount paid is deducted from the face of the policy and the tax-free death benefit is reduced by that amount. Let’s think about this for a minute. Let’s pretend that you have this policy as described above and also a $500,000.00 Traditional IRA which is fully taxable when you take distributions. You might be tempted to have the insurer pay $500,000.00 of your long-term care costs, leaving the $500,000.00 IRA and the remaining $500,000.00 policy balance to your heirs. Your heirs would enjoy $500,000.00 of tax-free money from your insurance policy, but would pay ordinary taxes on your IRA. Instead, you could tap your IRA for the $500,000.00 in care expenses and deduct the $500,000.00 in expenses on your taxes which will minimize taxes owed. Then your heirs will enjoy the full $1 million of tax-free benefits at your death.
Would you like to have a conversation about long-term care, retirement planning or estate planning? I’m here to help! Please call me at 563-949-4705 or email me at [email protected].
Securities offered through J.W. Cole Financial, Inc. (JWC). Member FINRA/SIPC. Advisory services
offered through J.W. Cole Advisors, Inc. (JWCA). Huiskamp Collins Investments, LLC and JWC/JWCA are unaffiliated entities.