It is likely we will all need long-term care. Someone turning age 65 today has a nearly 70% chance of needing some type of long-term care services according to LongTermCare.gov. Many of us may have experienced a long-term care event through a family member or friend and have personally seen how impactful it can be, both emotionally and financially. For these reasons, long-term care is now at the center of many planning conversations. Even high-net-worth individuals, who can potentially self-fund long-term care expenses, are turning to long-term care insurance for the benefits that can be provided.
C3 Financial Partners assists our clients and their advisors in understanding the role long-term care insurance can have in an overall financial plan.
Safeguarding a Portfolio
Affluent individuals and families are increasingly obtaining long-term care insurance to “insure” their investment portfolios. While incurring long-term care costs may not be a concern, the timing of an event may be problematic and result in severe financial consequences. If a long-term care need occurs during a market downturn, withdrawing funds for care could have a much more adverse and prolonged impact on their overall portfolio, especially if there is an extended health care event such as Alzheimer’s or other cognitive impairment. Additionally, the cost of care may look very different for high-net-worth individuals accustomed to elevated lifestyles, leading to the possibility of even greater portfolio erosion.
By leveraging a life insurance company to absorb some of this risk, C3 Financial Partners can demonstrate to clients and their advisors how a portfolio can be reinforced against such losses.
Another reason wealthy individuals turn to long-term care insurance is to meet liquidity challenges. Just because someone is ‘high-net-worth’ does not mean their worth is concentrated in liquid assets like cash and some securities. In fact, many high-net-worth individuals lack liquidity because most of their assets are tied up in illiquid vehicles such as real estate and family businesses. As result, the need for long-term care insurance may be relatively straight forward — cash will be needed to meet care costs.
The payouts of tax-qualified long-term care insurance policies are generally received tax-free by the policyholder. The premiums may be tax-deductible, or the policyholder may qualify for a tax credit.
All traditional long-term policies and some hybrid policies with separately identifiable long-term care premium components offer federal tax deductibility. As tax-qualified policies, they are considered medical expenses. For an individual who itemizes income tax deductions, long-term care insurance premiums are tax deductible to the extent the premiums exceed 10% of an individual’s adjusted gross income.
The long-term care planning advisors at C3 Financial Partners help clients and their advisors navigate the process of selecting and implementing coverage that can be customized for an individual’s unique planning needs.
Long-Term Care Coverage Options
C3 Financial Partners assists those considering long-term care insurance coverage by evaluating the suitability of the two types of long-term care (LTC) policies:
- Traditional LTC policies
- Hybrid LTC policies
Traditional LTC Insurance
With a traditional stand-alone policy, benefits are elected at the outset:
- Monthly Benefit (as an example, $3,000-$12,000)
- Benefit Period (2 years, 3 years, 4 years, 5 years, 6 years, unlimited) (Individual or Shared)
- Inflation Protection (3%, 4%, 5% Compounded)
- Waiting Period (30 days – 90 days)
A policy can be custom-tailored to suit a client’s needs. The client may choose from a multitude of benefit periods, elimination periods and inflation protection options.
The policy may be guaranteed renewable, meaning that the insurance company generally cannot cancel the coverage if premiums are paid. The premium is not guaranteed, however, and the insurance company may request a rate increase if needed. Premiums are typically paid on a monthly or an annual basis.
Hybrid LTC Insurance
Growing in popularity, hybrid long-term care insurance policies combine long-term care benefits with a cash value policy.
Unlike traditional policies that generally have a “pay-as-you-go” approach, hybrid asset-based insurance policies often are funded with a one-time single premium up-front, such as $50,000 or $500,000, although the policies are becoming increasingly more flexible with their funding options. With many policies, installment payments can be made over 5 years, 10 years, 20 years, or to age 95 or 100.
Similar to the design of traditional LTC policies, most hybrid long-term care policies will provide the ability to elect the long-term care insurance benefits at the outset, i.e., monthly benefit, benefit period, and inflation protection. The period of time between when an individual qualifies and when payments begin, or the elimination period, will typically be fixed by the insurance company, usually between 0 to 90 days.
The appeal of a hybrid policy is the guarantee of return of premium if the long-term care feature is not needed. The beneficiary will receive an income-tax-free life insurance benefit, avoiding the inherent “use it or lose it” nature of the traditional LTC policies.
Also, the premiums with hybrid LTC policies are fixed, and are guaranteed to never be increased, allowing the cost of the plan to be controlled.
Long-Term Care Insurance Benefits
Long-term care benefits are generally paid in one of two ways:
- As a reimbursement plan
- As an indemnity plan
A reimbursement plan pays the benefit directly to the care-giving organization or reimburses the policy owner for expenses already incurred. Invoices or receipts must be submitted each month to the insurance company. This means even though your policy has a maximum monthly benefit of $5,000, if less than this amount is documented, the balance may be lost.
An indemnity plan pays the full benefit directly to the policy owner. If an insured qualifies for a $5,000 monthly benefit, $5,000 is sent to the policy owner each month. No bills or receipts need to be submitted.
It is important to note that only an indemnity-style policy plan can work within a trust because the long-term care benefit is sent directly to the trust as the owner of the policy. The policy is essentially funding the trust with cash payments and the trustee has the ability to make preferred loans of this cash to the trust grantor (the care recipient).
Count on C3 Financial Partners
Long-term care planning should not be dictated by a person’s net worth, but instead be considered as a risk management and asset protection tool that can be strategically utilized for clients at varying levels of wealth. At C3 Financial Partners, we help our clients gain clarity in their goals and objectives, confidence that they are making the right decisions, and coordination with our clients’ other advisors.