Since it's October, I thought I would talk about a truly scary topic for many, Long Term Care. There are a few reasons why this conversation is so difficult. Most of us think of ourselves as Halloween candy with no expiration date. But we have all found that old stash of candy and discovered it doesn’t improve with age (especially the candy corn).
There are other factors as well. The cost of delivering care both in the home and in some kind of facility seems huge. Forget market corrections, high levels of care early in retirement will bankrupt retirement savings very quickly. This is a huge risk, because your spending level has increased to such a level that it can’t outpace your funds’ typical growth rates in retirement.
So, what are some solutions to this problem? The first step is planning. Taking stock of what resources are available is an important first step. Once we start to look at this from a planning perspective, we find that there are a variety of products available to protect wealth in these situations. This is important to recognize, because many will have you believe that the only way to solve a Long Term Care Problem is to purchase a Long Term Care Policy. There are many other products that have advantageous features that can help assist with the payment of Long Term Care Costs. My bag of tricks is listed below.
Life Insurance Riders and Endorsements
Many life insurance programs exist that enable access to a portion of the death benefit in the event of a chronic care event. There are many variations on this type of feature. Some can be added to existing policies, or some might be only available to newly issued policies. One benefit to using these features is that they often pay on indemnity, not on a reimbursement basis. This means that the funds become available once two activities of daily living trigger the feature.
How you use those funds or how much of them you spend is completely up to you. If you want to pay your daughter-in-law for time out of work for helping you, not a problem. There is no need to provide receipts or request reimbursement. That said, you are using up a portion of your death benefit, but in most instances when electing to take this benefit, the funds become available tax free (whereas retirement funds will have tax implications).
The upside is that if you only use six months of payments, you would likely have a substantial portion of your death benefit left as these are designed to pay out over a span of 3-4 years (depending on the carrier). As premiums are tied to a life insurance product, these products do not experience the same type of premium increases or escalation that takes place in traditional long term care policies.
Annuity Product Features
Many annuity products exist that can assist with care-related expenses, but also have a guaranteed minimum increase in value for a period of years. This value is typically available for indemnity payment upon experiencing a two activity of daily living issue, or for death benefit. The nice part about these sorts of products is that there is typically reduced underwriting, or simply a waiting period to access the rider.
Another great feature is that we can revisit them periodically and determine if the funding level is appropriate. If other needs arise, we can always sweep some funds from this type of product, so the funds are not consumed as premium in some kind of policy. These can prove to be particularly effective in cases where individuals want to self-insure but need to remove some level of market risk. Simply put, it prevents the double whammy of poor market conditions and care events occurring simultaneously. In the event funds are needed for care, they are usually needed right away, and one cannot wait to time the market for a big rebound.
Hybrid LTC- LIFE Products
A whole new class of products exists called hybrid products. These products are more LTC driven, with a death benefit tagging along. The purpose of the death benefit is to more or less refund you the premiums paid (or more likely your heirs) should you leave this earthly plain without needing care. There are several versions of these types of products, some with lifetime protection, others with stated amounts. These too have the added benefit of having fixed life-based premiums, so it alleviates the premium escalation issue. In addition, they typically can offer paid up options where premiums are completed in 10 years providing a fully paid-up policy. These policies can be a bit more difficult though, as they do require reimbursement of expenses and can be more restrictive regarding who is providing care.
In the end which one is the best… to quote Yogi Berra, “I don’t know which one is good, but I know none is bad!” When using these products, the attempt is to customize your program to fit your needs. Part of that process is determining what level of risk needs to be offloaded onto a product and what level of risk will be retained. In my experience this is much more effective than just selling another cookie cutter high priced policy.