The long term care industry has evolved over the last 30 years with perhaps the most significant changes occurring within the last 5 years. Many new products are now available, bringing access to long term care to those who previously could not qualify for coverage. Today, a long term care solution can be tailored to your client’s specific financial as well as medical situation. The changing landscape within the long term care industry is providing an opportunity for attorneys in tax, estate planning, and elder law to enhance the value that you bring to your clients as a trusted advisor. By incorporating a discussion about long term care into your estate planning process, you have an opportunity to address a client’s pressing need for long term care as well as provide additional ways to preserve and protect the client’s financial assets. The discussion that follows will provide an overview of the changing landscape of long term care.
Traditional long term care insurance has previously been out of reach for many clients due to a client’s pre-existing medical conditions. Unfortunately, many people tend to wait too long to begin thinking about long term care insurance and by the time they shop for coverage, they cannot obtain the coverage due to either advanced age, cost of coverage, or pre-existing medical conditions. The conversation with clients can begin as early as age 45 or whenever a client first contacts their attorney to discuss estate planning and asset preservation issues.
Traditional long term care insurance is underwritten in a manner similar to life insurance. The underwriting process typically requires a physical examination as well as a five year look-back period whereby the underwriters can request an applicant’s medical records going back five years from any medical provider. There is a long list of common medical conditions that serve as “knockout” conditions that disqualify an applicant from obtaining long term care. The list of common knockout conditions can include any diagnoses of a chronic disease or medical condition, even if the condition is not severe or presently manifesting itself, and can include diabetes, multiple sclerosis, Alzheimer’s, dementia, congestive heart failure, heart attack, stroke, and various types of cancer, etc. The brief list provided is not an exhaustive list and each insurance company provides its own list of disqualifying conditions.
Traditionally the analysis came down to whether a client had sufficient financial resources to self insure or whether they could afford or had the desire to purchase long term care insurance. These elements of the analysis remain largely unchanged. The difference today is the choice in insurance carriers that provide long term insurance policies and the types of policies that are available. However, the choice still ends up centering around what can the client afford and which solution is the most suitable to the client. Suitability varies from client to client depending on their financial resources, age, risk tolerance, time horizon, and any tax, estate planning, and asset preservation planning issues unique to the client.
A client with several million dollars in assets might choose to self insure. However, there remains the risk that even a person with substantial assets could spend through their entire nest egg and end up being a burden to their family or to society. The most rational choice for clients with substantial financial resources who wish to pass on a rich legacy to their heirs would be to purchase long term care insurance. Even for clients with modest means, long term care insurance makes sense if the client can afford it in order to not spend through one’s assets or become a burden to loved ones.
The cost of care is high today, no matter whether it is private at-home care or care given in a nursing or assisted living facility, and the cost is likely going to continue to increase in the future. For example, it is commonplace today to spend $1500 per week, out of pocket, for non-qualified at home care that includes cooking, light cleaning, running errands, and occasional personal care. This non-qualified care will cost $78,000 cash out of pocket this year and the cost would be even greater for qualified caregivers such as private at home nursing care. Also, consider the cost of assisted living. It is quite common today to spend $100,000 or more per year to keep a family member in a private room in an assisted living home. These costs will likely continue to increase with time given inflation and changes in healthcare policy in our country. Also, the cost goes up if the patient needs to move into a qualified nursing home.
The need for long term care is great since people are living longer. Today, if a disease doesn’t wipe-out a person quickly, the chances are great that person will live with the condition for many years. In general, people are staying active longer and are living healthier, more productive lives. Yet with all of the advances in medicine through the years, we have yet to come up with ways to ease the financial burden of growing old. According to a 2008 study conducted by the Department of Health and Human Services, at least 70% of people over the age of 65 will require some long-term care services at some point in their lives. Attorneys who get out in front of this issue with their clients by incorporating a long term care review into their estate planning process will be doing a great service for their clients.
The traditional long term care insurance policy is a reimbursement policy that reimburses the insured person for certain caregiver expenses if they cannot do two or more of the Activities of Daily Living (ADLs) which include eating, bathing, dressing, transferring, toileting, and continence. When shopping for traditional long term care, the client has a choice of the benefit amount, and the number of months of coverage, as well the type of inflation protection they desire. If approved by the underwriters, the long term care policy goes into effect, and the client must make periodic payments either monthly, quarterly, semi-annually or annually to the insurance company.
The traditional long term care insurance policy provides the purest form of long term care insurance. However, the traditional approach has drawbacks which include stringent medical underwriting, the necessity of having to pay the insurance premium continuously out of pocket as long as you own the policy or until you make a claim on the policy, as well as the possibility that the insurance company one day imposes higher premiums.
As mentioned at the beginning of this article, the long term care insurance industry has been undergoing rapid changes the last several years. Several insurance companies have exited the long term care industry, while others have expanded their presence with the roll-out of new products. Among the new products are several “hybrid” or “alternative” long term care solutions. The two major alternative categories are 1) universal life insurance policies that include a long term care insurance rider and 2) variable annuities that contain long term care features.
The most significant development in the long term care industry to come about with the introduction of the alternative products is the reduced or relaxed underwriting standard that is available through some of the insurance providers. This is very significant because due to the relaxed underwriting, and in some cases no underwriting, clients with pre-existing medical conditions who ordinarily would not qualify for long term care, can for the first time purchase long term care coverage.
The universal life insurance policy with long term care rider provides indemnification if a client cannot do two or more of the activities of daily living. The underwriting process for the universal life insurance hybrid can be satisfied with a simple 45 minute phone call rather than the lengthy and invasive medical underwriting process that is customary with traditional long term care. The universal life insurance hybrid provides three types of benefits. 1) If the client passes away suddenly without using the long term care feature, the policy will pay a death benefit to the client’s estate. 2) If a client purchases the policy and then changes their mind or a better product happens to come along and they want to get out of their current policy, some of the universal life insurance products provide a guaranteed return of premium. 3) The third benefit available with the universal life insurance hybrid is the long term care feature which will pay a specific dollar amount for a specified period of time if the client cannot perform two or more of the activities of daily living. All that is required is a signature by the client’s own doctor to certify that the client is unable to perform two or more of the activities of daily living. The certification must be renewed annually. Some of the policies provide total flexibility which gives the client the choice whether to go into a qualified nursing facility, assisted living, or to receive care in their own home.
The other alternative product is a variable annuity contract. For those who are not familiar with these investments, a variable annuity is an investment vehicle that comes with an insurance wrapper, ie: there is an investment portion that can grow in value over time, as well as a contractual guarantee from the insurance company to pay some specified benefit to the policyholder or beneficiary at some point in the future. In a typical variable annuity contract, a portion of the premium is used to pay for the cost of the insurance protection that the insurance company provides, and the remainder of the premium, less fees and expenses, is placed into a separate account at the insurance company and the money in the separate account is invested in a basket of investments such as mutual funds or indexes that follow the stock and bond markets.
The variable annuity featuring long term care requires no underwriting whatsoever. This is extremely significant because those clients who would not qualify for any other type of long term care insurance due to a pre-existing medical condition can for the first time obtain a form of coverage. The money the client places into the variable annuity contract is designed to grow if the pool of investments that the money is tied to grows. If the investments don’t grow, the variable annuity contract provides an underlying step-up in value that the insurance company is contractually obligated to provide.
As with all variable annuities, the investments in the separate account will continue to grow if the market performs well, or the policyholder will continue to receive the step-up in value from the insurance company either until the client reaches a specific age or until the client annuitizes the contract. If the client annuitizes the contract, this means the client is turning the cash value of the variable annuity into a stream of income for life, guaranteed for as long as they live. The long term care benefit comes into play if the client cannot do two or more of the activities of daily living and they obtain a signature from their physician, then the payout from the insurance contract doubles, serving as long term care. The cash is provided on an indemnity basis and can be used for any purpose. This gives the client total flexibility in choosing whether to stay in their own home or move into a care facility.
Both the variable annuity and the universal life insurance solution are designed as single premium solutions. These products can be purchased with a one time, lump sum, up-front premium rather than periodic payment of premiums. This provides retired clients who may be living on a fixed income with the peace of mind of not having to worry about making periodic payments of their premium as is common with the traditional form of long term care insurance.
As with most other types of life and health insurance, long term care tends to cost less if it is purchased when the client is younger and in their best health. Premiums for traditional long term care and universal life insurance will increase with age. Most of the resistance that clients have regarding long term care insurance tends to center around affordability. Some clients may have obtained quotes for long term care products many year ago and dismissed it because it was too expensive. It turns out that most attorneys as well as prospective clients are not even aware of the alternative/hybrid products that are available today and are not aware of the options available to pay for long term care. The bottom line is that there is a long term care solution available for just about everyone today and the products are available in a range of price points and include a range of features. The purchase of one of the available long term care solutions should not be dismissed out of hand simply based on a perceived lack of affordability.
How to fund the purchase of long term care is a specific concern for many clients, especially for retirees who are living on a fixed income. There are many ways to tackle the problem. For those who built a small business and have recently sold a stake in their company, a lump sum from the sale of assets or the business could be set aside for long term care. For those who retired with a 401(k) or IRA, several long term care solutions can be funded with assets from a qualified retirement plan. A tax free 1035 exchange of the cash value out of an old life insurance policy or an old annuity is another very common way to leverage existing assets to obtain long term care.
Each alternative has its own characteristics which can make the product either suitable or not-suitable for a specific client, depending on the facts unique to the client’s case, as well as the client’s time horizon, risk tolerance, and specific objectives. A comprehensive discovery process is required before specific recommendations can be made to clients. Doing the discovery and assisting the client with this analytical process should be left to the client’s financial advisor.
Incorporating the discussion about long term care planning into an attorney’s tax and estate planning review should be adopted as a best practice as part of any holistic estate planning practice. If handled the right way, a conversation about long term care would help get clients into the right mindset to address long term care with their financial advisor and help provide the client with action items that are consistent with preserving their hard earned assets and achieving a multi-generational transfer of wealth, as well as their other financial goals. Reviewing these issues with your clients will enhance the value that you bring to your clients and, strengthen your value proposition as an attorney, helping you win more repeat and referral business, and helping to cement your position as one of your client’s trusted advisors.