Feb 11, 2020
T.J. McCance, AAI, MBA
When choosing the type of long-term care insurance to purchase, would you base your decision on: (A) benefits and cost (B) name recognition and recommendation (C) ratings and claims-paying ability (D) all of the above?
Most people choose (A) because cost is usually the deciding factor. People rely on us to be their guide for who the best carriers are, what the best coverage options are, and what the balance is between benefits and costs. Unfortunately, one mistake people often make – and why they ultimately don’t pursue some type of coverage that could be the most suitable option for them – is their futile attempt to cover 100 percent of the worst-case scenario. Remember, planning is about managing risk, not necessarily eliminating it. You want to be adequately insured, not over insured.
Cost is Only An Issue in the Absence of Values
I see so many people become consumed on what the actual cost is that they try to minimize it and miss the whole point of getting the type of planning for coverage they need. So in the end, they get no real value out of what they purchased. You have to be open minded, look at all the options available to you, work with someone who is familiar with this area of planning and someone who knows the different options to make sure it will be a good fit for you and your family.
When people think about long-term care planning, or “extended care planning,” as I call it – mainly because it removes the implication that I am talking about a long-term care insurance “policy” – they tend to think about what the “product” is. Truth is, you might be in a situation where you don’t buy anything. Instead, you self-fund, and cover the risk on your own with your own assets. There is a possibility this option may be a suitable option for you and your family because we mustn’t forget that long-term care is a family issue.
Of course, the traditional long-term care policy is an alternative as well as hybrids, which offer a long-term care benefit and a return of premium option or small death benefit if you don’t use the policy. There are life insurance carriers that will allow you to add a long-term care rider to your policy too. So there are many different planning options, and I always go back to the “planning” element of it because there could literally be four or five options that could be a good fit. It could be a matter of cash flow (how you are going to fund it), where your assets are (all or part in retirement plans or taxed in different ways) as examples.
Delays in Planning Will Not Put Off the Risk
It is unfortunate that many people today who are not saving enough for retirement are also not saving for long-term care. What’s ironic is people will insure with life insurance when they are younger because there is the risk that they are going to die. I know people who have passed away young, but the chances of someone dying in their working years is very small. If you are healthy, you can buy a life insurance policy fairly inexpensively. Conversely, disability is a little bit more expensive because there is, on average, a 1-in-4 percent chance of becoming disabled during working years. Today, there are far fewer people with disability insurance because they look at it as a cost and not what value it brings.
And then, there’s long-term care, which is expensive. Fact is, there is a 70 percent chance those over the age of 65 may need some type of care. People are generally afraid of losing their independence and the conversation makes them so uncomfortable they do not typically even want to talk about it. Most people do not want to believe it can actually happen, which is why it doesn’t get planned for in the beginning, and why Medicaid is the highest payer of long-term care claims today.
Long-term care encompasses a variety of services designed to meet a person's health or personal care needs. It helps people live as independently and safely as possible when there are obvious signs of an inability to perform two of six everyday activities of daily living on their own, or they have a severe cognitive impairment. With a LTC Insurance policy, that inability typically triggers the insurance policy’s benefits and payments begin.
A federally tax-qualified long-term care insurance policy is a policy that offers certain federal income tax advantages. The Health Insurance Portability and Accountability Act (HIPAA) states that if you have a qualified long term care policy, and you itemize deductions, such as skilled nursing care or home health care, you may be able to deduct part, or all, of the premium. Adding your total policy premium to your other deductible medical expenses, if the total for the year is greater than 7.5 percent of your adjusted gross income, you may be able to deduct the excess amount on your federal income tax return. It is a reimbursement benefit (income) in most cases, which is considered income tax free.
“It’s Okay to Disagree”
When meeting with people for the first time, I usually tell them that I will likely ask questions that no one has ever asked them before, and that it’s okay if they don’t know the answers or have different answers and/or disagree. Chances are they’ve been married for many years and never thought about these things; never brought them up or never wanted to. So I let them know that I will always tell them what they need to hear, not what they want to hear. I think this goes a long way in building trust. My years at Hefren-Tillotson have shown me to not convince them to do anything, but to educate and guide them in making the best decision for them and their family.
I provide them the options, the pros and cons and my professional opinion. I tell them, “When you make an informed decision, it can’t be wrong. As long as I have given you the options and you understand them, 5, 10, 15, 20 years from now you won’t look back and say, “I sure wish we had done this or that.”’ So from a 10,000-foot view, they’ll have Options A, B, C and D, and the pros and cons. Most people will say, “I don’t like this option, and I don’t like that,” and most times, he or she will narrow it down to the two that I thought were probably the right fit for them anyway.
Transferring risk elsewhere isn’t always an option so if self-funding is the plan, we discuss using a portion of their assets, invest them conservatively, and create a tax-efficient income stream to fund their care. This alleviates the pressure of using retirement assets that should only be used for their retirement income. We simply don’t want to sell long-term assets that could be down to cover what could be a very immediate short term need for health care.
Think of this type of planning as building a moat around your castle. In the old Knights of the Round Table type of movies, you always see a castle but how many times have you seen that castle without a sizable wall or moat around it for protection. If you have a castle (your assets and family), it may make sense to start building your “moat”. Sometimes that means shaving off a part of your castle to fund the moat. For our clients’, it’s about protecting the physical, emotional, and financial wellbeing of themselves and their families.
This type of planning, at least for me, is about helping people maintain independence, have choices when they need to make difficult ones, and live life without worrying about what is in the back of their minds – what happens if I get sick?
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