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Long-Term Care Insurance Part 2: How Do I Fund It?

By Thomas "Greg" Darden, CLTC | March 6, 2020

This is the second part of a 2-part series on long-term care insurance where we look at its funding sources. In Part 1 we looked at what long-term care is, what it should cover, the care setting, and the cost of care.

What are my possible funding sources?

One thing is certain: long-term care (LTC) requires cash flow. If you are faced with paying for LTC, you will need a reliable source of monthly cash flow to cover those expenses. Depending on your level of income, this could affect your lifestyle and other financial commitments you’ve made.

It’s reasonable to consider LTC insurance to fund the cost of home and community care. You might look into reducing your discretionary or “fun” spending for early expenses. Eventually, you might have to tap into assets in the worse-case scenario of needing nursing home care.

As you consider your funding options for LTC, you might look at the following sources:

Your secure lifetime income.

This is cash flow that is guaranteed to last as long as you live. It typically is in the form of:

      • Social Security.
      • Pension, if you have one.
      • Income annuity, if you have one.

Excess cash flow.

These are funds you might be saving after covering your required expenses. Those required expenses are what we call your “minimum dignity floor” and are comprised of food, utilities, transportation, housing and health care.



What types do you have? Where are they located? How easily can they be converted to cash and what would be the tax implications of doing so?

      • Liquid assets, which could include:
        • Bank and brokerage accounts.
        • Retirement accounts.
        • Life insurance cash value.
      • Illiquid assets, which could be difficult to convert to cash when needed for LTC, and could include:
        • Real estate (home equity can be a source of cash flow through a reverse mortgage, for example).
        • Business ownership (this equity could be more difficult to tap).

A critical question is what the projected tax consequences would be of liquidating any of the various types of assets you have.

What are my options for funding my LTC plan?

The options available to you would depend on your unique circumstances.

Fully self-funding. Some people have enough financial resources to fully self-fund LTC should they need it. Even so, it’s important to consider that – unlike insurance – this option provides no leverage. (Insurance creates leverage through pooling of risk among thousands of policyholders.) Nor does this option offer any care coordination services from a team of professionals. Instead, that burden is placed on your family. And, depending on the type of assets allocated and how they’re positioned, the funding source you are envisioning could be subject to market volatility.

Partially self-funding. You could utilize LTC insurance to cover home and community care for the period of time you select. If an inflation benefit is attached, it can keep up with the rising costs of care. You would want to include in your plan how you could self-fund the shortage for a worst-case scenario, if that were necessary.

Fully funding the worst-case scenario through LTC insurance. Using insurance to fund the scenario of an extended stay in a nursing home or memory-care facility is the most expensive option. On one hand, it might be appropriate for some situations. On the other, it is potentially not the most effective approach. It could unnecessarily constrain your lifestyle spending and/or the growth of your assets.

Following are examples of different options you might think about for funding LTC insurance policies to cover part or all of your potential LTC needs. Depending on your circumstances, these strategies can be effective.

A pay-as-you-go policy. Reserve a portion of your liquid assets which you invest moderately conservatively. Use the earnings to pay annual premiums for a traditional LTC insurance policy. This type of policy is much like your homeowner’s insurance – it remains in force as long as you pay the premium. Policies of this type provide the most “bang for your buck” in terms of benefits. The key is to make sure the policy remains affordable, so you can keep it in force each year.

A hybrid insurance policy. Reposition a portion of your liquid assets to purchase an LTC “hybrid” insurance policy via a single premium or limited-time premium payment. It provides fewer benefits per dollar, but offers a death benefit for your heirs of the entire amount you paid into the policy to the extent the LTC benefits were unused. There is also a return-of-premium benefit if you decide to cancel the policy.

Such a strategy can be good for those who have $1 million or more in liquid assets, with a substantial portion in bank or brokerage accounts that can be repositioned with minimal tax impact. It is less attractive for those with most of their assets in retirement accounts. Since the IRS eyes tapping these as taxable ordinary income, liquidating retirement accounts would increase your adjusted gross income and could push you into a higher tax bracket.

In summary, if and how you choose to cover your potential needs for long-term care are very personal decisions. However, those decisions can affect more than just the care you receive. They can also affect those closest to you.

The best decisions will factor in the rest of your retirement plan. Consult your financial advisor if you would like help exploring the impact of each option.

Long-Term Care Insurance Part 1: How Much Do I Need?

By Thomas "Greg" Darden, CLTC | February 21, 2020

Every type of insurance you buy is a roll of the dice. Will you ever need it? And if you do, will it give you the coverage you thought you were buying? Long-term care (LTC) insurance is a classic case where you might ask these questions.

The answers you get are typically just statistics. While they might give you a general sense of the LTC usage landscape, they cannot predict if you’ll ever need the care and – if you do – what type of care you’ll need and for how long.

In that vacuum, it becomes more important to focus on the emotional, financial, and physical consequences to your friends and family, should you have to call on them for this type of help. You’ll also want to recognize the severe financial impact an extended LTC event could have on your retirement and estate plans. How willing are you to curtail the “fun spending” you programmed into your retirement plans? And is guaranteeing a legacy for your family one of your concerns?

So, in light of those questions, what is the ultimate role of LTC insurance? It can mitigate these risks by providing a guaranteed stream of monthly income for a specific period. And, by providing leverage, it means significantly more dollars of benefit per premium dollar spent. This leverage is difficult to match in a market investment over the long term.

What Type of Care Should I Cover?

Over the years, the need for care can present itself in two ways: related to getting older or triggered by a long-term event.

Aging Expenses: The Cost of Getting Older

As we age, we find we start needing help with some of the day-to-day tasks we were always able to do for ourselves. These could be cooking, cleaning, shopping, gardening, home-and-yard maintenance, and driving.

In the industry, these are often referred to as “instrumental activities of daily living” or IADLs. While your inability to handle these tasks might be very frustrating for you, they don’t necessarily qualify you for LTC insurance benefits. You will most likely have to count on the goodwill of friends and family or pay someone to do them for you.

Our recommended approach is to look ahead to your 70s, 80s, and 90s. Try to estimate how much additional income you might need to cover such expenditures during those years. You will have to assess your needs based on your lifestyle and where you live. You can then research what the relevant services cost today in your area.

As part of your planning, you will have identified a “fun spending” budget. You will want to factor these expenses as a reduction of that budget during the later years of your retirement (what we call the “SlowGo” and “NoGo” years). If that is not an option, you can determine the amount of additional money you would need to reserve today to ensure you can cover these future expenses.

A Long-Term Care Event

A long-term care event is not arbitrarily defined. The Health Insurance Portability and Accountability Act (HIPAA) of 1966 established the standards (sometimes referred to as “triggers”) for determining if you qualify to receive benefits under an LTC insurance policy. Those are:

  • Inability to perform, for at least 90 days, as certified by a licensed health care practitioner, any two (2) of six (6) of the basic self-care routines that get you through the day. These are referred to as “Activities of Daily Living” or ADLs. They include eating, bathing, dressing, toileting, continence, and transferring (for example, from bed to chair). Assistance with ADLs is considered “custodial care.”
  • Cognitive impairment, meaning your memory or reasoning is compromised to the extent that you can no longer interact safely with your environment.

The U.S. Department of Health and Human Services (HHS) says that about 70% of people aged 65 or older will need long-term support and services at some time in their lives. This figure includes two groups:

  • Those who only need help with IADLs as described under “Aging expenses” above, or maybe just one ADL, but otherwise do not qualify for LTC benefits, and
  • Those who do qualify for LTC benefits (accounting for about 52%) based on the triggers described above.

The majority of those who need LTC will need it for three years or less. In our planning, we consider this length of care to be “typical.” A typical need has a higher likelihood of happening and is relatively less costly. Planning for this type of event would be a reasonable approach if you are healthy and have no family history of chronic disease or dementia.

On the other hand, an LTC event expected to last longer than three years is considered “atypical.” An atypical need has a lower likelihood of happening, but is relatively more costly and can be financially devastating. Such a need often results from Alzheimer’s, Parkinson’s or other forms of dementia, a stroke, or a serious accident.

The progression is that a person will be incapacitated to an extent, but their decline will be gradual. They will require a much longer period of care. As such, these types of events can run up to six to eight years, or even longer in some cases.

What is the Care Setting?

You will want to think about where you choose to receive care and from whom. Also, who will coordinate your care going forward?

LTC insurance used to be thought of as “nursing home insurance.” Today it is a blend of care types and settings in a somewhat predictable progression. It starts in the home and transitions through other settings which might include assisted living and a skilled nursing facility (or nursing home).

Most care though starts and ends in the home, with the family providing care in the early days of a long-term care event. You will want to consider who would be able to provide custodial care for you, whether they would be willing to, and whether you would want them to do so.

Today, LTC policies cover care in the following settings:

In your home or community:

    • Homemaker Services provide help in your home with light housekeeping, meals, cleaning, laundry, or running errands.
    • Home Health Aides provide part-time skilled nursing care in your home as ordered by your physician for a specific condition.
    • Adult Day Care is a community-based service that provides social and support services in a safe and stimulating environment

In facilities:

    • An Assisted Living Facility combines residential living with common areas and activities, providing individualized personal care, which may include skilled nursing care.
    • Continuing Care Retirement Communities combine residential living with multiple levels of care within one community, from independent living to assisted living and skilled nursing care.
    • Nursing Homes are residential facilities with full-service skilled nursing care available 24/7.

Home and community-based care services, as well as assisted living, are typically about half the cost of a private bed in a nursing home.

What is the Cost of Care?

Each year, Genworth Financial publishes the national median cost of care. It includes state and regional costs for each of the six care settings described above. It also looks back five years at the growth rate of these costs.

This information can be a valuable starting point for you to estimate what you can expect to pay for LTC services today, then in the future, based on an inflation rate that you select.

What Next?

Now you have the basics of long-term care insurance: what it is, what it should cover, the care settings, and the cost of care. Next, we will examine a vital aspect of long-term care: its funding sources. If you have any questions about integrating long-term care into your retirement plan, feel free to reach out so we can help.

Five Positives and a Negative about the SECURE Act

By Bob Palechek, CPA | February 7, 2020

The U.S. Government is finally reacting to its concern that Americans are not saving enough for retirement. (About one-quarter of working Americans have no retirement savings.) So, Congress started writing bills and resolutions that would make it easier for certain employers to offer retirement plans to their employees – and for workers to save more money.

The name they gave it was the SECURE Act: the “Setting Every Community Up for Retirement Enhancement” Act of 2019. After months of delays, Congress finally passed the Act in December 2019 by tucking it into an Appropriations bill that had a year-end deadline.

But, not all of the parts of the new law will “enhance” everyone’s retirement, especially someone planning to use a specific strategy that benefits future generations. First, let’s see the five key positive changes, and then the one that may call for some crucial retirement plan adjustments.

Five Key Positive Changes

  • Before the SECURE Act, you had to distribute a minimum amount of your qualified retirement accounts (called RMDs) beginning in the year you turned 70½. (In the first year, the percentage to be distributed is about 3.65% and increases each year.) For higher net worth taxpayers, being forced to add this income to Social Security benefits can create a sudden jump in the taxes due. This Act raises the starting age to 72 for anyone younger than 70½ at the end of 2019.
  • Until this Act passed, you were allowed to contribute to a Roth IRA after age 70½, but not to a tax-advantaged traditional IRA. The Act removes the age limit on traditional IRAs. Yeah! Please keep in mind that you still need “earned” income to contribute. Part-time wages or consulting income (Sch C) works just fine.
  • Thanks to the Act, you now have increased access to lifetime income options (annuities) inside qualified retirement accounts.
  • If student loans somehow figure into your finances and you own a 529 Plan, you can now take a tax-free distribution from the plan to pay toward qualified student loans. The lifetime limit of $10,000 per child means a maximum of $40,000 for four children, for example. You cannot take a deduction for any student loan interest associated with these payments, but that deduction was phased out for many taxpayers in any case. What isn’t clear yet is how the states will handle this and which ones will conform or not.
  • The Kiddie Tax is going back to the old rules, starting in the tax year 2020. Changes in the Tax Cuts and Jobs Act of 2017 had some undesired tax effects as soon as they were implemented in 2018. Some families with minor or college-age dependents found they were hit with high tax rates on their Social Security benefits or taxable scholarships received by the kids. Taxpayers can opt out when filing for 2019, and can also amend their 2018 returns if it makes sense.

A Change with Cause for Concern

This change – the elimination of the lifetime Stretch IRA – was placed in the law to help offset the government’s overall decrease in tax revenues caused by the Act’s various positive changes. (And if it is good for the government, you should question if it’ll be good for you.) Before the Act, you could use the Stretch IRA provision when leaving an IRA to your kids.

It allowed them to spread the required distributions (RMDs) over their lifetime. For a middle-aged child with good earnings, for example, this protected the inherited money from very high tax rates. Now, instead of lifetime distribution, the new Act says the IRA has to be distributed in 10 years or less. Ouch!

A good Certified Financial Planner can find workarounds for retiring and retired clients. For example, by making Roth conversions during low tax rate years before death, you can leave more tax-friendly IRAs to the kids. This change only applies to IRAs inherited after January 1, 2020. And, the Act exempts surviving spouses, minor children, and individuals who are not more than 10 years younger than the decedent.

If any of these changes can potentially impact your existing retirement plans, be sure to check with your financial advisor for a re-evaluation. Besides what is in this summary, many nuances exist that could be even more beneficial to you.