How to protect yourself against long-term care costs

Money Matters

One of the frequently asked questions in the financial planning discussion is: “How can I protect myself against the possibility of long-term health care expenses?”

This subject is a concern for most Americans. A recent survey of over 10,000 affluent investors, conducted by Spectrem Group and Vanguard Financial, found that long-term care was the top concern among individuals with $5 million to $25 million in assets.

Many of these individuals are in a position to self-fund their long-term care planning. Besides the traditional coverage of paying annual premiums, there are other ways to maximize tax efficiency and reduce costs by using asset-based accounts.

This especially makes sense in this low-interest-rate environment. Besides traditional long-term care insurance, there also is a proven hybrid strategy. There are opportunities to leverage a self-funding approach.

Like most things in life, long-term care planning has changed. Traditional long-term care policies are experiencing multiple and, in some cases, substantial premium increases as the cost of long-term care rises. These rising costs are passed on to long-term care policy holders.

This is a serious concern as individuals do not want their coverage to become prohibitively expensive just when it is needed the most.  Also, it is difficult to budget retirement expenses if premiums may increase substantially.

Over the years, long-term care planning concepts and programs have entered the marketplace with the goal of avoiding this pitfall.

Long-term care?

Long-term care is what individuals may need if they reach a point in their lives when they are not able to care for themselves because of a physical or cognitive impairment. Most people equate long-term care with nursing homes, assisted-care living facilities, or adult day-care centers. However, professional care is often provided in home.

A sobering fact is that a lifetime of retirement savings can be depleted by the need for long-term care. This can become a difficult scenario for the remaining spouse.

How can individuals protect themselves and their family from these risks using both conventional and unconventional approaches? Everyone has a long-term care plan–whether it is self-funded or through the use of traditional or asset-based, long-term care insurance. Here are three options.

Self-funding care

Self-funding care

Although family members may attempt to provide long-term care, it is often necessary to employ the services of skilled professionals, and this requires tapping into personal assets to cover the expenses. This is self-funding.

This concept works if people do not need to liquidate assets to provide care. However, it becomes expensive and will threaten a secure retirement if a family faces a multi-year event, such as Alzheimer’s disease.

When these family-care decisions are discussed, they can be emotional and they are made with maintaining the dignity and comfort of the one in need. Many times these decisions will override logical financial reasoning. Ideally, it is best not to have financial restraints dictate the quality of care, or increase the chances of an individual becomes dependent on someone else when assets are depleted.

There are government programs, such as Medicare and Medicaid, to cover the cost of long-term care. Unfortunately, these programs provide limited benefits and may not allow individuals to receive the proper care they seek, in the place they would want to receive it. Therefore, it is not an option.

Traditional premium coverage

As a result of the issues outlined, the best alternative for most people is to transfer some of the long-term care risk by purchasing long-term care insurance. Using insurance helps take control of the care and expenses, placing more of the long-term care decisions in the individuals’ hands.

Instead of liquidating taxable retirement dollars to pay for long-term care, individuals may enjoy tax-free benefits from these policies, which means the payments are not subject to either federal or state income taxes.

While today’s policies continue to change and improve, there are a limited number of quality insurance providers available. Long-term care planning decisions should be taken seriously. Before making any decision, be sure to evaluate the quality of the insurance provider.

One tool to help investors create their long-term plans is called the Envision process. Unlike other investment-planning tools, this process helps individuals work toward their financial objectives by looking at life circumstances and planning the money around those circumstances.

Chart 1 shows one of the process’ most valuable outputs. It’s called simply the “dot.” With an Envision plan, one is able to see what impact long-term care costs may have on the probability of success in retirement.

The idea of the plan is to make sure that one’s personalized “dot” stays within the “Target Zone.”

Investors do not want to be guessing what might happen to their cash flow if a long-term health care event lasts several years.

Two cases

The first case study is a 60-year-old couple (Jim and Susan) who are concerned what would happen to their retirement plans if one or both of them needed long-term care. Neither wants to be a burden to the other or to their children.

Although Jim and Susan have adequate assets to fund their basic retirement desires, an extended long-term care situation could derail the lifestyle they have worked so hard to achieve. In this hypothetical situation, it was assumed they would consider transferring the risk of long-term care to an insurance company.

Hybrid self-funding insurance

The second case study involves a 60-year-old physician who has a net worth of $2 million; has $700,000 in qualified retirement plan assets; lives modestly; and has $200,000 in a money market account. This is a case of a hybrid long-term, which allows guaranteed premiums, whether it is single paid-up or spread out from two to 10 years.

We have reviewed three ideas that may help physicians manage the financial risk of long-term care. Self-funding; traditional annual premium coverage, and hybrid self-funding insurance.

Whether individuals are planning for retirement or are already in retirement, long-term care insurance may fit an investors’ circumstances, and should be considered.

Disclosures:

John J., John S, and Traudy F. Grande, CFPs, are the editors of the Money Matters column. They are owners and principals of Grande Financial Services Inc., Oakhurst, NJ, (www.grandefs.com) and registered principals of Wells Fargo & Co., member of SIPC. The Grandes advise doctors across the country on a diverse range of investment and financial matters. Readers may submit their financial questions to them at john.s.grande@wfafinet.com or call 800/722-1258.

The views expressed in the Money Matters column are the views of Grande Financial Services, and should not be considered as investment advice. Grande Financial Services does not provide tax or legal advice. All information is believed to be from reliable sources; however, Grande Financial Services make no representation as to its completeness or accuracy. Past performance does not guarantee future results. Investing involves risk including the potential loss of principal.

Envision is a registered service mark of Wells Fargo & Co. and used under license. Insurance products are offered through non-bank insurance agency affiliates of Wells Fargo & Co. and are underwritten by unaffiliated insurance companies. Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC are separate non-bank affiliates of Wells Fargo & Co.