Long Term Care Insurance Companies Are Not The Only Option
Segment 1
Segment 1 Transcription
00:00 Danny Howes: Good morning, welcome to the Financial Pulse radio show, I’m your host Danny Howes, CEO of East Coast Tax and Financial Planning. We’re gonna continue our discussion on life insurance this month. And one thing I’m gonna hone in on in this first segment is just talking about the epidemic of long-term care, and I’ve talked about this quite a bit, but it should be on the front of everybody’s mind, especially if you’re getting close to retirement, or just retired, maybe you’ve been retired for a while. But the statistics say that one out of every two of us, is actually gonna need some sort of long-term care, whether it be home health care, or all the way to full-time skilled nursing facility, hospital bed.
00:41 DH: And we’re seeing a lot of these type of facilities pop up everywhere, we see a lot of transitional living, where people will start off maybe just with no health care at all, just basically living in a condo, planned unit development, with the idea that if and when we start to need help, there’s on-site nurses and caretakers to be able to come into the house and take care of you. And then as things get progressively worse, you could go into maybe light long-term care, where you’re still in your own apartment, and so forth, all the way to the fact that they have skilled nursing facilities on site.
01:24 DH: And the reason why there’s such a big demand, and these facilities are popping up everywhere, is because of the fact of that statistic, one out of every two of us is actually gonna need some sort of care like that, and it’s getting more and more. And the reason why is, even if we don’t wanna live that long, there’s medicine [chuckle] and things to keep us alive, and so we are actually in this advancement period of our society where people are just living longer and longer and longer, and with that comes ailments, and we can’t necessarily do the things that we normally could for ourselves, and so that’s where we stand, and just about everybody’s been touched by that.
02:07 DH: In our own life, we actually were a third of the caretaker for my grandmother that had Alzheimer’s. So my aunt and my uncle took turns, and then my wife and I took the other third, and so for quite a while, she just kind of bobbed between her houses, and we looked after her, and God bless my wife, she took care of her. But eventually it got to a point to where we no longer could do it, because transferring her from one room to another and things like that, and bathing and all that, just got to be way too much work, and just too much for some of the family to handle. So eventually we had to place her in a home, and it was a very expensive, it was very long. They say that the average person goes into a long-term care facility for about three years, but that’s the average. In our situation, my grandmother lived almost ten years after she was diagnosed with dementia. And while, for a long time, we could actually have her live at home, and we were blessed with wives, and people who were able to take care of her, that’s not always the case.
03:25 DH: And it’s not always the case that there’s people that have enough family members, or enough resources for those family members to actually be able to be a caretaker like that. So the costs are staggering. If you look at a full-time, skilled nursing facility, it’s north of a $100,000 a year in many cases nowadays. And Medicaid will flip the bill, but you’ve gotta be broke first. And so the reason why I wanted to talk about life insurance today, in that context, is because many people don’t realize that there are more options than just traditional long-term care insurance. Traditional long-term care insurance is very expensive, especially if you’re older than 60 years old.
04:17 DH: It’s almost cost prohibitive for many people because there’s really very few policies, if any, out there now, that have cost of living adjustments, or protection against premiums going up. So now we have people that come in and they look at their policies, and they’re like, “Wow we’ve had this policy for 10-15 years, but the premiums keep going up and up, and we don’t know if we could justify continuing the expense.” And so it becomes very frustrating with traditional long-term care insurance, sometimes it’s practical, but in many cases it’s not. So enter in a whole new breed of insurance, a life insurance policy with long-term care riders, or what they call chronic illness riders. And these are really a godsend for people that are older, still want to transfer the risk of the long-term care cost to an insurance company, but can’t afford or can’t justify the expense of really ultra-expensive, traditional long-term care insurance.
05:23 DH: And let’s talk about what traditional long-term care insurance looks like. Traditional long-term care insurance is basically that, it insures you in the case of an event that you would need long-term care. Some are very restrictive policies, where they only provide if you are actually in a long-term care facility. Some are actually very liberal, where you can even use it for home health care, you can use it for just adult daycare, things like that, but some are very restrictive. At the end of the day, what’s really difficult for people to swallow, the long-term care, the traditional long-term care insurance pill, is the fact that, “Well, what if I don’t ever use it?”
06:05 DH: So what you’re saying to me, “I need to spend thousands upon thousands of dollars a year in premium, to pay for something that my parents didn’t need to use, or I’ve never seen anybody needing to use, for an event that may never happen.” I’m already paying for my house insurance, I’m already paying for property, casualty, health insurance, all these other insurances, and now you want me to pay for a long-term care insurance for an event that may never happen. Albeit, it could be really expensive and people understand that, and they’re starting to see people in their communities, family members, neighbors, and the like, that may need to use it, but it’s very difficult to swallow that pill, especially now that it’s gotten so expensive.
06:49 DH: So in order to mitigate against that, enter in life insurance with the long-term care rider, or a chronic illness rider. And what that looks like is, is a traditional life insurance policy, it’s a permanent policy. Sometimes they’re whole life, sometimes they’re universal life, and we’ll talk about the differences in the next segment on that. But what it provides is, it provides that it’s a death benefit policy, that so long as you meet the premiums for the rest of your life, whenever you expire, ’cause nobody gets out of here alive, then that policy will pay out a death benefit. But let’s suppose that you need some sort of long-term care, maybe it’s home health care, maybe you go into a facility, maybe you plan on going in to do transitional lifestyle community, it will actually pay for that long-term care.
07:44 DH: So, to put it in context, let’s say we have a $250,000 life insurance policy, meaning that when you pass, that $250,000 goes to your heirs tax free. However, if you need long-term care, and let’s say you need home health care, and it’s costing $30,000 a year, or $40,000 a year, it doesn’t matter how much it cost. You can actually tap that $250,000 death benefit in a number of different ways depending on how the policy is structured, in order to help pay for those costs, or completely pay for those costs, depending on the size of your policy and how that policy is designed. So the good, the bad, of that is that, yeah, that kind of eats away at the death benefits, so that doesn’t go to my estate, however, it does transfer the liability of that long-term care to the insurance company still.
08:39 DH: But if you don’t use the long-term care aspect of it, if you don’t need any kind of long-term care help, or anything like that, then that $250,000 goes to your estate tax free, and goes to your heirs tax free. So it’s one of those things where, even though you’re paying those premiums, you’re not throwing that money away, you’re not flushing it down the toilet. You’re actually still investing in your estate by paying those premiums, because the death benefit will still payout. And keep in mind, long-term care insurance, or this type of insurance I’m talking about, life insurance with a long-term care rider, chronic illness rider, isn’t there to protect your health per se, because like we’ve said, if you’re broke, Medicaid will still pay for it.
09:23 DH: But it’s there to protect your wealth, it’s there to protect your assets, your home, it’s there to protect your brokerage accounts, your IRA accounts, and so on and so forth. It’s there to protect the liquidity, and if you’re married, it’s there to protect your spouse, as far as financially goes. So we get back, we’re gonna talk more about this hybrid long-term care life insurance policy. We’re also gonna talk about the differentiation of how some of these things work, because it is on the forefront of so many people’s minds, or at least in the back of your mind, wondering how we’re gonna take care of this, if and when this would never happen to us.
10:00 DH: I’m Danny Howes from the Financial Pulse. We’ll be back in just a bit.
Segment 2
Segment 2 Transcription
00:00 Danny Howes: Well good morning and welcome back to the The Financial Pulse Radio Show, I’m your host Danny Howes, CEO of East Coast Tax and Financial Planning. Well, if you’re just joining us this morning, we are continuing our conversation that we’ve had throughout the month and that is life insurance. And today we’re focusing on a particular type of life insurance that provides for also long-term care. And we talked about the fact that long-term care is a huge epidemic right now and it’s only growing and I feel like within the next 10 years to 15 years, it’s gonna be right there in front of our faces like “How are we gonna solve this problem?” Because let’s face it there are 10,000 baby boomers a day that are retiring, and so with this aging population comes a growing medical expense and a big part of that medical expense is long-term care. We’re living longer. There’s medical advancement, there’s technology and medications and so forth that are keeping us alive longer, but sometimes we need help.
00:58 DH: And that’s where long-term care comes into play. One out of every two of us, statistics say are gonna need some sort of long-term care, and that’s just growing and the average person needs about three years, once they enter into a long-term care facility, the average person is in there for about three years. Put that in the context so… You can lay me on a table, put my head in the oven and my feet in a freezer. And that’d be an average, right? But there’s one extreme or the other, right? And so with my grandmother, God bless my wife helping me out with my responsibility taking… I took care of a third of my grandma. If you want to think about it that way. My aunt and uncle, we all basically took turns and my father wasn’t able to do it, so we took my father’s time and my wife was just unbelievable, but literally grandma would go between the three houses because she was diagnosed with dementia and eventually Alzheimer’s for, I think, four years.
02:01 DH: That went on until finally we couldn’t do it anymore, because it was just too much on all the family members. So then we placed her in a home, and that’s where she lived for a couple more years. So a long time, way more than three years that she was taken care of, that the expense was shared and so on, and so forth. And we did part of that for Medicaid planning, transferring assets out of estate and so forth, her estate. But I say all that to say it’s average of three years, but there’s one extreme or another. And so how do we plan for this, how do we make sure that it’s not crippling on our spouse if you’re married or other family members or just what your desire is for your estate? Because like we talked about in the last segment, long-term care insurance, long-term care coverage is not there to protect your health, it’s there to protect your wealth.
03:01 DH: Because that expense has to come out and Medicaid will pay for it, but you gotta be broke first. So preparing for long-term care, whether it’s being creative with a trust and transferring assets out of your name within the time period that they can’t go back to what they call a look-back, it’s a five-year look-back where they could say, “Oh well, you transferred assets out of your name two or three years ago. So we still have access to that. If Medicaid is flipping the bill for long-term care. I’m not an attorney. I had to put that out there. But that’s kind of the general understanding of how that sort of thing works. So the alternative is either paying out of pocket and depleting your estate or selling the house, or if you’re married, spouse gets to live in the house until they pass. But then the house’s still up for grabs.
03:54 DH: So in order to mitigate against that, we’d have to have some kind of coverage, some kind of insurance to transfer that risk. And last segment, we talked about how a life insurance with a long-term care rider or chronic illness rider can really help mitigate against that without having to pay for insurance that you may never use. That’s one of the biggest fears for people, when they think about traditional long-term care insurance. Number one, it’s super expensive, if you’re over 60 years old.
04:26 DH: There’s not many policies out there that protect you from rising premium. So many times people now are cancelling long-term care insurance policies because they just can’t afford the premiums anymore. But then there’s that just dread of like, “I don’t want to pay for insurance that I don’t know if I’ll ever use” Maybe you have the mindset, “Well my parents were both healthy, they were fine, they never needed any kind of long-term care.” But that goes back to the old adage we learned from previous generations of how to do things. And then all of a sudden, there’s a shift and everybody’s like, left like “Woah, what do I do?” We don’t know what to do. We have a whole generation of people now that are retiring and aging, yet, haven’t planned for this type of situation, so there’s gonna be a lot of wealth destruction as a result, household wealth destruction as a result of having to liquidate IRAs and 401Ks and savings accounts in order to pay for these astronomical, potentially astronomical bills. Again, long-term care costs for a full-time nursing, for skilled nursing facilities is north of a $100,000. So here’s how this conversation works if you’re married.
05:36 DH: And you don’t have any kind of coverage or haven’t put any plants in the place. It’s a loving but sad conversation. So here’s how it goes. “Look, I know I have to go into this, I feel really bad, I don’t wanna go… I don’t wanna have to have this be a financial burden on you. I want you to find the cheapest, stinkiest place. I don’t care, I just want you to be able to live out your life without me being a burden.” And then the spouse says “No, no, no, that’s not how it’s gonna work. I’m gonna sell the house and move into a small apartment, I’m going to eat ramen noodles every day for the rest of my… I don’t care what it takes, we’re gonna buy you the most expensive, best, you know, care facility that we could possibly find. Because I want you to be comfortable.” So it’s a very loving conversation, on both sides, but it is very sad, because there’s really no, there’s really no solution. And that’s because there was a failure to plan for that situation, and failing to plan is a plan to fail. And just ignoring it is something that we can’t do either. So that’s why I really am harping on “Look at other alternative solutions.”
06:51 DH: Whether it’s looking at a creative trust type of situation to transfer some assets and so forth, or whether it’s taking a look at this type of policy, a long-term life insurance policy with a Long-Term Care Rider. And I wanna review how this works, again, if you’re just joining us in the second segment, and basically it’s a permanent life insurance policy, you pay a premium, you pay it monthly, annually or you can pay it all up front if you have some money, maybe sitting around that you know you’re probably not gonna really touch or need access right away, you can pay it up, of course, the more you pay up front, the cheaper the insurance is over the long haul, so that’s why you take a look at doing that. You pay for this insurance as long as the premiums are paid throughout your life, one of two things is gonna happen: If you need long-term care, you can use the death benefit of the policy for long-term care. So let’s say it’s a $250,000 policy. And all of sudden, you find you can’t meet two of the six daily living activities, maybe you need help dressing or maybe you need help bathing, or different things like that, transferring from one room to another and the like. You can actually use a portion or even all of that $250,000 for that long-term care.
08:14 DH: But let’s suppose that you never need it, or let’s suppose you only use a little bit of it, let’s say maybe you only use $30,000 or $40,000 of it, whatever is left over or if you haven’t used any of it, when you pass that $250,000 would go to your estate and tax-free. So it’s not like you’re throwing premiums away, it’s actually still going to your estate for the people that you love, whether it be your spouse, whether it be your children, so on and so forth. There’s even policies out there where you can make one lump sum premium deposit, it pays the policy up completely for your whole life. And let’s say that there’s an event for whatever reason, you decide you don’t want that policy anymore, and you want that money that you paid into that policy, you can actually just get a total return on premium, and you can take that money right back out. No questions asked, that cancels the policy and you get your money out.
09:09 DH: So, I call it live, die or quit, right? So, I can live, use the money for long-term care if I need it, I can die and that 250… 500… Whatever the amount is, goes to my estate tax-free, or I can quit. I can take all my money out, no questions asked. If you look at interest rates today on dormant money sitting in CDs and money markets, it could be actually a great alternative for money that’s just sitting on the sidelines for you to be able to transfer that risk of long-term care and still have access to your money if you actually needed it or wanted it for whatever reason.
09:43 DH: Just like every week we’re running out of time. Next week we’ll talk more about life insurance, believe it or not, there actually is more to talk about it and I hope you tune in. Every single Thursday, right here, 10:30 AM, right here on WAXY radio. We’ll talk to you and make sure you protect that money folks, but most importantly, make sure you know who and what you’re protecting it from. I’m Danny Howes, go to eastcoasttaxandfinancial.com. Talk to you soon.
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