|Why Affluent Clients Should Consider Long-Term Care Insurance
They can afford to pay for nursing care out-of-pocket, but insurance protection offers estate planning and economic advantages.
November 19, 2009
Surprising economic times can reveal fault lines in previously solid assumptions. The conventional wisdom was that the wealthy would pay for long-term nursing care out-of-pocket and the middle-class and upper-middle-class Americans would buy long-term-care (LTC) insurance. Advisors assumed that affluent clients would have the income stream to cover skilled staff for in-home care or full-facility care regardless of the length of convalescing, if necessary.
In fact, wealthy Americans with a very comfortable standard of living and adequate resources to cushion from portfolio shrinkage have expressed concern about the expense of healthcare 10, 20 or 30 years in the future. In a 2008 survey by Northern Trust, the high cost of healthcare came in second after inflation eroding income as the chief concern of Americans with a minimum net worth of $1 million (not including primary residence). And more people need to consider those costs. Those who reach age 65 will have about a 40-percent chance of entering a nursing home, according to the U.S. Department of Health and Human Services. For those who do enter a nursing home, about 10 percent will stay there for five years or more. Five years is a long time to be paying for nursing-care out-of-pocket. The average national cost of facility care was $209/day (over $76,000 annually) for a private room in a nursing home according to the National Clearinghouse for Long-Term-Care Information, US. Dept of Health and Human Services.
The published averages of nursing and in-home care can be misleading when considering the likely high service expectations of wealthy families. Average rates buy you rooms in facilities that your affluent client may perceive as more Motel 6 than the Four Seasons. For a high-end care facility such as the one in Boston associated with Harvard Medical School with its own hospital on the grounds and highly trained staff, the yearly costs are well over $100,000 or more than $270-per-day. In New York, however, $398-per-day is just the average cost according to the 2008 Cost of Care Survey, Genworth Financial. Other locations have much less expensive averages: Dallas, St. Louis, Denver and Memphis, for example. According to the survey, five-year annual increase — on average — cost of private or semi-private room in a nursing home is four percent.
Actual Cost of Self-Insuring
Affluent families won't be challenged to pay such fees, but the real impact may not be in the checkbook but in the legacy. A recently retired business owner who sold his stake a couple of years ago and invested in the stock market that's limping along in the current economic crisis may look to pull cash out of his portfolio to pay for care at the worst possible time. Any subsequent recovery of his portfolio will be diminished by the principle he withdrew.
To pay for long-term-care costs directly, high-net-worth (HNW) clients would typically hold onto invested assets to generate the required income. The client keeps those assets, thereby not transferring them out of his or her estate. Self-insuring therefore limits the ability of HNW clients to transfer assets before death in an effort to minimize transfer taxes for the family, according to an economic analysis of long term care by David M. Cordell, Ph.D, CFA, CFP, CLU, director of finance programs, University of Texas, Richardson, TX, and Thomas, P. Langdon, J.D., LL.M, CFP, associate professor of business law at Roger Williams University, Bristol, RI.
Getting Back Those Premium Dollars
An option on some LTC policies — return of premiums at death — works well for clients concerned about risk protection but unhappy about paying for a product they may never use. Not all companies offer it and not all states allow it. The client's designated beneficiary will receive a portion or all of the premiums paid, less any benefits paid by the insurance company.
Return of premium options come in two basic types. The less-expensive one aimed at younger policy-buyers is based on age at death, usually before 65 and sometimes at a shrinking percentage after that year. For a client who bought a policy at age 45 and dies suddenly at 55 without receiving any claim payments, the policy would pay 10 years worth of premiums to the beneficiary. If the same person dies suddenly at age 70, the policy would pay 50 percent, with the rider terminating at age 75. The additional cost for this enhancement is in the range of 8 percent over the regular premium.
The second type of rider returns all of the premiums, less any paid claims, regardless of the insured's age — as long as the policy has been in force for at least 10 years, typically. For a client who purchases a policy at age 55 and passes away at 70 without any claims, the beneficiary would receive 15 years worth of premiums. The added premium for a 55-year-old buying a policy would be in the range of 25 percent to 34 percent, with the rider cost increasing as the "age at the time of purchase" increases.
While the after-10-years benefit is expensive, the net cost to the client becomes the interest lost by not being able to invest the annual premiums. This factor can also make the policy attractive for wealthy clients with the responsibility of caring for parents or other older relatives. The returned premium becomes part of the beneficiary's gross income.
As an owner of a closely held business, the client can deduct the cost of LTC paid through the business entity, up to the Internal Revenue Service's (IRS) inflation-indexed limits for that year. If the client owns a C-Corp., select employees can participate in a group-LTC plan and have the business pay the premiums. In both cases, the business-paid premium is deductible. The return-of-premium feature can be especially useful when the business is paying the premium. The refunded premium can still go to the client's beneficiaries or go back to the company to recover its payments for the policy.
Many Moving Parts
LTC policies have many moving parts: the amount of the benefit, deductible days, benefit limits, inflation type, plus various riders. Seemingly small changes in the policy can affect major results 10, 20 or 30 years in the future when the benefits are needed. They are best analyzed by the client's advisors to understand the full, long-range economic impact. One option on all policies, for example, is the amount of inflation to grow the benefits — five-percent simple or the more expensive five-percent compound. While annual nursing costs grow at compounded rate, a policy with benefits only growing by a simple percentage will fall far behind in a couple of decades, requiring the client to cover more of the costs out-of-pocket.
Extended nursing care can have a strong impact even on HNW families. When creating any new comprehensive financial plan for HNW clients or reviewing an existing one, LTC insurance should be considered as a tool to lessen risk. Rather than depending on self-funding, strategically designed LTC policies can mitigate financial exposure and provide coverage for relatively reasonable sums through the use of return of premium riders.
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Lewis Schiff is the principal of Advanced Planning Group, a family office network for advisors. His latest book, The Middle-Class Millionaire, was published in January 2008. View complete details on how to receive a free report on The Highly Effective Habits of Successful Advisors by the authors of The Middle-Class-Millionaire.