With the onset of the flu season, an interesting thing is happening. Many people who would be great candidates to receive either the H1N1 or seasonal flu vaccine are choosing not to get it.
Their reasons are interesting -- some, for example, are concerned about "toxic" elements in the flu vaccine, including tiny amounts of mercury or aluminum -- amounts that are dwarfed when compared to those present in a tuna fish sandwich or antiperspirant. Meanwhile, we know that H1N1 flu has been the cause of some deaths of young people across the country. It seems like an easy choice -- get the vaccine, if available, because the flu risks far outweigh any potential complications. But with the media focusing on the extreme situation -- an allergic reaction to a vaccine -- people are naturally afraid.
Unfortunately, the same thing can be said for long-term care insurance (LTCI). You rarely see an article touting how someone who has Alzheimer's is on claim and able to stay at home or get specialized care at an expensive Alzheimer's facility because they own long-term care insurance. Instead, the focus is on the possibility of future rate increases, what happens if the carrier goes out of business, or a denied claim. This creates an initial resistance to planning for long-term care.
Adopt a straightforward approach
A successful discussion of LTCI, then, must start by overcoming this resistance. An initial decision to plan must be made before any specific products can be discussed or the features of those products considered. There is no better way to do this than by discussing the elephant in the room -- the devastating impact that Alzheimer's, or another long-term care need, could have on a person's finances and wealth.
Because many wealth managers and financial planners understand the impact that extended long-term care would have on their clients' retirement portfolios, they now incorporate long-term care planning into their comprehensive client financial plans. This planning uses software to evaluate the potential effect of the cost of care on the client's income and retirement assets under various long-term care scenarios.
Once the client agrees that a long-term care event could happen to them and it would cost a significant amount of money, planning alternatives can be considered. Of course, it must also be demonstrated that the client's long-term care costs will not be covered by current health insurance, disability insurance, Medicare or Medicaid.
The default option is liquidating current assets to pay for care. Although a perfectly appropriate strategy for many people, one thing that might be overlooked is the unanticipated costs of having to cash in certain assets before typically needed. These costs can include capital gains taxes, penalties on qualified plans withdrawals, and poor market timing. Benefits from qualified long-term care policies, on the other hand, come out tax-free.
Another option is not paying for care at all and relying on family. Again, this is a strategy that may work in some situations, but it must be determined whether the future family caregivers are on-board with the plan.
When it becomes clear that self-insuring and relying on family for care are not preferable options, the third-party payer option, or insurance, can be investigated.
Explore the options
In examining LTCI, it is helpful to focus on an area that is the least confusing -- benefit triggers. Highlight that no matter what tax-qualified long-term care policy someone buys today, whether it is in the form of traditional policy or asset-based combination policy, the benefits will be triggered by either the loss of two of six activities of daily living or by cognitive impairment. Thus, purchasers can count on a fairly industry-wide standard for assessing and approving claims.
Once it is determined that LTCI is desired, the question turns to how to pay for the premiums. The purchase methods for LTCI generally fall into four categories: Health-based plans paid individually; health-based plans paid through an employer; Life/LTC plans; and annuity/LTC plans.
Remember, all the plans feature tax-qualified long-term care policies -- the difference is just in the way to pay for them. It is also important to note that all four possibilities may not be available for some clients because of health status. Here's a breakdown of the four different payment options and who might be interested in them:
Individually paid plans: This is annual-pay LTCI. Paying annually works for clients who are comfortable viewing this as pure insurance protection and understand that they may never get back the premiums they've spent, similar to term life insurance, health insurance, and homeowner's coverage. Annual premiums shouldn't be greater than 5% of annual income. As a rule of thumb, clients should to be able to absorb a premium increase of 1% annually. Therefore, if someone buys a policy for $3,000 annually at age 60, by the time they're 90 the annually premiums might be 30% higher. This anticipated rate increase history tracks well with experience of leading long-term care insurers.
Employer paid plans: There are three potential advantages of this option -- reduced premiums as compared to individual purchase, certain tax advantages, and potentially easier underwriting. Many carriers offer discounts to groups as small as three employees. For C-corporations, premiums are completely deductible to the corporation, not considered income to the employee, and benefits for long-term care services are tax-free. Because of these benefits, executive carve-out plans are popular, and accelerated pay options are available. For self-employed, S-corporation owners and partners, premiums are deductible up to certain indexed premium limits. Those with health savings accounts can pay premiums (up to the indexed limits) out of health savings values. Finally, underwriting may be more favorable than individual plans.
Life/LTC plans: These plans combine life insurance and LTCI, with some very attractive features to consumers. First, they appeal to "self-insurers" because clients can tap an accelerated benefit rider to pay for long-term care costs out of policy values. Those benefits are received tax-free and, if the policy is exhausted, an extension of benefits rider kicks in with most plans. Clients usually have an option of a full premium refund if desired and, if long-term care is not needed, a death benefit is available to assist with wealth transfer.
Annuity/LTC Plans: Effective Jan. 1, 2010, tax-free distributions are allowed from Pension Protection Act qualified annuities with long-term care benefits. Moreover, clients can do a 1035 exchange from an existing annuity into an annuity/LTC combination plan. In addition, underwriting for these annuities is typically simpler than health-based LTCI.
Like vaccines, the risks of not owning LTCI far outweigh the "side-effects" of owning a policy. Once a client has decided they want a long-term care plan and insurance may play a role, there are many options for paying for coverage that can alleviate perceived concerns. The risk of inaction is the greatest threat of all.
Tom Riekse Jr., CEBS, ChFC, is managing principal at LTCI Partners, a brokerage general agency specializing in Long-Term Care insurance. E-mail him at tom.rieksejr@ltcipartners.com.
