How Are You Going to Pay for Long Term Care for You or Your Parent?

Dear Mr. Miller:

My Dad, 75, is living at home and has a hard time getting around. He needs help for most of the day but can still perform all of the “activities of daily living.”   I know he is not going to get better and the future will probably require him to live at an Assisted Living Facility. And down the road, a Skilled Nursing Facility is also possible.  How are we going to afford this?

My Dad is not wealthy but he does have a house worth $750,000 and an annuity for $250,000.  I guess we could withdraw the annuity money and pay for things that way for a limited time.  Could he still purchase a long term care policy and get coverage that way?   I imagine the annual premium would be enormous.

Fretting Daughter

Introduction
Traditional Long Term Care Insurance
Non Traditional Long Term Care Insurance
Income Tax–Internal Cash Build Up
Income Tax–LTCI Benefits
Medical Exams & Limitations
Conclusion

Dear Fretting:

Introduction:  How to pay for Long Term Care is a problem that almost every non-wealthy family (and even some wealthy ones) deals with at some point in time.  Most don’t do anything and just hope for the best.  Those that are proactive, such as how you are approaching this, often find a solution.  There are alternatives, including insurance, so give us a call (760-436-8832) so that we can, first, assess the situation and, second, if appropriate, coordinate with an expert in the field.  The first consultation is complimentary and right now all consultations are being done by video conference.

What we are going to discuss today is Long Term Care Insurance (LTCI).  Let’s also define the term activities of daily living (ADL’s) since we will be getting into that, also.  ADL’s are bathing, dressing, eating (i.e. feeding oneself), transferring (i.e. getting out of bed or a chair), toileting, and continence.

Traditional Long Term Care Insurance:  This is the type of insurance in which you pay an annual premium for the coverage.   Generally, it is a “use it or lose it” approach.  In other words, if you don’t need the benefit this year you don’t get anything back.  Some policies do have a return of premium rider but that generally increases the cost.  Further, no one seems to worry about the use it or lose it approach for other types of insurance (i.e. fire insurance on your home) but for LTCI that is a big deal breaker for many.  And then there is the premium.  According to a Consumer Reports article of a number of years ago, the mid-50’s in age is sort of the sweet spot to purchase.  The policy isn’t terribly expensive yet and the odds of needing long term care shortly after that age make the purchase more palatable.  At 75, such as your Dad, the premium will be quite high; too high to justify the expense for most families.

Non Traditional Long Term Care Insurance:  Insurance companies are in the business of selling insurance policies.  If one of their policy types is not selling very well then they redesign the policy and create something else to replace it that they hope will sell better.  (No different than car manufacturers or any other business.)  And that brings us to Non Traditional LTCI.  With this approach you generally pay one premium (or just a few) in a large lump sum.  You are actually purchasing a Life Insurance product or an Annuity product.  But the policy comes with a LTCI rider attached to it.  The LTCI generally provides LTCI coverage (in the form of a pot of cash) in several multiples of the premium you paid.  If you use it, then the life insurance or annuity benefit will be reduced accordingly; if you do not use it then that benefit remains for you or your family according to the terms of the policy.  So if you don’t use it, you don’t lose it.  (These policies are also called hybrid or combo policies.)

Income Tax–Internal Cash Build Up :  Traditionally, if your Dad cashed in the annuity to purchase the LTCI policy there would be an income tax on the internal cash build up.  But the law was changed under the Pension Protection Act of 2006 (PPA) to make it easier for people to acquire these policies.  One can now enter into a tax free exchange of the old policy for the new policy if the new one meets certain requirements.

Income Tax–LTCI Benefits :  Further changes by the PPA make it such that payouts for long term care are not generally taxable (up to certain maximums).  So this means that the benefits stretch further since nothing has to go to the government.

Medical Exams & Limitations:  Some policies require these and some do not.  There are generally limits on how old the applicant (i.e your dad) can be when applying.  And there are generally certain limits regarding how many ADL’s one can do on their own.

Conclusion:  In your Dad’s situation, he could potentially use the $250,000 (or a portion) toward the purchase of an combo annuity/LTCI policy which could provide far more than the $250,000 coverage for long term care needs.  And those needs could include not only skilled nursing but also assisted living or in home care.

However, there are alternatives to insurance so give us a call so that we can, first, assess the situation and, second, if appropriate, coordinate with an expert in the field.  The first consultation is complimentary and right now all consultations are being done by video conference.  Call us at 760-436-8832.