April 01, 2013

Long-Term Care Insurance: Who, What, When, Where, and Why?

Wes Hentges

Planning for the future is central to the ideals of modern America. Most people enter the workforce and work toward financial independence. Some work for their financial future or to build a family, and others work to be able to pursue hobbies. However, uncertain economic times, coupled with dramatic increases in life expectancy, lead many to plan for extended care. You know only too well about the need to advise your clients—and your own family members—about the different requirements for, and costs of, living a long life.

Attempted Federal Intervention: The CLASS Act

In 2010, Congress enacted the Community Living Assistance Services and Supports (CLASS) Act as part of the Patient Protection and Affordable Care Act (ACA). The CLASS Act was intended to provide for and fund community and institutional residences for the U.S. middle class. It was an attempt by the federal government to alleviate the growing financial pains felt by an aging middle class that was both unable to take advantage of federal healthcare plans for low-income people and unlikely to have the wealth necessary to self-fund long-term care.

The federal government was trying to bridge a gap. Medicare does not cover long-term services. Medicaid only provides for services for the person who is experiencing financial hardship or who has limited means. Individuals only qualify for Medicaid assistance after substantially depleting their resources. The CLASS Act was to bridge the gap by providing assistance for individuals with enough financial resources to be denied Medicaid but not enough assets to sustain an extended care stay without liquidating significant amounts of those assets. This act, therefore, would have provided for long-term care—a kind of care that is becoming ever more important to the elderly as modern medicine increases longevity. Lifetime benefits, simplified underwriting, and availability of a cash benefit were to be the key features of the federally administrated plan.

Initially, the CLASS Act was built to be affordable: it was to cost as little as $5 per month for the lower-income brackets, with the average being $123. It was designed to be accessible: any working adult who did not opt out of the program was to be enrolled after working for the same employer for five years. However, later analysis concluded that premiums for the benefits provided would cost between $235 and $391 per month. Ultimately, the CLASS Act was determined to be unaffordable for the government and was repealed.

The CLASS Act had several key problems. First, it suffered from adverse selection. The principal entrants into the plan would be those unable to obtain private long-term care plans. This would prove to drive estimated premiums higher. Second, it was actuarially unsound. Given its promises, the program would have required an immediate and immense amount of monetary support. Under the law, the CLASS Act was required to be funded solely by premiums paid by participants, but this outcome was soon determined to be unlikely. Ultimately, the program would not be solvent in 75 years with the premiums that were required by law to be collected.

Without a government-sponsored solution, a private solution may need to be found. In fact, in the absence of a government-sponsored long-term care plan, individual planning has become more crucial. However, as you may have observed with your clients, many people never consider long-term care planning until the need for a solution manifests itself.

Long-Term Care: Why Everyone Should Plan

When someone is compromised by a life-changing medical event, loved ones may form the first lines of defense. When they are, they often need to adjust their priorities and put their own plans on hold. The consequences of failing to properly prepare for a life-altering medical crisis are not limited to the person who is sick. Whether the impairment is physical or mental, that impairment may not end the life of the person afflicted. It will, however, be life-altering for that person and his or her caregivers. Everyone should plan for life’s contingencies.

Personal Experience Turns to Passion for Planning

My maternal grandfather suffered a stroke in 1988, and he continued to live for 11 more years. He lost most of his mobility on the right side of his body and was told he would likely never walk again. While he eventually did, he still required comprehensive care, which consisted of family support and in-home care. Most of this care was given by my grandmother along with the help of professional caregivers. At that time, my grandmother was in her late sixties.

My maternal grandmother now requires her own care. Despite the onset of dementia in 2009 and a stroke in 2012, she just celebrated her ninetieth birthday. One of her daughters-in-law is a live-in caregiver; she stays with her around the clock in a rehabilitation facility. My grandmother will be released to a nursing home once her rehab is complete, but the potential inadequacy of nursing homes to continue to improve her health is concerning.

My paternal grandmother is currently suffering from Alzheimer’s disease that was diagnosed in 2003. This horrible disease afflicts one in eight seniors over the age of 65. Fortunately, I represented several insurance companies, and my grandmother’s long-term care was provided for under an in-home plan. My grandfather cared for his wife for the first few years, but despite his reservations about having strangers in their home, this policy afforded him freedom to live a relatively normal life and to provide advanced care by licensed, in-home caregivers that might have otherwise been fiscally impossible.

Despite this preparation, the situation took its toll on my grandfather. In 2005, he was diagnosed with cancer and, when other family members stepped in to take his place as caregiver, they understood the stress. My grandmother has lived in an Alzheimer’s unit at a local nursing home ever since.

My paternal grandfather passed away in 2008 after his cancer spread. When he learned that his cancer was terminal, he chose to live out the rest of his remaining days with his wife in the nursing home. Given his terminal condition, his long-term care plan waived the 90-day waiting period and began providing benefits immediately. Long-term care insurance paid, and continues to pay, for his wife’s nursing home stay. Nearing the end of his life, he voiced his concerns to his daughter: “I know it cost a lot to be here for me and Mom. Do we have any money left?” he asked. His daughter was able to reply, “Don’t worry, Dad, you’ve done everything right.”

Planning for Imminent Care

If the need for long-term care is likely or imminent, planning becomes an immediate concern. Many financial advisors focus on accumulation of wealth for 30–45 years. With discipline, these years, are the easy part. The distribution period, typically 25–30 years, is the hard part. Predicting all the variables that come with investment return uncertainties and the uncertainties of advanced age is extremely difficult. Jumping off the high dive is easy—landing graciously is hard.

Preparing Your Clients

You probably know how to prepare your clients to think about their possible long-term care needs. Here is a review of some of the most important points. Ask them to:

  • Discuss with their family members who, if anyone, will be able and willing to provide long-term care;
  • Prepare family members for the implications of the life changes necessitated by long-term care, including time away from work and other family members;
  • Prepare for lost income; Discuss how and when they might want to compensate family caregivers;
  • Plan for whatever support other family members and loved ones can provide the caregiver;
  • Consider that accounting, banking, and corresponding with doctors and hospitals are duties that can often be allocated elsewhere to save the primary caregiver time and stress;
  • Understand how calling upon other part-time caregivers can help alleviate the stress of a family caregiver, who may also be a parent caring for his or her own children; and
  • Help family members by discussing where the money will come from to provide for the care needed: (a) In today’s uncertain times, transferring wealth assets into income-generating assets should be considered. For example, high-yield corporate bonds, lifetime annuities, and municipal bonds may be considered for tax-free income, especially for those whose tax bracket is high. (b) Paper assets should be turned into assets easily transmutable into cash. The volatility of the stock market, for example, can be dangerous for those anticipating a need for long-term care. (c) Always help clients understand the need to invest with a keen eye toward inflation, especially inflation in medical-related fields. (d) Advisors may also want to recommend that clients be wary of fixed-rate investments, given today’s historically low-interest rate environment.

Given the power of modern medicine, long-term care planning is essential. There is an astounding one-in-four chance that at least one spouse in a married couple will live to age 97 if both are age 65 today. Considering that many retirement advisors plan for their clients to live to age 90, the risk of running out of resources is all too real.

Proper planning allows your clients to have a say about when and where they will live out their days. With this planning in place, resources can be available to families that will provide them the option of providing a related primary caregiver. Help them to protect assets and leave a legacy for their family that is more than remembrance of the years they sacrificed to help care for them. Give them peace of mind.

With the assistance of a knowledgeable advisor, long-term care solutions can be affordable. In some cases, they can even produce tax savings at both the federal and state levels.

Planning Considerations

On its new long-term care website (www.longtermcare.gov), the federal government points out that 70 percent of adults over the age of 65 require long-term care of some sort. The first steps in planning for long-term care are the obvious ones. Stop smoking, eat a healthy diet, exercise, maintain social interaction, and seek regular medical care. Financial resources, though, are also important. Social Security, pension, savings, stocks, bonds, dividends, IRAs, 401(k)s, or even mortgages and reverse mortgages can raise needed funds. The right mix of products for meeting clients’ needs will differ for every client and will be based upon their risk tolerance, tax bracket, and investment objectives.

Powers of attorney for property must also be taken into account. As family members age, they may not have planned for others’ access to funds. In many situations, a loved one may wish for family members to plan on their behalf, to make payments, to have access to accounts, and if needed sell assets. The aging senior, while still competent, must have appointed someone the authority to make decisions on his or her behalf. The best way to plan in this manner is through a durable power of attorney. If the durable power of attorney document meets certain requirements, it will continue in effect when the person who implemented the document becomes legally incapacitated.

Additionally, aging seniors may wish to have control over their medical decisions, even if they are not able to make them on their own behalf. Advance directives, living wills, or medical powers of attorney are necessary for two reasons. First, these documents give power and direction to the loved one making the medical decisions on behalf of the older adult. Second, they can help decrease the level of stress in an already stressful time by allowing the deciding family member to point to a document and say, “Mom wanted this done.” The potential for altercations among disagreeing family members can be drastically reduced.

Creating both property and healthcare powers of attorney can also reduce the strain, cost, and time for making decisions in these matters by eliminating the need for a court to step in and decide who will make the decisions and under what terms. In situations where a family member needs long-term care or is critically ill and the family goes to the court to make the decision, everyone has already lost. There is no victory in these situations; it is best to plan now, to avoid adding to the stress experienced by family members.

Conclusion

With proper preparation, your clients can decide when and where they will live, what quality of care they will receive, and what their lives will be like in the event of a need for extended care. If they have planned properly for retirement and have assets, the government is unlikely to provide long-term care assistance unless their assets are depleted. Help your clients take matters into their own hands. Prepare them for the hard conversations with their families, and enable them to set aside resources that can be used to protect themselves and their family members when the need arises.

Wes Hentges

Wes Hentges (wes@propartnerswealth.com) is the principal of ProPartners Wealth, a fee-based financial planning firm located in the Columbia, Missouri, area. He focuses on business succession, retirement planning, and estate planning for family-owned businesses. He is also a partner in AgriLegacy, which helps agribusiness owners plan for succession; an investment adviser representative with Eagle Strategies LLC; a registered investment adviser offering securities through NYLIFE Securities; and a member agent of The Nautilus Group, which assists with estate and business planning. Finally, he is the creator and host of AgriLegacy on KMOS-TV, a local PBS affiliate. The program is dedicated to the topic of “keeping the family farm in the farm family.”