For many a carefully developed income plan is like a car that receives regular tune ups in the hopes that you’ll have a smooth ride into retirement. But a serious illness can force your income vehicle up on the shoulder of a road and reinforce the benefits of long-term care policies, according to fee-only certified financial planners.
The first assumption to look at is whether you and your income plan need long term care insurance. The overwhelming answer from all interviewed was that unless you have significant wealth or have a low income, you do.
In fact, several planners drew on experiences in their own family to explain the value they place on long-term care insurance. Doug Kinsey, of Artifex Financial Group, Dayton, Ohio speaks of his father, an insurance broker who bought coverage but not enough. When his father had a stroke, a skilled care situation was need. The cost is between $8,000 and $9,000 a month, he says. At some point, patients in these situations will end up on Medicaid, he adds. “But what about the spouse?” Kinsey adds.
Curtis Smith, a planner with Interactive Capital Management, Sugar Land, Texas, says that long-term care insurance preserves net worth for the caregiver spouse so that in the future that spouse does not end up on Medicaid. Without insurance, “the caregiver is at risk,” with “children taking up the slack” or the caregiver eventually relying on Medicaid, he adds. Smith says that in the last eight years, he has seen it with both his parents and his wife’s parents. “Anyone who has cared for a parent (as a baby boomer) will tell you the same thing. Only those who have not experienced this are the hardest to convince.”
While there is general agreement about the need for long-term care protection, there are very divergent approaches to recommendations planners are making. Part of the reason is individual client circumstance and another factor is that there are just so many facets to long term care. “For this product, maybe you can’t be overinsured because there are so many unknown risks to be covered,” says Artifex’s Kinsey.
“Long term care insurance policies are among the most complicated insurance policies there are. They have many moving parts including the amount of coverage, co payments, inflation protection, elimination periods, and coverage for a variety of levels of care like home care, assisted living, and nursing home care,” according to Frank Boucher, a planner with Boucher Financial Planning Services, Reston, Va. And, he says, “beware of ‘cheap’ policies because they may exclude coverage on items that are important to you.”
Roger Wohlner, a planner with Asset Strategy Consultants, Arlington Heights, Ill., maintains that it is important to take a look at how much you can afford. “You can be insurance rich and cash poor,” he contends. But, he also notes that in his part of the country, annual costs for a nursing home can be $75,000 or more. Wohlner says that since the general life expectancy in a nursing home is approximately 3-5 years, he often suggests ‘share care’ of 5 years for both spouses.
A ‘shared benefit’ in which one can tap into a partner’s benefits is also mentioned by Jerry Miccolis, a planner with Brinton Eaton Wealth Advisors, Madison, N.J. Miccolis says that married couples may qualify a “partners discount” on the policies’ premiums.
In fact, according to Artifex Financial’s Kinsey, even if a couple buys separate policies, the discount for each policy can be as much as 30%.
Long-term care insurance is something you buy to protect against catastrophes when care extends beyond the typical 18 months, according to Barry Korb, a planner with Lighthouse Financial Planning, Potomac, Md. Korb says that to protect against catastrophic risk, one should buy at least 10 years of coverage between a couple if they can afford it.
He questions agents who sell an inadequate amount of insurance just to make a sale rather than no sale. For instance, he said that his sister-in-law was sold coverage of $160 a day with an inflation protection of 5% simple interest rather than 5% compounded interest, which saved $1,000 annually in premium but would make a difference in $90,000 annually if the policy needed to be used. Fortunately, he was able to get the policy changed because it was in an introductory phase of the contract, called a free-look period.
That is why Jerry Verseput, a financial planner with Veripax Financial Management, El Dorado Hills, Calif., recommends avoiding anyone who has the sole purpose of selling a LTC policy. Veresput also notes that insurance is just one way to prepare for long-term care needs.
Korb notes another risk for those who can afford LTC insurance and do not purchase it: the trap of refusing to pay for needed care and dying as was the case of one woman he knew.
A common error is buying a policy with the least expensive premiums, according to Rick Shapiro, a planner with Investment & Financial Counselors, West Hartford, Conn. The reasons, he explains is the risk of a significant increase in premiums as well as the long-term viability of insurers who are charging the cheapest premiums.
For those who are concerned about cost, potential purchasers of policies should also consider that the cost of normal expenses such as the need for a car and things like golf membership will go away when a spouse goes into a facility, according to Larry West, a financial planner with West Financial Consulting, Huntsville, Ala. And, LTC is a tax deduction on Schedule A of tax forms subject to 7.5% of adjusted gross income.
West says that if LTC policies protect the spouse who does not need assistance, once that individual dies, his firm generally recommends the remaining spouse drop coverage and if needed, apply for Medicaid coverage if the second spouse’s retirement is put in question. However, if the remaining spouse can afford the coverage, it should be continued because Medicaid is usually the lowest form of care.
Planner Frank Presson of Presson Financial Associates, Tucson, Az., says that if investments can cover part of the cost of long-term care, then a policy covering the full cost will not be needed. He also says that since medical expenses are rising faster than the Consumer Price Index, he urges an inflation rider of 5% compounded annual increase.
And, inflation on care costs will be higher than average inflation, because as baby boomers enter care, there will not be enough facilities to hold them all, cautions Lauren Lindsay, a financial planner with Personal Financial Advisors, Covington, La.
This article first appeared on FiLife.com.
Friday, August 28, 2009
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