The results of failing to have a conversation with your clients about long term care - PowerPoint Presentation

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The results of failing to have a conversation with your clients about long term care

Unconsidered Consequences

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Agenda

The numbersThe numbers aren’t important – the consequences arePaying for Long Term Care (LTC)What type of client are we dealing with?

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Provided content is for overview and informational purposes only and is not intended as tax, legal, fiduciary, or investment advice.

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The numbers1

By 2025: 253 seniors for every 100 middle-agedThose over age 50 control 75% of the wealth and 50% of discretionary incomeThere is a 70% probability for those over 66 that they will need long term care40% needing LTC are between 18 & 64

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Costs of care2

$92,300 per year ($256 per day) national average for private room$816 per day in AK to $169 per day in LA70% of singles entering a nursing home are impoverished within 1 year50% of couples impoverished within 1 year of spouse entering nursing home

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The numbers aren’t important

How the consequences of needing long term care are perceived is what drives clients to have a discussion about long term care coverage – or not have a discussion about it.

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How men and women perceive risk

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Sexes perceive risk differently3

Men separate risk from consequenceIt won’t happen to them. Hence, no risk, no consequenceWomen integrate risk and consequenceThe risk is the consequence – for themselves, their spouses and their families

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Thinking differently about LTC

The discussion is not about a series of risks that one faces with age, but ratherA discussion about the ability to fulfill financial commitments if care is needed – to oneself, spouse and familyConscience trumps beliefCreating a plan to protect loved ones

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Appreciating consequence is more important than understanding risk

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Paying for LTC

Government benefitsSelf fundingLTC insurance

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Medicare

3 night hospital stay within 30 days of entering nursing homeNursing home entered for same reason has hospital stayCare must be skilledCare must be rehabilitative with ascertainable goalsLimited to 100 days of coverage (new period if 60 days without hospital or skilled care)

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Medicaid

Income and asset tests ($2,000 assets for single)For spouses: the assets of both, the income of applicant only (certain assets not countable)Spousal impoverishment and spend downHalf up to $126,420 ($252,840) in 20195 year (60 month) look back on assets transferred for less than fair market valueThe requirement of a Medicaid facilityState liens to recoup benefits paid

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Veterans Administration Benefits

Service criteriaService must have been within a “window” of time (90 days active with at least one day during wartime)Financial criteriaNew rules on asset transfers, net worth and deductible expenses as of October 18, 2018Types of care provided

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Self funding

Assets do not pay for care – income doesThe liquidation of assets to pay for care can begin a cycle of increased taxation, exposure to market volatility and loss of ability to spend on discretionary itemsMost will say valued discretionary activities are really nondiscretionary spending

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Implications of self funding

Liquidity is the asset really liquid?Is the market down?Mutual funds, stocks and other securities can experience the double hit of loss in worth simultaneous with increased taxationThe loss of principal means reduced income from that principal

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Sequence of Returns Risk

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Accumulation rates of return with $1,000,000 beginning account value*

Chart 1Rate of ReturnAccount ValueChart 2Rate of ReturnAccount ValueYear 110.0%$1,100,000Year 10.0%$1,000,00028.0%$1,188,000212.0%$1,120,00032.1%$1,212,94834%$1,164,8004-5.0%$1,152,30148.0%$1,257,984520.0%$1,382,761515.0%$1,446,682615.0%$1,590,175620.0%$1,736,01878.0%$1,717,3897-5.0%$1,649,21784.0%$1,786,08482.1%$1,683,851912.0%$2,000,41498.0%$1,818,559100.0%$2,000,4141010.0%$2,000,414

*This is for illustration purposes only, and is not to be construed as indicative of any actual investment

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Sequence of Returns Risk

Chart 1Rate of ReturnAccount ValueChart 2Rate of ReturnAccount ValueYear 110%$990,000Year 10%$900,00025%$934,5002-12%$704,0003-4%$801,1203-15%$513,40048%$757,21043%$425,802515%$755,79158%$351,86668%$708,254615%$289,64673%$626,50278%$204,8188-15%$447,5278-4%$100,6259-12%$305,82395%$ 656100%$205,8231010%$(109,278)

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Decumulation rates of return with $1,000,000 beginning account value*$100,000 annual distribution

*This is for illustration purposes only, and is not to be construed as indicative of any actual investment.

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Implications (continued)

For retirees there are only four tax neutral investment withdrawal activities:HSA withdrawal for qualifying medical expensesLTCI payment for qualifying long term care expensesQualified Roth IRA distributionsCash value life insurance surrenders switching to loans at basis

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Implications (continued)

Everything else affects the tax returnOrdinary income taxCapital gains or qualified dividendProvisional income for Social Security3.8 retirement income surchargeAlternative Minimum Tax (AMT)Medicare part B and D surchargesPEP and Pease (suspended with TCJA)

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Implications (continued)

LegacyAre the clients being forced to sell assets desired for inter generational wealth transfer?Business, farm or home, special real estate?PhilanthropyAre the clients being forced to liquidate assets they desired to leave to charity?

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Long Term Care Insurance

Health-basedA lot like health insurance. The insured pays monthly premiums, and when LTC expenses are incurred, the insurance starts paying. Health-based long term care insurance (LTCI) has no cash value. If the insured never requires LTC, no LTC benefits are paid, and there is no benefit for the insured’s heirs.

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LTCI (continued)

Asset-basedLinks LTC benefits with either life insurance or a deferred annuity. When LTC expenses are incurred, LTC benefits are paid. If LTC is not needed or if the policyholder dies, assets are transferred to the insured’s heirs.

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Health-based LTCI issues

Claims experience and the cost of claimsMisjudging policy retentionA poor investment environmentPremium increases and the use-it-or-lose-it concern

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Asset-based LTC coverage

General methodology (life insurance based)Basically a prepayment of death benefit on a permanent life policy for qualifying LTC claimsEach payment of LTC benefits correspondingly reduces the policy death benefitPayment of qualifying LTC expenses is received income tax freePayment of death benefit is income tax free

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Asset-based LTC coverage (cont.)

If there are no LTC claims the insured’s beneficiaries receive the policy death benefit, and receive it income tax freeAsset-based coverage pairs the relatively stable assumptions used in life insurance (150 years of study) with the harder to judge assumptions of LTC risk

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Continuation of Benefits (COB)

Additional premium, underwritten, up to lifetime coverageThe concept of large deductibleThe outlying claimEssentially using the insured’s money first

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COB (continued)

In essence, asset-based LTC policies with COB coverage combine the stable pricing and tax efficiency of the base policies with the concept of a large deductible to provide up to lifetime coverage for claims in the most efficient and risk minimizing manner currently available. This is, additionally, accomplished without the “use it or lose it” quandary present with health-based LTC coverage.

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Annuity asset-based products

Similar to life-based products in that there is a spend down for qualifying LTC claimsLTC payments are tax free and deemed to first come from policy basisNon-medical underwriting – carrier primarily concerned that applicant is not already on claim

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Type of Policy ToLife InsuranceEndowmentAnnuityLong Term CareLife InsuranceYesYesYesYesEndowmentNoYesYesYesAnnuityNoNoYesYesLong Term CareNoNoNoYes

IRC Section 1035 Exchanges

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LTCI premium deductibility

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Age of InsuredAnnual Premium Deduction Limit (2019)Under 41$420Age 41 – 50$790Age 51 – 60$1,580Age 61 – 70$4,220Age 71 and older$5,270

- Illusory for individuals because of 10% AGI floor- Base policy considerations- LTC rider (like health-based coverage)

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IRC 7702B versus 101(g)

LTC vs. terminal illness and chronic careLTC license required for LTCLTC continuing education requirementsLTC consumer protections (consumer guide)LTC benefit is known at issue (no discounting)COB is available only with LTC

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LTCI as an executive benefit

LTCI premium is deductible medical expense under IRC section 213(d)IRC section 105 permits employer deduction for a “plan” (reasonable class)Not included by non-owning employeesOwners of pass-through entities:Available but limited to age-related tableC corporation is unlimited

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What type of client are you advising?

Medicaid planning versus legacy planningWhat is most efficient for this clientThe best plan begins before the risk event occurs

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Endnotes

1. Carol Einhorn and Steve Leimberg: Long-Term Care 2017” , Leimberg Information Services, Inc., Elder Care Law Planning Newsletter Archive Message #19, 14 February 2017.2. Id.3. For a discussion of how the sexes perceive risk differently and how they are sold to differently see: Harley Gordon, The Conversation, Acanthus Publishing, 2016, pages 47-60.4. Internal Revenue Code section 213(d)(10).

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Eubie BlakePresentation by: David A. Gresham, JD, CLU, ChFCAdvanced Markets Analysis ManagerIndividual Life and Financial ServicesOneAmerica®OneAmerican SquareIndianapolis, IN 46206david.gresham@oneamerica.com

“If I’da known I was going to live so long, I’da taken better care of myself.”

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