Key Takeaways
As you get into your mid-50s, life insurance becomes less crucial, but you should start planning for other financial risks later in life.
Seven out of every ten people will require long-term care (LTC) at some point in their lives—and it can be very expensive.
We recommend a three-prong approach to LTC consisting of a care manager, an attorney, and a financial advisor.
As many of you know, the cost of LTC services can be jaw-dropping. The cost of LTC has increased faster than the rate of inflation since 2004, according to a recent report.
Many clients start asking us about LTC options for themselves when they start helping their parents decide whether to age in place or move to a community with a higher level of care. It’s not an easy decision for many families. I frequently hear our clients tell me: “I want to start planning for this. I see what my parents are going through and don’t want to put that burden on my kids.” We typically raise the issue of LTC with our clients when they get into their mid-50s. That’s the typical inflection point when life insurance becomes less crucial and you begin looking at other potential financial risks later in life. According to Genworth data, seven out of every 10 people will require LTC at some point in their lives. So, it pays to plan in advance.
First Steps
At Novi, we know it can be daunting to plan for a major expense years down the road – an expense you may or may not face. That’s why we take a three-pronged approach to develop a long-term care plan. The three prongs consist of a care plan (or care manager), an attorney who is an expert in elder law, and us as wealth managers.
1. Care managers can help you determine whether you’re better off with in-home care or moving to a continuing care retirement community (CCRC). And if so, which type of in-home care or CCRC in your area is best aligned with your values and lifestyle? Care managers are also very helpful for far-flung families in which the adult children live far away from elderly parents. Care managers can monitor the loved one’s well-being on a regular basis and act as advocates if the family needs someone local to support them and help coordinate care. 2. Estate attorneys handle asset protection and make sure all the documents are in place to clarify who can make decisions on your behalf if the need for care arises.
3. The financial advisor or wealth manager can coordinate with the care manager and estate attorney to ensure your family has sufficient funds to pay for the type of care needed. Your advisor can also determine the best strategy for where the money comes from to pay bills in the most tax-advantageous manner possible.
Is LTC insurance right for me and my family?
LTC insurance is all about protecting the value of your savings, so you don’t blow through all of your assets paying for assisted living or other types of elder care -- and leave your spouse destitute. The other reason we recommend LTC is to protect the value of your assets, so you can pass them down to future generations.
Unfortunately, there’s no simple way to determine whether LTC insurance is needed. Insurance is a type of risk management. The first step is determining whether you have enough to self-insure or if you need to purchase insurance to help manage the risk of facing hefty eldercare expenses.
Everyone’s situation is unique. At Novi, we’ve found the ideal candidates for LTC insurance are clients who have sufficient wealth to afford the premiums, but they’re not so wealthy that they’re better off self-insuring. Again, you don’t need a policy to cover 100% of your projected LTC expenses because you still have your savings, Social Security, and retirement income from other sources. LTC insurance is there to fill the gap.
You always want to get an LTC policy that has some form of inflation protection. The reason why we start broaching the LTC conversation with clients in their 50s is because in your 50s, you’re typically in your peak earning years and you can afford the premiums. You are also giving yourself several decades for inflation protection to accumulate.
Traditional vs Hybrid? There are two main types of LTC: traditional and hybrid: 1. Traditional LTC insurance is less expensive on an annual basis, but it is a use it or lose it policy. If you don’t make any claims at the end of the term. Also, there’s no cash value remaining when you pass. Another downside: If the insurance company increases the premiums, you must pay the higher amount to keep the policy in force. Otherwise, you have to make some hard choices about reducing the policy benefits or letting the policy lapse.
2. Hybrid is a combination of life insurance with an LTC rider on the policy. One benefit of the hybrid policy is that you know exactly how much it will cost. Typically, hybrid policies are structured as one-time lump sum payments or even payments over ten years.
Real-world example A 55-year-old client came to us with a whole life insurance policy she bought before she started working with us. The policy had accrued about $200,000 in cash value, but she no longer needed life insurance since her children were grown, the mortgage was mostly paid off and she had been able to accumulate substantial assets. Our client could keep paying the high premiums for the whole life policy or she could cash it out. But by cashing out, she’d have to pay income tax on the gains. Or she could do a tax-free exchange to a hybrid life insurance policy with a long-term care rider. This way, she would pick up the LTC benefit and still retain some life insurance. Even if she never needed the LTC during her lifetime, when she passes away there would still be a tax-free life insurance payout for her spouse.
Your goals, lifestyle, retirement income, and family structure are all contributing factors when determining if insurance makes sense. If LTC insurance does make sense for you, we can discuss the timing of purchase and types of products (hybrid vs traditional) as well as different ways to pay for it. As a reminder, Novi is a Fiduciary. We do not sell insurance. We make sure our client's get what is needed for their personal situation, guidance you simply trust.
As part of this process, we can also help you start to think about non-financial questions such as who will change your lightbulbs and whom are you going to eat ice cream with? We ask the right questions to get you thinking about what is important to you and how you want to be cared for later in life.
Conclusion
If you or someone close to you has questions about longevity planning or long-term care insurance, please don’t hesitate to reach out. We are happy to help.
RYAN M. VOGEL, CFP® is the CHIEF PLANNING OFFICER, PARTNER at Novi Wealth