I just learned that the state of Minnesota will be mailing out over 1 million letters from Governor Dayton to raise awareness and encourage individuals to plan for future long-term care needs. Over the last few weeks, I have written several times about the importance of long-term care planning, and helping families make sure that they avoid some of the mistakes that even financial gurus like Suzie Orman have made by failing to properly prepare for long-term care. In response to recent inquiries from these articles, I’m going to outline three different plan options for how families can protect themselves in case long-term care is ever needed.
- Indemnity-Based Plans
- Asset-Based Plans
- Annuity Income Riders with Chronic Illness Multipliers
While traditional long-term care is often the most common planning option we see with families when they visit Secured Retirement Advisors, many families are choosing other options.
Option One: Indemnity-Based Plans
Most traditional long-term care policies fall under what the insurance industry calls indemnity plans. Indemnity plans are the most used kind of insurance when trying to protect clients from large risks, and the risk of long-term care is no different.
For example, most homeowners have indemnity policies on their homes. Which is to say that you pay a small premium in comparison to the value of the property being insured and should your house ever burn down, the insurance company will have to cover far more than the total of your previous paid premiums in order to have your home rebuilt. Only by selling into a large enough “pool” of homeowners can the insurance company continue to cover the finances required to provide adequate protection to the consumers. Long-term care insurance or traditional long-term care insurance works the same way. You make a relatively small premium payment relative to the risks associated with needing long-term care.
One of the concerns cited by the families we meet with is that premiums can, and likely will, increase over time for those choosing traditional long-term care policies. In just the past year, premiums have risen by as much as 17% according to the American Association for Long-Term Care. These rate increases often don’t occur until many years after the policy was originally taken out, and seem to hit a client just before the need for long-term care is most likely.
Another concern many families express with traditional long-term care policies, is that if you never use the insurance, you lose it. If you think about it, your homeowners insurance is the same way. Many of us have lived in our homes for 30 years, and we never had to file any claims. With traditional long-term care, if you make your premium payments and never use it, the premiums are not returned, but this keeps the cost down compared to other options for long-term care that are available.
Option Two: Asset-Based Plans
Families that choose to self-insure or can afford larger premiums in which the funds will ultimately return to their families, should be looking at asset-based long-term-care protection. Most often asset based plans will combine life insurance products with long-term care protection. These hybrid life insurance policies allow a consumer to accelerate the payment of their death benefit prior to death to cover cost of long-term care expenses.
For example, a family would purchase $500,000 worth of life insurance. They will continue to make the premium payments as outlined by the agreement with the insurance company, but should they ever fail two of the six activities for daily living, the insurance company agrees to allow them access to that death benefit early. Because of the way these plans are structured, that death benefit is paid out tax-free and generally will last for coverage for anywhere from three to six years.
One advantage of using an asset-based approach is that if long-term care is never needed, there are additional benefits, including a death benefit which will pass on to the beneficiaries. Keep in mind that because you're purchasing both life insurance and some long-term care coverage here, you may actually pay higher premiums than you would just using a traditional indemnity-based long-term-care policy discussed earlier. However, for many of the families we service, this option also can address other retirement planning issues in addition to LTC protection such as access to funds for long-term care if needed, additional legacy assets and liquidity upon death.
Option Three: Annuity Income Riders with Chronic Illness Multipliers
The third option that we often will discuss with families is the annuity products out there with long-term care accelerated payment options. For the most part, these do not work as tax-efficiently as the more traditional asset-based life insurance and long-term care coverage or indemnity-based traditional long-term care insurance policies. They are, however, a good option for families that may have fewer assets to devote to long-term care protection or who find themselves in poor health and can no longer qualify for other planning options.
The way that these products typically work is that a family will purchase a deferred annuity product that can be either fixed, fixed indexed, or variable. With that, the insurance companies provide an optional GMIB (Guaranteed Minimum Income Benefit) rider. These riders guarantee a specific rate of return that must be taken as income payments. Typically we see that for a retiree this income generally pays between four percent and six percent of an accumulated income value depending on several variables. A few companies offer a chronic illness accelerator which is a provision that allow for the doubling of the withdrawal rate assuming certain provisions are met.
Be cautious when looking at these products because they often require skilled care and may not pay out as readily as many of the life insurance or traditional insurance products. Also, note that these are not total protection long-term care products, but they can certainly offer additional income to help cover long-term care expenses.
At Secured Retirement Advisors, we advocate that families need to plan for the best but prepare for the worst. Sadly, one thing that we often see that families have not prepared for as adequately as they should, is long-term care. To help you transition to retirement, we're hosting a special event on November 1 at the Doubletree in St. Louis Park. We're bringing in guest speakers to discuss a lot of different aspects that you may want to be aware of as you make this transition. This is open for all readers, but most appropriate for those within five years of retiring or recently retired.
To RSVP for this event, simply visit our website and click on the events section.
Our advisors work with our clients to not only maximize profit potential when the stock markets are doing well, but also protect them from potential financial risks like those inherent in long-term care, so that they can continue to spend with confidence in their retirement years. Feel free to visit us at www.securedretirements.com and help yourself to our educational materials. If you would like a complementary “3 Step Review” of your own retirement plan, call Secured Retirement Advisors at 952-460-3260.