Long-Term Care Planning

What Is Asset-Based Long-Term Care?

Extended care can be an emotionally charged topic. After all, no one wants to think about themselves or their loved ones being incapable of living on their own. But if you want to make a smart financial decision and protect your nest egg, long-term care coverage is a must. The average cost of in-home care in Florida is about $6,000 per month. For a private room in a care facility, that cost quickly exceeds $9,000 per month.

Asset-based long-term care (LTC) is an innovative insurance strategy that provides coverage specifically for extended care expenses. Services covered are in-home health care, assisted living facilities, adult day care services, nursing home, and hospice.

It’s “asset-based” because you’re able to increase and leverage the value of an existing asset as a means of paying for necessary care. It allows you to protect your estate (tax-free) from significant decline due to the rising costs of long-term care.

The beauty of an asset-based LTC policy is that, if you don’t need long-term care, the policy retains a cash value and death benefit. And many people who might not qualify for traditional long-term care insurance due to preexisting health conditions may still be able to obtain coverage.

LTC Coverage And Death Benefit

If an asset-based LTC plan benefit is triggered, funds from the policy are applied toward your long-term care expenses. This allows you to receive care in your home, or in a facility of your choosing. You are in control of your care.

So, you have a lot more money for long-term care expenses than if you just surrendered an existing market account or annuity and earmarked the cash for extended care costs. Having a good asset-based LTC policy in place will provide a tax-free benefit to provide the care you desire.

How Do Asset-Based Long-Term Care Plans Work?

Asset-based LTC care plans function similarly to traditional LTC insurance policies, whole life insurance, or annuity product with a LTC rider. The main difference is that most asset-based products do not require an annual premium and maintain cash value and death benefit. After applying for the coverage and going through underwriting, you make a single premium payment to the insurer.

Lump Sum

In many cases, the premium is paid via a single, up-front, lump-sum payment. The funds can come from moving other investments or through a tax-free 1035 exchange that converts an existing whole-life policy or annuity into an asset-based LTC policy.

IRA or 401K

A popular approach is to fund an asset-based LTC plan using cash from an IRA or 401k. The transfer of funds into the LTC policy will not be taxed, but when the benefit is triggered (if used), the income will be taxable.

Fixed Premium

If more than a single premium is involved, future premium payment amounts are guaranteed to stay the same for the life of the plan. This is often described as a “cost of benefits” rider. Likewise, the long-term care benefits are guaranteed for life. And, as with a regular whole-life policy or an annuity, the policy’s value earns guaranteed growth. So, if the long-term care benefits are never tapped, the money is not just sitting there doing nothing – it’s earning interest that your beneficiary receives on the back end.

Surrender

Most asset-based LTC policies allow for a full premium refund should you choose to surrender the plan. That is, if you decide after a few years that you don’t want a LTC plan anymore, you can get back all (or most) of the money you put into it. The cash value and surrender charges are illustrated and guaranteed when you purchase the product.

Benefit triggering events can vary by policy but benefits commonly kick in if the insured needs assistance with two or more activities of daily living (e.g., eating, dressing, bathing, toileting, transferring, and continence).

Some, but not all, policies have a waiting period (elimination period) of around thirty to ninety days from the time a healthcare provider verifies eligibility until benefit payments commence. Once triggered, benefits can be paid to the long-term care provider directly, as reimbursements for bills and receipts, or in the form of a check to the insured – depending on the policy type.

However paid, benefits are typically subject to a predefined monthly benefit cap. Some policies only pay expenses from licensed healthcare providers, while some permit expenses for care provided by an unlicensed family member. So, if an adult son or daughter takes time off work to provide assistance, the policy can help make up the difference in missed pay.

Income Tax Free

As long as the benefit is used for long-term care expenses, asset-based LTC plan distributions are not subject to income tax (unless the policy was originally funded by pre-tax dollars). The Pension Protection Act of 2006, which provides for tax-free distributions from annuities or life insurance policies when applied to long-term care expenses, has played a large role in the recent surge in popularity of asset-based LTC plans

Riders

Various customizations and riders are available to tailor asset-based LTC plans to a policyholder’s specific needs, including “joint” plans that cover couples within a single policy. The joint policy will cover both parties at the same time if needed.

Extension of coverage riders (or continuation of benefit riders), which provide coverage for an additional period after initial benefits run out, are among the most common riders.

These extensions (riders) will often require an annual premium. The annual premiums used for LTC insurance can be funded from an health savings account. If you do not have an HAS, the annual premium is often tax deductible.

Underwriting

Most products that include asset-based LTC care require premiums and underwriting similar to standard insurance policies. And, like any life insurance policy, younger, healthier insureds are generally eligible for lower premiums (or greater coverage for the same premium).

The great thing about asset-based products is that there are solutions up to age 85! There are also LTC products available in situations where there have been significant health issues. We can help you asses your health and the options that will be available to you.

An Example

As an example, let’s say an insured (we’ll call him “Randy”) is fifty years old, in good health, and has an existing whole life policy or annuity with a cash value of $100,000. Randy decides that he needs long-term care coverage, but instead of purchasing a traditional long-term care insurance policy, he opts to convert his existing policy into an asset-based LTC policy through a 1035 exchange, resulting in no tax liability on the policy growth. Randy’s new policy comes with a $300,000 death benefit and a guaranteed growth rate of 1.5%. If Randy ends up needing long-term care, he can tap the policy benefit value, including the growth, as tax-free monthly benefit payments. The long-term care distributions will be tax-free under the Pension Protection Act.

Any remainder will be paid to his designated beneficiary upon his death. If he doesn’t need long-term care at all, the beneficiary will receive the entire death benefit. Either way, the death benefit will not be taxable income to the beneficiary.

Asset-Based Long-Term Care With An Annuity

With the introduction of the Pension Protection Act, asset-based LTC plans far exceed the performance of previous insurance policies. Many older LTC insurance policies are experiencing skyrocketing premiums that are causing clients to reduce the coverage to afford the premium. Unfortunately, this is happening as they are getting closer to needing the policy.

Deferred Annuity

An asset-based LTC annuity is a deferred annuity, which means that it doesn’t start paying out right away. Instead, after you make a lump-sum payment to the insurance company to purchase the annuity, it stays in the “accumulation phase” (the period during which an annuity earns interest before paying out) until either the long-term care benefits are triggered or you opt for annuitization. This is where you experience the full benefit of “safe” money. You will continue to see growth without market exposure/risk. Because some of the growth is designated for the insurance portion of the policy, the growth rate is usually a little less than what you would otherwise expect from a deferred annuity.

If triggered, the annuity pays out each month for long-term care, up to an overall coverage maximum, usually around 200 – 400% of the starting value of the annuity itself, depending on factors such as age, health, and monthly caps.

Cash Out or Annuitization

If you end up deciding you don’t need long-term care coverage and any minimum deferral period has concluded, you can either cash out the annuity for its current value or elect annuitization and receive regular payments from the insurance company, as with a lifetime annuity.

If you keep the coverage but don’t use it, your heirs will be able to inherit the annuity’s accrued value. Individual assetbased LTC annuities vary considerably from company to company and product to product. Some make regular payments upon maturity, like a standard lifetime annuity, and increase the size of the payments if long-term care benefits are triggered. Others cover long-term care only while annuitization is deferred. Annuities also vary in the extent to which the remainder can be inherited if benefits are triggered but not exhausted.

Commonly, survivors can inherit any of the annuity’s cash value remaining after deducting long-term care payments. By way of example, say Sharon uses $100,000 in retirement funds to purchase an asset-based LTC deferred annuity with a $300,000 coverage cap. The $100,000 principal grows at 2.0% for ten years until benefits are triggered. Then, the annuity pays out $4,000 per month for long-term care expenses. After a year, Sharon passes away. Because the total long-term care benefits did not reach the annuity’s cash value, Sharon’s heirs can inherit the remaining cash value, including growth.

On the other hand, had Sharon received long-term care for five years, the annuity would have paid out $240,000 for long-term care – considerably exceeding the cash value but still within the coverage cap. In the latter scenario, Sharon’s heirs would not inherit the annuity because no cash value remained.

Long-Term Care Common Misconceptions

How Can We Help?

We would love to sit down with you and discuss your goals in ensuring you have a plan in place should you need extended care. Our first question is, “If you needed care tomorrow, where do you want to receive your care?” Most people answer without hesitation, “in my home.” That is totally understandable, so now we need a plan.

The second question is, “what asset will you liquidate first to pay for that care?” This is where the conversation gets interesting. What seems to be the simple answer isn’t always the best solution. You have tax exposure, access to funds, the possibility of loss in a down market, etc. This is where we come in!

Our mission is to provide you with a solution that brings peace of mind and security of knowing care will be available when needed. We will help you find the most tax-efficient, cost-effective way to get the care you desire. There is no concern about spending down your estate or having to rely on family to provide your care.

Let’s talk!