Scott Roberts, CPA, CLU
Director of Estate Planning
According to LongTermCare.gov, 68% of all people in the United States will require some type of long-term care (LTC) after the age of 65. Decades ago, older and informed people would not survive long in a state where they required significant aid for their daily living. But medical advances have made is so that such people can now live years in relative comfort, even if they need help to do so. On top of that, health insurance costs, especially in the final years of life, continue to spiral upward out of control.
What is also increasing is the number of years the typical person will require long-term care, also the result of advances in medicine. Years ago, nursing home stays were often brief but the average stay now is 2.3 years and rising (Source: Centers for Disease Control and Prevention, Nursing Home Care FastStats). The result is a significantly negative financial contingency against which it is increasingly prudent to insure.
Of course, among those with significant assets and the ability to comfortably pay for LTC, many choose to self-insure this risk. When considering the fact that substantial LTC premiums could be paid with no claim and, thus, constituting a sunk cost, the self-insured route seems reasonable for the wealthy. And when you also consider the fact that insurance companies reserve the right to increase premiums or decrease benefits on most traditional LTC policies, the argument for self-insuring becomes even stronger.
However, ever the resourceful industry that it is, continually developing products to meet demand, several insurance companies have come out with policies tailored to address these concerns and can be an excellent fit for many wealthy clients. In essence, these policies allow the client to “self-insure” but still leverage the resources of the insurance company into benefits several times the premiums paid, often yielding double-digit IRRs.
Several companies, including Lincoln, Pacific Life and Nationwide, have developed these policies which essentially allow the client to “park” an amount of cash at the company and retain partial or full access to the funds (depending on the company/product) without surrender charges. If the funds are not taken back by the client for other uses, when there is a LTC claim in the future, benefits are paid on a reimbursement or indemnity basis, again depending on the product. Besides the potentially unfettered access to monies deposited in these products, a key feature is if there is never a claim then the client’s heirs receive the monies back plus a small death benefit. As such, it is possible to structure a plan where no money can be lost, whether there is a claim or not (assuming the company does not go out of business – a reason to always use highly-rated companies). In which case, the only “cost” of the coverage is the opportunity cost related to what could be earned elsewhere by the funds on deposit. But when you take into account the fact that most wealthy investors have a portion of their portfolio in liquid money market accounts earning well south of 1%, all that needs to be done is to incorporate the LTC deposit funds as a portion of the highly liquid segment of a diversified portfolio. By doing that, these types of LTC policies become a nearly cost-free hedge against potential future LTC expenses, potentially providing double-digit returns with little or no downside risk.
Each product has subtle but important differences, such as inflation adjustments, reimbursement vs. indemnity benefits, elimination periods, etc., which are beyond the scope of this article. In addition, this material is for general information only and is not intended to provide specific advice or recommendations for any individual. As such, to determine what is appropriate for you, please contact our office to discuss if one of these products may be a fit for you and, if so, which one.