Extended Care


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Don’t Jeopardize Your Financial Independence


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Long-term care refers to a wide range of medical and non-medical services – including custodial help with daily activities, nursing care and skilled nursing services – for people who are physically or mentally unable to care for themselves. Home health care, adult day care, respite care, assisted living and nursing home care all fall into the category of long-term care.

I don’t think a lot of individuals think enough about that uncertainty. In fact, when I talk to older individuals, they see it happening around them, but they say, “Well, that won’t happen to me.” So, there is sort of a head-in-the-sand, ostrich [mentality] to saying, “Well, I won’t have to deal with that.  Even though the longer you live, the more likely some degree of expenditure will be needed to support a frailer existence.

Many Americans assume that Medicare will cover these costs. However, coverage is limited and may still require large out-of-pocket expenses. Also, Medicare pays for skilled nursing facility care only after a discharge from a three-day hospitalization. It does not pay for custodial or intermediate care, and the majority of care provided in nursing homes is custodial, which includes assistance with dressing, eating and moving around.

After an individual has exhausted all of their assets, they may qualify for coverage under Medicaid. However, with Medicaid, an individual and their family members lose choice over the care received.

“A long-term care insurance policy can save you from having to deplete your assets to provide for care. “In some sense it’s lifestyle preservation to ensure you have a choice in your care. At the same time, it’s asset preservation – allowing you to pass something to your heirs.”

But the interesting thing to me–and I call it the second half of retirement problem–is the question of thinking about the period of frailty, generally post age 80, sometimes post age 85, sometimes post age 75, where you’re actually alive and well but need additional support in the form of long-term care–and that includes home nursing care (incidental or around the clock), assisted living, or true long-term nursing care.

And those liabilities sort of come on you suddenly. It’s not like you sit down and think, “In five years, I’ll the long-term care.” It could be the next day; it could be 10 years. And they require suddenly large drawdowns from your portfolio.

Until recently, consumers had few choices when it came to long term care insurance. Traditional policies, which provided a certain amount of selected coverage, were the norm. Policies could be designed to cover care expenses for a few months, or much longer, even providing benefits for the insured’s lifetime.

For example, consumers could purchase coverage that would provide $100 a day in benefits for a period of three years. When calculated, the $100 daily benefit multiplied by 365 days in a year for 3 years would create a $109,500 “pool of money” available for care.

This pool of money would pay for care in a nursing home, assisted living facility, adult day care, or in the personal residence of the policyholder once certain criteria had been met.

When the pool of money was depleted, the traditional policy would provide no more benefits. However, if the policy was never used, the owner would lose the investment of his or her premium payments. Thus, some seniors opted not to purchase these policies, deciding instead to rely on their families or current savings in the event that care became necessary.

With the cost of health care rising rapidly, and a single day in a nursing home costing $175 or more in major cities, self insuring is a risky proposition. Relying on family is an alternative, but not necessarily a viable one. Unfortunately, most families do not have the time, resources or ability to provide around the clock care to a loved one.

The average cost for a private room in a nursing home is more than $87,000 per year, according to the 2014 Cost of Care Survey produced by Genworth, a financial-services company.

And the average cost of an assisted living facility, which provides a level of care that is not as extensive as that offered by a nursing home, is $42,000 per year, according to the same Genworth study. All long-term care costs have risen steadily over the past several years, with no indication that they will level off.

Many people, when they think about long-term care at all, believe that Medicare will pay these costs — but that’s just not the case. Typically, Medicare only covers a small percentage of long-term care expenses, which means you will have to take responsibility.

Of course, if you are fortunate, you may go through life without ever needing to enter a nursing home or an assisted living facility, or even needing help from a home health-care aide. But given the costs involved, can you afford to jeopardize your financial independence — or, even worse, impose a potential burden on your grown children?

To prevent these events, you will need to create a strategy to pay for long-term care expenses — even if you never incur them. Basically, you have two options: You could self-insure or you could “transfer the risk” to an insurer.

In response to customer demands, insurance companies have designed what can be best described as hybrid or linked policies. These policies combine the benefits of an annuity or life insurance agreement with a traditional long term care contract. With hybrid policies, the consumer has the guarantee of long term care benefits or, if no care is needed, the promise of insurance benefits to themselves and their beneficiaries.

The Long Term Care Annuity –The newest addition to the hybrid marketplace is the long term care annuity. This product also functions exactly like a fixed annuity, but has a long term care multiplier built into the policy.

There is no premium rider attached to this medically underwritten annuity policy. Instead, a portion of the internal return in the contract is used to pay for the long term care benefit. Long term care coverage is calculated based on the amount of coverage selected when the policy is purchased.

The insurance company offers a payout of 200% or 300% of the aggregate policy value over two or three years after the annuity account value is depleted. For example, a policyholder with a $100,000 annuity who had selected and aggregate benefit limit of 300% and a two year benefit factor would have an additional $200,000 available for long term care expenses after the initial $100,000 policy value was depleted.

The policy owner would spend down the $100,000 annuity value over a two year period and then receive the additional $200,000 over a four year period or longer. In this example the contract pays $50,000 a year for a minimum of six years, but care will last longer if less benefit is needed. Again, if long term care is never needed the annuity value would be paid out lump sum to any named beneficiary.

These innovative products can meet consumer demands and provide more guarantees by combining traditional long term care insurance with the advantages of life insurance or annuity policies. Thus, consumers who utilize hybrid policies can avoid self-insuring against catastrophic long term care related expenses and have the peace of mind associated with a comprehensive plan.

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Monday, November 17th, 2014 Wealth Preservation Comments Off on Don’t Jeopardize Your Financial Independence

Combination Annuity and Long Term Care

It’s common knowledge that our population is getting older and is quickly shifting from portfolio growth goals to guaranteed income and lifestyle type goals. There is an old saying that when a person is thirsty, they drink.  Regardless of current interest rates, people will always need guaranteed income streams that they can never outlive.

There are few things in life that let you do a do-over. Retirement is not one of them. Many people are still looking over their shoulder in fear of another market drop. Those market loss scars are permanent with most American’s, and the trade-off of contractual guarantees in lieu of upside opportunity seems to be winning over investors to the fixed-annuity story.

Saving for retirement is tough, but perhaps the biggest financial challenge comes once you stop working. After all, those years leading up to retirement leave you a certain margin for error — if your retirement savings start falling behind, you have options such as increasing your retirement savings rates over the next few years or even working a while longer than originally planned. Once you walk away from the workplace though, your savings are somewhat locked in — now you have to make them last.

It is a sobering thought as millions and millions of baby boomers are beginning their retirement. On top of that they are living longer than previous generations. It is only inevitable that the elderly will need more medical care than ever before. Yet, most will not have enough money to cover the costs that will accrue.

It is important for seniors to have a long-term care plan. Many folks dread and avoid discussing this planning. They know about seven out of 10 folks that reach age 65 will require some form of long-term care during their lives. They hope it is not them.

Some folks believe Medicare will take care of this problem. Unfortunately, Medicare only pays for medically-necessary care and only after the senior has spent at least three days in the hospital as an “admitted” patient. Even then, Medicare will only pay in full for the first 20 days of long-term care. The senior must pay a co-payment for the next 80 days. In 2013, that co-payment was $148 per day. After 100 days the Medicare coverage stops. Then the senior is responsible for all expenses.

It gets worse. Sometimes the hospital shows the senior as an “observation” patient instead of “admitted” patient. If the senior is considered an “observation” patient, Medicare will not pay anything for long-term care.

The common fear of wasting premiums on a traditional long-term care policy can be overcome with a combination/partnership “rider” on the life insurance or annuity policy.

As you can imagine, the federal government is worried about the burgeoning cost of long-term care and its impact on the federal budget.  Two major laws, the Deficit Reduction Act of 2006 (DRA) and the Pension Protection Act of 2006 (PPA), reflect Congress’ goals to discourage people to seek Medicaid benefits but also, to reward those who finance their own long-term care.  This is a classic “carrot and stick” story.

To discourage people from gifting assets in order to qualify for Medicaid sooner, the DRA changed the look-back period from 3 to 5 years.  Thus, all gifts made by a Medicaid applicant on or after February 8, 2006 are subject to a 5 year look-back period and will cause a period of ineligibility that only begins on the date of application.  As a result, those receiving the gifts will probably have to return the gifts before the Medicaid application is approved.  BEWARE!

One way to protect some of the assets you are growing now is to have a Qualified Long-Term Insurance policy in place. This policy can exempt your assets from being counted towards your Medical Assistance eligibility up to the value of the policy amount, as well as can provide you an opportunity to transfer assets out of your estate while getting  the care you need before needing to enroll for Medical Assistance benefits.

Congress wants to give incentives to people who buy long-term care insurance.  After all, it’s just too much of a drain on the federal government to pay everyone’s long-term care expenses.  The DRA and the PPA each contain important incentives.  FIRST:  the DRA authorized individual states, including Minnesota, to approve long-term care insurance “partnership” policies.  A person who collects benefits from a “partnership” policy can now qualify for Medicaid when that person reduces his or her available assets to the sum of $3.000 PLUS the amount of benefits collected from the policy.  This is BIG!

The PPA contains an important tax provision that took effect January 1, 2010.  This new tax provision allows a person who owns a non-qualified annuity to make a tax-free exchange of the annuity for (1) an approved long-term care insurance policy or (2) a new “combination” annuity which is a fixed with a long-term care rider.  Again, an example will illustrate the importance to you of this new law.

Assume Helen, age 70, owns a fixed non-qualified annuity which lists her children as beneficiaries.  Helen originally paid $20,000 for the annuity, and it’s now worth $70,000.  If Helen cashes in or takes withdrawals from the annuity, the first $50,000 of withdrawals will be taxed as ordinary income.  However, in light of the PPA, Helen can now make a tax-free exchange of the old annuity for a new COMBINATION annuity.

One type of combination annuity would provide Helen with long-term care benefits equal to THREE TIMES the value of the annuity, or $210,000, TAX-FREE!  (However, Helen must wait two years after the tax-free exchange before she can access the long-term care benefit.)  If Helen needs care after two years, the $210,000 of tax-free benefits will be paid out to Helen in the form of a daily benefit of $96 per day for up to six years.  Helen will use this daily benefit, along with her social security and other fixed income, to pay for her long-term expenses.

EVEN BETTER:  If Helen never needs long-term care, upon her death her children will still get to inherit the FULL VALUE of the annuity.  If Helen uses some portion of the annuity for long-term care, Helen’s children will inherit an amount equal to the value of the annuity less the amount of long-term care benefits paid to Helen.  Thus, if Helen received long-term care benefits of $30,000, her children would still inherit $40,000 ($70,000-$30,000), all of which will be taxable income to the children.

Note:  that this tax-free exchange can only be made from a “non-qualified” annuity.  Qualified annuities (those that are held in an IRA, 401(k), 403(b), etc) do not qualify for this special tax treatment.

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Wednesday, March 12th, 2014 Wealth Preservation Comments Off on Combination Annuity and Long Term Care

New Hybrid Extended Care Plan

Having a discussion about extended care or long-term care is not a favorite conversation of a lot of people.  It is a must-have conversation.  It would be very helpful to us when we are doing financial planning to have a real good crystal ball.

Most financial plans are built around the Primrose Plan; you live a long healthy life and then drop dead at 90.  A great plan but is it realistic?  You have to ask yourself, where would you like to receive any care should the need arise one day? Most will say in a home setting, preferably in their own home.  Great, so who is going to be there every day providing it? Bathing and feeding and moving someone can be hard work that can take all day.

If we knew for certain how long we were going to live and just what our future health was going to be, we would have no problem making decisions on such risk management ideas as insurance. It is impossible to tell what is going to happen in the future and we have to make those important decisions based on rather uncertain factors.

Extended care is what you get when you need help with daily life, such as eating, dressing and getting around.  How do you manage this specific risk?  It is better to get a handle on the real unfunded risk.  Shouldn’t you talk through who you would like to take care of you, when you can no longer manage on your own?

Long-Term Care is expensive.  In a Genworth 2012 Cost of Care survey the median annual cost for a semi-private room in a nursing home was found to be just over $81,000 per year.

Who needs Long Term Care Insurance? The answer to that question is quite simple. It is really the people who have a lot to lose who need it the most.

What’s the risk?  With medical advances in healthcare, increasing longevity, and a growing senior population, the need for long term care is greater today than ever before. The need is even greater for women since their risk is twice that of their male counterparts.

With the cost of health care rising rapidly, and a single day in a nursing home costing $175 or more in major cities, self insuring is a risky proposition. Relying on family is an alternative, but not necessarily a viable one. Unfortunately, most families do not have the time, resources or ability to provide around the clock care to a loved one.

Between 35 percent and half of today’s 65 year-olds will someday use a nursing home.  Of those, 10 percent to 20 percent will stay for more than five years.

Five years at $80,000 a year is exactly the sort of large, uncertain expenditure risk for which insurance would seem to be most valuable.  Whether having insurance is solution is beside the point.  It’s having a plan in place.

Most folks think that government programs such as Medicare or Medicaid will take care of long-term care needs but unfortunately, that is usually not the case. Medicare will only pay for long-term care if you are getting better and it covers only 60 days. Medicaid has very stringent stipulations around the support that they will provide in a long-term care setting (that varies by State but budget cuts have negatively impacted most programs).

There are really just two alternatives to buying long term care insurance.  One is to have enough money saved to feel secure should a nursing home or other care services be needed, and the other is to spend down all of the savings and qualify for a government program.

Until recently, consumers had few choices when it came to long term care insurance. Traditional policies, which provided a certain amount of selected coverage, were the norm. Policies could be designed to cover care expenses for a few months, or much longer, even providing benefits for the insured’s lifetime.

When the pool of money was depleted, the traditional policy would provide no more benefits. However, if the policy was never used, the owner would lose the investment of his or her premium payments. Thus, some seniors opted not to purchase these policies, deciding instead to rely on their families or current savings in the event that care became necessary.

There are different funding sources available for long-term care. The funding sources range from family to personal assets, federal government and long-term care insurance.

The first funding source for long-term care is your family. Your family is affected the most because of the emotional decisions that must be made for the person needing care. Your family must decide where that person will receive the care needed. The different places can be home, assisted living, adult day care and a nursing home. The cost of each place can be very different based on the level of care needed for the person. The money for these different places will be paid by the family. This can cause a financial hardship for all the family members.

The second funding source is someone’s assets, like cash, retirement money, and property. With the cost of care at $40,000 to $100,000 a year, the question is how long will someone be able to pay for this cost?

The third source is two programs of the federal government called Medicare and Medicaid. Medicare is based on your health and will pay for home health care for a limited time. Medicaid is based on your wealth and will pay only for nursing home care. Most people will qualify for Medicaid after they have spent down their assets and income. If you are married, the spouse at home can keep $2000 of income to live on and little more than $100,000 of assets. If you are single all your assets are to be spent down to qualified. These rules for Medicaid are different for each state and I would call your local social security office to know your state rules.

The fourth source is long-term care insurance and has been around since the eighties. This policy is designed to give people options on the amount of money to available for long-term care and the different places where the money can be used. The money can be used for home health care, adult day care, assisted living and a nursing home. The amount of money set aside for care will be decision by the amount of premium paid by the individual.

The fifth and newest source is The Long Term Care Annuity. The newest addition to the hybrid marketplace is the long term care annuity. This product also functions exactly like a fixed annuity, but has a long term care multiplier built into the policy. There is no premium rider attached to this medically underwritten annuity policy. Instead, a portion of the internal return in the contract is used to pay for the long term care benefit. Long term care coverage is calculated based on the amount of coverage selected when the policy is purchased.

The insurance company offers a payout of 200% or 300% of the aggregate policy value over two or three years after the annuity account value is depleted. For example, a policyholder with a $100,000 annuity who had selected and aggregate benefit limit of 300% and a two year benefit factor would have an additional $200,000 available for long term care expenses after the initial $100,000 policy value was depleted.

The policy owner would spend down the $100,000 annuity value over a two year period and then receive the additional $200,000 over a four year period or longer. In this example the contract pays $50,000 a year for a minimum of six years, but care will last longer if less benefit is needed. The part seniors like  best is if long term care is never needed the annuity value would be paid out lump sum to any named beneficiary.  This feature addresses the concern that if  the policy was never used, the owner would lose the investment of his or her premium payments.

These innovative products can meet consumer demands and provide more guarantees by combining traditional long term care insurance with the advantages of life insurance or annuity policies. Thus, consumers who utilize hybrid policies can avoid self-insuring against catastrophic long term care related expenses and have the peace of mind associated with a comprehensive plan.

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Friday, April 5th, 2013 Wealth Management, Wealth Preservation Comments Off on New Hybrid Extended Care Plan

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