Long Term Care Insurance


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Red Zone Multitasking – Long Term Care Annuities

It is not unheard of – or even uncommon – for long term care insurance policyholders to receive a letter that tells them that when they renew their coverage for the next year, they will face increases in premiums that will be higher than 50 percent. This, regardless of claims history, heath status, or even age.

One of the things that can discourage people from buying long-term-care insurance is the idea of paying a lot of money for a policy that with any luck they’ll never have to use.  One way to avoid spending a lot of money directly on a long-term-care policy while still getting its benefits is to buy an insurance policy with a long-term-care rider.

Baby Boomers like the “red zone multitasking” nature of these hybrid policies, as they offer an annuity in addition to a long-term care component. That means that the premiums wouldn’t go to waste if the purchaser doesn’t end up needing long-term care.

Long-term care insurance is designed to protect your assets and provide coverage in the event that you require care at home or in a facility prior to leaving this world. The care could be custodial in nature or skilled care. The average stay in a nursing home in this geographic area is over $300 a day. That equates to over $109,000 a year. These are significant numbers.

Health insurance is designed to cover medical expenses, whereas long-term care insurance covers help with daily activities like washing, dressing, and bathing. Medicare doesn’t pay for any custodial care, whether rendered in the home or a facility. Medicare will cover very limited nursing home stays when skilled nursing care is required. So if you don’t have long-term care insurance, you’ll need to pay for such costs out of pocket, unless you have very little income and can qualify for Medicaid, the federal-state health program for low-income people.

Long-term care annuities – Even though traditional long-term care coverage is still the best in my opinion, long-term care type annuities are offered in two versions, simplified and guaranteed issue. In a perfect world, they should only be used as supplemental coverage to traditional long-term care, but annuity long-term care coverage allows you to fully control the principal in case you never access the benefit.

Most policies have few restrictions on how you use the money. Once you meet the qualifications, usually the inability to manage two of the six activities of daily living (eating, bathing, dressing, toileting, transferring and maintaining continence, or cognitive impairment), how you spend your money is up to you. You can pay a neighbor or a family member to help out or use the tax-free payments to augment other money that you have available.

These hybrid policies work variously, but the type that has gotten the most attention is a long-term-care annuity. Beginning in 2010, the IRS will let those who hold one of these deferred annuities use the money to pay for long-term care free of federal taxes. Annuities allow money to grow tax-free, but the tax man has to be paid when the money is removed. These long-term-care annuities free holders from this obligation.

Most hybrid deferred annuities operate this way: Purchasers put money — $50,000 is about the minimum — into an annuity. These also can be funded with another annuity or a whole or universal life insurance policy that the owner no longer needs through what the IRS calls a 1035 exchange.

Purchasers then choose the amount of long-term care coverage they want, usually 200 percent or 300 percent of the face value of the annuity, and they decide if they want inflation coverage. They also have to decide how long they want the coverage to last, usually two to six years. Inflation coverage will affect the maximum duration of the plan.

The person who purchases a hybrid annuity/long-term care policy and does not touch the long-term care coverage will be able to tap the annuity for income throughout his or her long lifetime.  When long-term care coverage is needed, the value of the benefit is subtracted from the value of the annuity.

Another benefit, at least in theory, is that hybrid policyholders will be insulated from the premium hikes that purchasers of long-term care policies have confronted in recent years. The hybrid policies typically require an upfront lump-sum premium, whereas long-term care premiums are usually paid on an ongoing basis, often annually.

Hybrid policies may be appropriate in certain instances. One of the key situations would be if an individual would not otherwise qualify for a pure long-term care policy due to health factors; he or she may in fact be able to qualify for a hybrid policy, especially an annuity/long-term care hybrid. Some policies offer “simplified underwriting,” which means that no physical or medical records are required; rather, the applicant may have a telephone interview with a nurse about his or her health.

In addition to a long term care strategy there are the six documents you need for a solid red zone estate plan:

• Joint Ownership — Enables you to own property jointly with another person and upon the death of the joint tenant, the surviving joint tenant automatically becomes the owner of the property.

• Last Will and Testament – A legal document which expresses the wishes of a person concerning the disposition of their property after death and names the person who will manage the estate.

• Durable Power of Attorney – Grants authority to another individual to act on behalf of the person who executes the instrument and are commonly used for legal and financial purposes.

• Durable Health Care Power of Attorney- Grants authority to another individual to make health care decisions on your behalf should you be unable to make such decisions.

• Advance Care Directive – A set of written instructions in which a person specifies what actions should be taken for their health, if they are no longer able to make decisions due to illness or incapacity.

• Living Trust – Created during your lifetime. Assets are transferred to the trust while you are alive. Provides written instructions for the disbursement of the trust assets upon your death.

These documents can play a vital role in the major plays during the fourth quarter of your life. Understanding how they work now can make the difference between a last-minute victory or loss.”

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Wednesday, September 3rd, 2014 Wealth Management Comments Off on Red Zone Multitasking – Long Term Care Annuities

Wealth Preservation Strategy

The best reason for an income annuity is to provide a guaranteed income stream.  Along with some savings, it is meant to help cover yourself and your wife’s basic living expenses. People are living longer in retirement, and ever fewer of them have a pension. To reduce the risk of running out of money in old age, they need to find other sources of guaranteed income, such as annuities.

The strategy involves covering ongoing basic retirement needs with predictable income from Social Security and any pension.  If they aren’t enough, we advocate filling the gap with an income annuity. We specify a single premium immediate annuity (SPIA), which is typically paid for from savings. Once their core needs such as food and rent are met, retirees can spend or invest remaining savings as they see fit.

Outliving one’s retirement savings is what keeps retirees and near-retirees up at night, We believe that annuities are the best choice for safe retirement investments in uncertain times.  The vast majority of retirees require a portion of their accumulated savings be used to generate an income during retirement. As a result, they carve out a portion of their “pile of money” to be used specifically to generate income.

Fixed annuities have contract provisions that protect annuity holders from ever running out of income.  However, there are other benefits that are available when using annuities.  At a recently held education session on inflation-fighting strategies with seniors. Any guesses as to the one spending category that retirees consistently increase as they move through retirement? You guessed it: healthcare and long term care. .  It’s an age-old problem — how to pay for long-term care.

Every other expense categorically declines over time as a percentage of a retiree’s household income, but healthcare and long term care will categorically increase. That means that many seniors should invest some of their “surplus” savings in a strategy to fund long term care expenses.

Just consider these national averages from a 2010 government report: $205 per day or $6,235 per month for a semi-private room in a nursing home; $229 per day or $6,965 per month for a private room in a nursing home; $3,293 per month for care in an assisted living facility (for a one-bedroom unit); $21 per hour for a home health aide; $19 per hour for homemaker services; $67 per day for services in an adult day health care center.

One of the things that can discourage people from buying long-term-care insurance is the idea of paying a lot of money for a policy that with any luck they’ll never have to use. Of course, almost all insurance is like that. But long-term-care insurance is particularly expensive and frequently, its purchase comes at a time when people are facing retirement and looking for ways to cut back.

As traditional long-term care coverage continues to lose ground — due to escalating premiums, greater numbers of claims, lower returns and lower mortality rates — a new set of insurance products has been gaining ground.  People are gravitating toward these products because they provide a “use it or use it” approach, instead of the “use it or lose it” challenge of traditional long-term care policies.

Baby boomers want LTC-type coverage, but don’t want to pay premiums and never receive LTC benefits. The big advantage of the hybrid products is “they all provide “some type of protection, in the event of needing LTC care in the future. But if the LTC isn’t needed, their premiums are not being thrown away.”

Unlike most traditional long-term care policies, this new series of so-called “combo” products offers living benefits beyond a mere death benefit. These combination or hybrid products package long-term care coverage with a life insurance policy or annuity-like product, providing for critical, chronic or terminal illness along with a death benefit.

They pay the benefit when the insured needs it the most.  If you die prematurely, the death benefit is paid to your beneficiaries, and if you live too long it can be accelerated to offset the expense of chronic, critical or terminal illness.

Since long-term care insurance is too costly for most, not to mention the market is rather unstable, Medicaid is the primary payer. Medicaid funds the care of nearly 70 percent of nursing home residents and 34 percent of home health care. The high cost forces most low and middle class families to turn to Medicaid to pay for care.  The reliance on Medicaid and the unavailability of other financing options limit a family’s ability to make choices regarding care settings and services.

Hybrid Annuity LTC policies – One way to avoid spending a lot of money directly on a long-term-care policy while still getting its benefits is to buy an insurance policy with a long-term-care rider.

These hybrid policies work variously, but the type that has gotten the most attention is a long-term-care annuity. Beginning in 2010, the IRS will let those who hold one of these deferred annuities use the money to pay for long-term care free of federal taxes. Annuities allow money to grow tax-free, but the tax man has to be paid when the money is removed. These long-term-care annuities free holders from this obligation.

Most hybrid deferred annuities operate this way:- Purchasers put money — $50,000 is about the minimum — into an annuity. These also can be funded with another annuity or a whole or universal life insurance policy that the owner no longer needs through what the IRS calls a 1035 exchange.

Purchasers then choose the amount of long-term care coverage they want, usually 200 percent or 300 percent of the face value of the annuity, and they decide if they want inflation coverage. They also have to decide how long they want the coverage to last, usually two to six years. Inflation coverage will affect the maximum duration of the plan.

If this person never needs long-term care, then the annuity can be redeemed for its accumulated value when it matures at 20 years — or it can be left to accumulate further interest and the long-term care policy will remain enforce.

When this person dies, his heirs will inherit the greater of the accumulated annuity value, if there have been no withdrawals, or the single premium he paid initially less the amount of long-term care paid.

Most policies have few restrictions on how you use the money. Once you meet the qualifications, usually the inability to manage two of the six activities of daily living (eating, bathing, dressing, toileting, transferring and maintaining continence, or cognitive impairment), how you spend your money is up to you. You can pay a neighbor or a family member to help out or use the tax-free payments to augment other money that you have available.

These policies generally don’t qualify for partnership plans that protect you from having to spend all your money before you qualify for Medicaid. If you have a lingering illness, having partnership insurance that protects some of your assets could be important.

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Saturday, June 28th, 2014 Wealth Preservation Comments Off on Wealth Preservation Strategy

Alternative Long Term Care Coverage

As we age, long-term care insurance offers us a path to living comfortably and independently in our own homes and communities. Long-term care is not always direct medical care, but rather is a range of services and supports that help individuals care for themselves on a daily basis; a key to aging-in-place.

There are advocates of what we refer to as a ‘Good, Better, Best’ approach to long term care insurance protection.  Long term care insurance is basically a commodity in the eyes of consumers and understanding how to effectively give consumers viable choices that will be a benefit to all.

Long term custodial care is hugely expensive. And the cost is not covered by Medicare or supplement policies. Only if you’re truly impoverished, you can turn to your state Medicaid program for coverage – but it is unlikely to offer home care. Instead, you’ll be stuck in a nursing home that is dependent on state Medicaid payments. That probably won’t be your desired choice for care for yourself – or for your parents in your old age.

It’s a problem no matter what your age because we’re experiencing a “Silver Tsunami” of retiring baby boomers and the costs of long-term care can be extremely high. Medicaid is the only option for many seniors, and that’s straining the funding for that safety net. Many people are not eligible for Medicaid, but also cannot afford the expense of care.

Why do we automatically talk about Medicaid when the subject of long-term care is raised? The answer is that Medicaid pays for a significant majority of all long-term care.  Medicaid, the “payer of last resort,” has become the de facto long-term care financer, a situation not expected to change in the foreseeable future.

As a result, long-term care providers and the federal government are bringing lawsuits and mandating claw-back actions against families, insurance companies and legal advisers. Many are turning to filial support laws, which impose a duty upon adult children for the support of their impoverished parents. Medicaid also has the right to sue families in probate court to “claw-back” funds spent on care.  Most people do not understand filial support laws, which are spreading to more states — 28 and counting.

While self-funding, long-term care insurance, Medicaid, and family provided care will continue to be the primary sources of long-term care funding for the foreseeable future, the market is changing and more people are becoming aware of these new and alternative ways in which to pay for long-term care.

While long-term care insurance is one way to fund long-term care expenses, it is not the only option. Policies can be expensive, unavailable (to those who are not healthy enough to purchase them), and many object to the use-it-or-lose-it nature of long-term care insurance. Long-term care expenses can also be financed through a variety of newly developed “hybrid” or so called linked-benefit products.

Annuities now offer tax qualified long-term care benefits. Companies offer fixed annuities with long-term care riders, which enable you to invest the money you might have saved for long-term care into a product that provides a fixed income but also will provide higher payouts if you need long-term care benefits. In some cases, these types of products will double or triple the annuity payment when long-term care is needed.

Additionally, these products can be purchased with a single lump sum payment which might be preferable to long-term care insurance which generally requires life-time payment of premiums and the possibility that premiums will rise significantly (which has occurred with some policies over the past few years). Lastly, annuity hybrid products solve the use-it-or-lose-it problem with long-term care insurance. If the long-term care benefit is not needed, benefits are available for other purposes.

Another alternative is you can convert your life insurance policy for long-term care. There is $27.2 trillion worth of in-force life insurance policies in the United States, according to the National Association of Insurance Commissioners — that’s triple the amount of home equity today. Rather than cancel or drop a policy to save on premiums when faced with long-term care needs, you can use it to pay for home care, assisted-living or nursing home expenses.  Seniors can sell their policy for 30 to 60 percent of its death benefit value and put the money into an irrevocable, tax-free fund designated specifically for their care.

Medicare specifically does not cover chronic or long-term care, and, due to the high cost of such care, the majority of individuals do not have sufficient funds to pay for an extended period. There is also long-term care insurance, but the relatively high premiums and requirement that people are medically qualified tend to reduce its utilization.

Nearly everyone finds it difficult to see themselves needing hands-on assistance with basic living activities like bathing, getting dressed and eating. So they avoid thinking about it all together. The U.S. government reports that 70 percent of people who reach age 65 will require long-term care services at some point in their lives.

The reality is that the longer we live, the greater the likelihood that we may require long-term care. The costs associated with needing long-term care are significant. It may take decades to accumulate the assets you’ll need to retire comfortably; but just a few years of paying for long-term care may threaten a lifetime of savings.

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Tuesday, April 22nd, 2014 Wealth Management Comments Off on Alternative Long Term Care Coverage

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

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