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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

Silver Tsunami Coming For Boomers

There is a silver tsunami coming; 10,000 people are turning 65 every day, a phenomenon that will happen for the next sixteen years. Living longer than expected, which is often referred to as longevity risk, can increase the likelihood of other risks occurring, driving up certain retirement expenditures such as long-term care costs.  This tidal wave of baby boomers will someday soon need long-term care.

When planning for retirement, clients often list long-term care as a primary concern. However, very few people have well defined plans for dealing with related expenses. The financial cost of long-term care is incredibly expensive, with the average U.S. semi-private nursing home room costing roughly $85,000 a year.

A basic problem for clients looking for long-term care insurance today is that they simply may not be able to find it. Major carriers have pulled out of the market in the last year, and the policies that remain can be prohibitively expensive and contain strict qualification requirements.

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.

Hybrid or linked-benefit products now allow for long-term care insurance and annuity products. These products can help cover multiple risks for one client through one product, simplifying the planning process. They also can alleviate the “use it or lose it” concerns many people have with long-term care insurance as some of the premium goes to fund another benefit, either annuity payments or a death benefit, in the event they do not need long-term care.

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.

A Hybrid life care annuity is a bundled insurance product comprised of a life annuity and long-term care insurance. The life care annuity—the integration of the life annuity with long-term care insurance coverage—is intended to deal with major problems in the currently separate markets for life annuities and long-term care insurance. Some recent studies find the two risks – longevity risk and long-term care risk – to be opposing and thus life care annuities is advantageous in regard to pooling the two risks.

Hybrid annuity products that combine the estate and income planning features of an annuity with the protection of long-term care insurance are becoming increasingly popular among clients looking for replacement insurance. Because the available long-term care benefits under these contracts are based on a percentage of the annuity premium value and often offer optional inflation coverage, clients may need to triple their initial investment to ensure long-term care needs are met, but with the added bonus that those funds are not lost if care is never required.

A “Hybrid” annuity product features an annuity combined with a qualified long-term care insurance rider. It provides financial protection for retirement assets by offering benefits for a potential long-term care event. The long-term care benefits are typically a multiple of your initial investment. In other words a $100K investment in to the annuity can almost immediately be worth up to $300K in long-term care benefits.

Most people will get better coverage if they buy a stand-alone long-term-care policy. But the combination products appeal to people who prefer the flexibility of being able to finance long-term-care coverage if they need it, or to use the policy for other expenses.

Under this combination design, the insured can simply reposition assets into an annuity and receive growth on principal as well as long-term care protection. In accordance with the Pension Protection Act, amounts including investment gains can be paid out as tax-free LTC benefits. The insured maintains the account value and death benefit within the annuity to the extent that these amounts are not used for LTC benefits. Any withdrawals taken for purposes other than for qualified long-term expenses will naturally reduce the account value and thus the total LTC guaranteed benefit as well.

Advantages of Hybrid Annuities:

  • If you need long-term care you can receive up to three times the annuity value to pay for your care
  • In many cases underwriting is limited
  • In some case there is no underwriting
  • If you don’t need long-term care, you still receive the benefits of the annuity
  • Can have a guaranteed interest rate
  • Tax-deferred growth
  • Access to your principal through penalty-free partial withdrawals (typically 10% of account value)
  • Ability to create a guaranteed lifetime income stream
  • Provides a death benefit to your beneficiaries that is designed to avoid probate
  • Usually paid with a one- time lump-sum premium payment
  • Conversion opportunities
  • Can be guaranteed benefits for life

How does this strategy compare to a traditional LTCI policy? While premiums paid to fund the traditional long-term care policy will continue over the life of the policy, an annuity contract with long-term care benefits is fully funded when the contract is purchased. The client will not have to worry about meeting the monthly premium payment or potential future increases in that premium.

Further, while a long-term care policy provides benefits only if the client eventually does require long-term care, the value of the annuity with long-term care benefits may be withdrawn by the client when the contract reaches maturity or passed on to the client’s heirs in the event that care is not required. Conversely, the client’s investment in a traditional policy is lost if he does not require care.

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.

Purchasers put money — $50,000 is about the minimum — into an annuity. 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.

Most hybrid deferred annuities operate this way: A long-term-care annuity. You buy an annuity with a lump sum and can use double or triple the premium amount as your long-term-care benefit. A $100,000 investment could provide up to $200,000 or $300,000 in long-term-care benefits. If you choose the $200,000 coverage with a four-year benefit period, the monthly benefit would be $4,200. The LTC Payments within the combo policy are comparable to a stand-alone policy with similar benefits.

If you need the coverage, the value of the benefit is subtracted from both the annuity’s value and the coverage’s value. After a person uses $4,200 for a month in a nursing home, there would be $195,800 left in long-term-care benefits and $95,800 left in the annuity. In the past, the policyholder would pay tax on the amount transferred from the annuity to long-term care. If the policyholder uses up the entire annuity, he or she would still have long-term-care benefits left.

Example: A 60-year-old purchases a $50,000 long-term care annuity with 5 percent inflation protection compounded annually with a 200 percent coverage maximum and a six-year benefit period. So, his initial long-term-care coverage maximum is $100,000 — double the premium he paid. (If he had refused inflation protection, then he could have chosen three times the premium, or $150,000.)  If he makes no withdrawals over 20 years at a 3.5 percent compound interest rate, minus administrative fees, he would have — under the 5 percent inflation-protected scenario –$265,330 available in long-term-care insurance. Or a monthly maximum of $3,685.

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.

Many annuity contracts with long-term care riders will provide coverage with significantly fewer qualification requirements than a traditional policy, providing an attractive alternative for clients with preexisting conditions who may be unable to qualify for traditional policies.

Like a traditional long-term care policy, if amounts are withdrawn to pay for the client’s long-term care expenses, those amounts are taken tax-free (regardless of whether they represent the client’s investment in the contract or earnings over the accumulation period).

However, clients should be advised that some of these contracts may take years to fully mature and tie up a larger dollar value over this accumulation period. The contract may permit the client to make withdrawals during the accumulation period, but any withdrawals will reduce the amounts available to the client if care is needed.

Conclusion – Though a hybrid annuity contract may not be the solution for all clients, for those who seek to protect themselves in the event that extended long-term care becomes necessary, finding long-term care benefits through the use of an annuity product may provide a relatively simple-to-obtain and tax-preferred alternative.

The appeal of these products lies in their ability to use leveraged dollars to secure both life and LTC coverage. In the current interest rate environment, it’s a great use for money that’s earning next to nothing in a fixed vehicle such as a CD. What’s more, if the policyholder never needs long-term care, that money stays inside the policy, to eventually pass to beneficiaries on a tax-favored basis. “So you’re not only getting death benefit coverage, you’re getting living benefit coverage.



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Tuesday, February 4th, 2014 Wealth Management Comments Off on Silver Tsunami Coming For Boomers

Asset Disregard – LTC Annuity

Presently 60% of those over 65 will need long term care at some point. Nursing home care averages $200/day or $73,000/year. Assisted living averages $35,000/year. And unskilled home care generally starts at $15 to $20 /hour.

Long term care insurance is designed to bridge the gap where Medicare or private insurance ends. But it can be expensive and it is difficult to estimate how much you will need. Or whether you will use it at all.

Blended or hybrid insurance products are now on the market from reliable companies. The aging demographics of the United States coupled with the Pension and Recovery Act of 2006 (the “PPA”) and Deficit Reduction Act of 2007 (“DRA”) have provided an excellent planning opportunity to create tax efficient vehicles to solve a persons’ planning needs.

Beginning on January 1, 2010, a tax-free planning option will become available for individuals who desire to provide for long-term medical care by utilizing an existing annuity or life insurance contract purchased after 1996. While not a new concept (it dates back to 1997), the 2010 tax-free planning opportunity may be beneficial to an individual with the desire to incorporate long-term medical care into his or her estate plan.

Under the PPA provisions, annuity funds may be withdrawn completely tax-free on a FIFO (First-in, First-out) basis for long-term care benefits (amending Section 72(e) of the Internal Revenue Code). The PPA also includes a “1035 exchange” option which allows for the tax-free and penalty free basis withdrawal of the entire annuity value for qualified long term care expenses.

However, no income tax deduction will be allowed for any payment made from the cash surrender value of a life insurance contract or the cash value of an annuity contract for coverage under a qualified long-term care insurance contract (Section 213(a) of the Code).

This benefit is further enhanced by the modification of the Medicaid “look back” period from thirty-two (32) months to sixty (60) months for transferred assets, and the authority for all states to adopt “partnership long term care insurance plans” under the DRA. The qualified partnership plans allow an insured to “exclude an amount of assets equal to the value of the benefits purchased in a long-term care partnership policy from Medicaid qualification.”

Now, how do these guidelines work? A qualified partnership policy gives you, as purchaser, with the right to request under Medicaid eligibility rules change to include a special feature called ‘asset disregard’. This permits you to retain assets that would otherwise not be allowed if you need to apply and qualify for Medicaid to receive other long-term care. What Medicaid will disregard is the amount you actually receive benefits under your Partnership Qualified LTC Policy.

Partnership programs benefit both the policyholder and the state. For the policyholder, it allows them to obtain and pay for the services they need without having to spend all of their assets. While for the state, it can decrease the amount of dollars available for Medicaid used in long term care services.

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.

The U.S. Department of Health and Human Services (DHHS) surmised that partnership program will leverage savings through:
– Consumers will have better option in protecting and transferring their assets without going through rigorous Medicaid qualification
– The back-end protection and assistance can help consumers maximize their insurance dollars
– The protected assets can be used for future costs and expenditures

They say that middle income groups have the hardest decision in buying long term care insurance because their savings and monthly pension are only enough to provide a better retirement living, but paying for extended care as such very questionable. This group is more likely to spend down assets for Medicaid however, the dollar for dollar asset protection model helps middle income groups protect their resources and save enough for their care.

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Thursday, September 26th, 2013 Wealth Management, Wealth Preservation Comments Off on Asset Disregard – LTC Annuity

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