By: Lloyd D. Lowe Sr
As one of the largest generations in history continues to age, the subject of long-term care planning has become an increasingly important topic for financial planners. One obvious reason is that people are living longer – in 1917, the average life expectancy for a man was 48.4 years, while today it’s 79.5 years. For women, the odds of living longer are greater – 83.3 years today, as compared to 54 years of age 100 years ago.1,2
As people live longer, the next obvious concern is quality of health – and depending on any number of factors, that varies from person to person. In one study conducted by the University of Southern California, life spans from 1970 to 2010 increased, but they did so in proportion with an increase in disability.3
No one likes to think of getting older and needing assistance with everyday tasks. But even more mystifying – and often frightening – to people is trying to project the costs of long-term care. At best, it’s an educated guess as to how long you will live, and how well you will live. You can look to family history for some clues, but as with anything in life, there are no guarantees.
What you can do is plan for the worst and hope for the best. There are typically three main approaches to hedging long-term care. The first is to self-insure, or in other words, fund the care through personal savings. This option seems logical, but it does have a downside – what if the cost of the care is more than you anticipate or is needed longer than you expect? You could run out of money. And, since one study showed Americans underestimate the cost of long-term care by about 50%, the risk of going broke can be high.4
The second option is to use Medicaid, which can provide long-term care for those with low income and asset levels. Qualifications for Medicaid vary from state to state, and in some instances, people cannot utilize Medicaid until they have exhausted their personal savings. Another downside to relying on this program is that, like all government programs, its structure and availability is at the whim of the government and subject to change.
The third option is to purchase long-term care insurance, or LTCI. This type of insurance can be very expensive and the costs increase as you age. There is one caution to consider, and that is because the benefit must be used for long-term care, you can incur thousands of dollars in expense without realizing any benefit.
An alternative to the LTCI option, however, is to use a hybrid LTCI policy with a life insurance benefit, or life insurance itself with an acceleration rider to provide for cash flow earlier in your life to cover long-term care.
There’s also a way to obtain life insurance using other people’s money to fund your long-term care needs, protect your legacy, and save on taxes. A Premium Financed Equity Indexed Universal Life Policy (PFEIUL) is a large-sum policy that is structured so its premium can be paid by a bank loan. Because the borrowing costs of the bank loan are significantly lower than the returns earned on investments, servicing the loan can provide protection while generating additional cash flow.
For example, a 55-year-old woman could secure a $5 million PFEIUL policy with asset-based, long-term care protection that accelerates a portion of the death benefit when she does not meet two or more of four daily living activities (bathing, feeding, dressing, mobility, etc.). In addition, the policy benefit would be tax deferred, would increase annual income, provide for long-term care expenses and provide the client’s heirs with a death benefit.
Policy premiums would be paid using a bank loan at 3.5% and pay $119,500 per year over a term of five years. Using this method, she would receive a projected supplemental income of $4,935,000 over the life of her plan.
There is no question that addressing long-term care options is definitely part of today’s financial planning, and comprehensive wealth advisors have many tools at their disposal to choose the best option based on a client’s assets, income and long-term goals.
1 Life expectancy in the USA, 1900-98, University of California, Berkeley, http://u.demog.berkeley.edu/~andrew/1918/figure2.html
2 “South Korea will take lead in life expectancy by 2030, study predicts,” CNN.com, Feb. 22, 2017: https://www.cnn.com/2017/02/21/health/life-expectancy-increase-globally-by-2030/index.html
3 “Gains in Longevity Versus Quality of Life,” USCPrice: https://exechealthadmin.usc.edu/blog/gains-in-longevity-versus-quality-of-life
4 “Americans’ Estimates Of Long-Term Care Costs Are Wildly Off,” Next Avenue/Forbes, May 10, 2016: https://www.forbes.com/sites/nextavenue/2016/05/10/americans-estimates-of-long-term-care-costs-are-wildly-off/#3f9d7f305180