Some advisors have been known to tell clients with $2 million to $3 million or more of assets that they don't need to worry about developing a strategy to fund a long term care health risk because they have more than enough money to cover it on their own.
This is changing. Many advisors are probing this assumption a little further to see if it is prudent.
A sound plan for an individual's LTC strategy should address 2 critical components. The first is to assess the financial impact a long term health care event may have on the individual's retirement portfolio. Second and equally as important is to evaluate the emotional impact the event would have on family, friends or neighbors.
Many advisors focus solely on the first issue. Let's look at one scenario:
Mr. and Mrs. Smith, ages 66 and 64 respectively, have 2 sons, a daughter and several grandchildren. The Smiths' estate is worth $4 million, with $2.5 million of that made up of their home and possessions.
Both are entitled to Social Security. Mr. Smith has a single-life pension, and their retirement portfolio is an IRA worth $1.5 million.
Let's be conservative and assume the Smiths are not using any of the IRA and support their lifestyle from the pension and Social Security. The total monthly income from both is $12,000 ($9,000 from the pension and $3,000 from Social Security). The Smiths, like many others, consider a retirement portfolio available for living, traveling and having fun (which clearly does not include the cost of an extended health care event). They regard their life savings as evidence of their life's work and their legacy to children, grandchildren and charities.
Fifteen years into retirement and now age 81, Mr. Smith suffers a debilitating stroke. Mrs. Smith cannot personally provide for all his care, so she hires skilled home care aides for 8 hours a day. Using today's national average of $7,768 per month (as a recent Genworth Inc. study found), and applying a 6% average inflation factor for LTC costs, the monthly cost for a home health aide would be almost $18,616 at the time of Mr. Smith's stroke.
It's easy to see the challenge for the Smiths. Monthly income is now about $23,200 and has kept pace with inflation, but only about $6,800 a month would remain after covering the cost of Mr. Smith's care. This amount may also need to cover medications, rental of hospital equipment for Mr. Smith's confinement at home and physical therapy costs over and above Medicare payments.
As a result, Mrs. Smith is faced with some hard choices. It seems unreasonable to expect her to maintain any semblance of her current lifestyle on roughly a quarter of her former monthly income. She could either reduce expenses related to her lifestyle, allotting more of her income to cover the cost of Mr. Smith's care, or she could begin liquidating more of the IRA. If she did that, within 5 years of providing for Mr. Smith's care, she would exhaust over $1 million of the IRA. That would leave little for her continued income needs.
Typically, affluent clients have above-average expectations for most of the things they consume. The costs of LTC described above are averages. A higher level of service and care could easily raise the figures significantly. Affluent clients also understand that wealth creates risk, and they usually understand the value in mitigating it.
Looking at the Smiths' situation, would they have been better served by looking at transferring this significantly large risk to an insurance carrier, rather than self-funding it? Let's look at an alternative approach that incorporates an LTC insurance policy.
Assume Mr. and Mrs. Smith instead had purchased an LTC insurance policy with a $300 per day benefit or $9,000 per month, with a total pool of health care dollars of $540,000 ($9,000 per month times 60 months) for each of them. They purchased a zero-day elimination period for home care, while the elimination period for facility care is 100 days. They also added a shared-care rider that allows both of them to have access to each others' pool of funds, should one of them require care beyond their own benefit pool. Included as well was a 5% compound inflation rider with a dual waiver of premium.
Their combined premiums are $7,500 per year (about $625 per month). When Mr. Smith went on claim 15 years later, they would have paid total premiums of $112,500 ($7,500 x 15 years). Further, the policy provisions waive both individuals' premiums on the claim of one, so no additional premiums are due after Mr. Smith's stroke. Had they addressed their LTC risk with insurance, the Smiths would have reduced their financial exposure by over $1 million, allowing Mrs. Smith to maintain her lifestyle while more greatly protecting the retirement portfolio that she and Mr. Smith had built.
Had the couple truly believed neither would ever need the benefits of an LTC insurance policy, they could have added a full or partial return-of-premium rider for an additional cost, which returns the total amount of the premiums to the estate if neither received benefits from the policy.
The impact on the caregivers should not be overlooked in LTC planning. Considering that 60% of all long term care is provided in a home or community setting–and the spouse, children or other family and friends manage and provide that care–many challenges unfold.
From the family's perspective, a thorough plan for LTC should address the following questions:
1. Who in the family will develop a plan of care for the loved one?
