LTCI: Finding the funding

Tap policy values
If the coverage still makes sense, it might be possible to fund LTCI through withdrawals from existing permanent life contracts or annuities. Steve Sperka, head of Northwestern Mutual's LTC business in Milwaukee, says clients who don't need an increasing death benefit can consider surrendering value out of that life contract or annuity each year to pay for LTCI. Since the passage of the Pension Protection Act, those withdrawals are not taxed as income; additionally, insurers have made the transfer process smoother for policyholders. "For people in that situation, it's a great strategy," Sperka says.

Share the cost
A strategy that Kazinec and others recommend is to have family members help pay for the LTCI. Mostly, they may be acting out of self-interest to reduce the risk their parents will spend down their inheritance. In other cases, the adult children know that the caregiver role likely will fall most heavily on them. LTCI can provide the funds for hiring professional caregivers and reduce the risk of family members burning out in that role.

There's also the issue of quality of care. "I've had some clients in the past that actually would be eligible for Medicaid but family members who have dollars don't want them to have that option," Kazinec says. "They want to have more options for them so they buy the long term care insurance."

Charles Sachs, CFA, CFP with Evensky & Katz Wealth Management in Coral Gables, Fla., cites the case of a client who would benefit from LTCI but had "hemmed and hawed" for several years over applying for coverage. One day the client mentioned that her son worked for a U.S. government agency in Washington, D.C. and one of his benefits was access for family members to LTCI through the Federal Long Term Care Insurance Program (FLTCIP; www.ltcfeds.com).

Sachs asked her who would be "on the hook" if she ran out of money and she replied it would be her son; consequently, Sachs recommended she ask her son if he would consider contributing to the premium. She asked, he agreed to pay half, and she subsequently bought the coverage.

Of course, premiums can flow from the older generation to adult children as well. James Ciprich, CFP, a wealth manager with RegentAtlantic Capital LLC in Morristown, N.J., had a case where a wealthy widow was giving her children the full $13,000 gift allowed under the annual exclusion. Ciprich suggested she purchase LTCI for her adult children because those expenses fall outside the annual gift exclusion (within a limit determined by the insured's age).

"We looked at what that limit was given the ages of the children and the IRS indicates that if anybody is 50 to 60 years old, that limit would be $1,270 per year," says Ciprich. That amount purchased decent coverage for the children, he says: "They all got pretty basic coverage, $200 a day benefits, three-year benefit period, 90-day elimination period with some compound inflation protection. If she's still alive at the point when her children turn 60, she can actually pay more toward that long term care expense. It actually goes up between (ages) 60 and 70 to a total of $3,390 per year."