Benjamin Franklin, the venerable inventor, statesman and intrepid leader, once said, “If you fail to plan, you are planning to fail!”
Much the same can be said for the general populace and their attitude toward long term care and estate planning; nobody plans to fail, but they often fail to plan. As producers and advisors, 70 percent of those with whom we will come into contact will require some degree of long term care at the end of their lives. For single women this figure is 79 percent, and for married couples, fully 90 percent of them will be touched by this need in their lives. The question therefore is not whether it will happen, but to what degree will they have structured their estate plan to deal with this contingency.
By definition, long term care is required when an individual is no longer able to perform two or more of the activities of daily living (bathing, toileting, dressing, eating, transferring, and continence) or suffers some form of cognitive impairment. This impairment can be organic in nature (Alzheimer’s, dementia, Parkinson’s) or non-organic (traumatic brain injuries, depression, behavioral).
Back in the day, our grandparents, and even some of our parents, would rely on the old 40-40-40-40 method of retirement. They would work 40 hours a week for the same company over a career of 40 years, and subsequently retire on 40 percent of their pension, clasping a $40 watch as they walked out the door. They were the same people who retired with a paid off mortgage, virtually no debt, and savings in the bank. Today, it is not uncommon to find recently retired members of Society with newly re-financed thirty year mortgages, and carrying a fair amount of consumer credit card debt. These same people may have retired early, started drawing a reduced amount of social security, with no real consideration of just how long their retirement funds will carry them into the future.
Previously for our 40-40-40-40 crowd, adding Social Security as a windfall, estate planning merely meant having a will to divvy up the house and whatever personal property was left after both Dad and Mom had passed on. Those days are long gone as pensions and even defined benefit plans, are becoming endangered species. Fortunately for subsequent generations, retirement and estate planning are terms bandied about by people as young as in their 30s.
Further muddying the waters of retirement planning are the facts that we are living longer as a society and dying slower. Advances in medical science, pharmaceuticals, and life style lessons have all largely contributed to an ever aging society. In Japan, more adult diapers are now sold annually than their infant counterparts. Contrary to public misconception, Social Security was never meant to be the primary means of support for retirees. At its inception, the average life expectancy was 63, with benefits beginning at age 65. Today the average life expectancy is 81. At the beginning in 1935, there were 16 workers contributing to the fund for every one beneficiary drawing benefits. Now it is slightly under three to one.
For all of these reasons, it is imperative that the client and the estate planner remember that long term care insurance is for the living, life insurance is for the dead.With the average retiree looking at an average of twenty five to thirty years in retirement, the goals are very much about ensuring that they don’t outlive their money and about estate preservation.
With the release of the new iPhone X, I am reminded of the fact that nobody knew that they wanted an iPhone or an iPad or an iPod until Steve Jobs told them that they wanted one. Likewise, many people today remain completely unaware of the tsunami that lurks over the horizon and could potentially ravage their estate plan if the specter of long term care has not been afforded appropriate attention.
Simply stated, some variation of long term care insurance (LTCI) has to be part of every balanced and responsible estate plan. Some may construe that as a biased statement given that I find myself immersed in the long term care insurance industry—having joined it in 1999.
Current occupation aside, I should note that in a previous life I was a general practice attorney at law. Quite often a residential real estate sale would lead to my preparing wills for the new homeowners. Never mind that they had two, three, or four children for whom an estate plan would have been deemed critical. Unfortunately, for a lot of folks, it was only that deed of title that prompted them to change their thinking or raise their awareness and take the leap into some form of estate planning.
As the attorney of record, my charge was to be concerned about the “what ifs” associated with estate planning—to wit: Guardians, trustees, executors, conservators, successors to those roles, medical and durable powers of attorney, living wills, and other aspects that address that “what if” the client dies. I remember a bit of an epiphany when I was sitting at my computer drafting one such set of documents and I found myself with the dilemma of what if the client does not die? What if they are merely disabled or find their lives turned upside down and inside out with an illness, chronic condition, or accident that raises the dark specter of long term care? Who will provide the care? Where will the money come from? What will be the consequences of a void not filled with a bona fide LTCI policy? This was both sobering and fright-filled, because the documents I was drafting and to which I was boldly affixing “prepared by:” were intended to address a myriad of scenarios. As a result of that harsh reality check, I embarked on a journey to learn about long term care insurance. I spoke with insurance producers who largely knew very little about it, estate planners and wealth managers who knew even less, and finally stumbled into an office of long term care insurance planning specialists. And the rest, as we say, is history.
Fast forward several years, and it is now the year 2000. As a recovering attorney, and now fledgling LTCI regional sales manager, I am now regularly meeting with attorneys and financial advisors networking with them in an attempt to bring the protection that LTCI affords to all of their clients. Everyone recognized the need for life insurance (liquidity, taxes, and/or the enlarging the corpus of the estate) in estate planning—so why wasn’t LTCI playing a more prominent role in estate planning? That was both the question and challenge, and set me on the path of educating and raising awareness for the past seventeen years.
The challenge was that the very idea of providing, or needing, care was a completely foreign thought that never occurred to many advisors. Fortunately that situation has changed, and despite the near 80 per cent slump in stand-alone long term care insurance from its peak of $1 billion in 2002 to last year’s $200 million of sales, more advisors are stepping up and addressing this need with the use of other hybrid and combo products that are built on either a life insurance or annuity chassis.
So what occurred to prompt this seemingly seismic change within the financial services community? It was probably several things.
From the perspective of the advisor it was growing awareness that as a fiduciary they had a duty to their client, and the client could in fact unduly rely on the advice that the practitioner did or did not render unto them. Bottom line: If a devastating illness, accident, or chronic condition forced the liquidation of the estate in the absence of a LTCI policy, courts were finding in favor of plaintiffs, be they children or other surviving heirs, at an alarming rate. So, future liability was a growing concern.
Second, the livelihood of these financial advisors, particularly wealth managers, is dependent upon the income and commissions generated by assets under management. An ever shrinking estate being ravaged by long term care costs became a growing area of concern. The negativity of this cause and effect could also prompt other (healthy) family members who are clients to move their assets to other more “progressive” advisors, forcing an even greater hemorrhaging of lost assets under management and annual income.
It would be unfair if we didn’t also recognize that a good number of advisors did have their clients’ best interests at heart, and wanted to do something to preclude this tragic scenario from coming to pass. For these well intentioned advisors it made perfect sense to bring in a specialist like me, or one of my agents, to help construct this critical aspect of the estate plan.
The other argument for forming this win-win-win strategic alliance with financial advisors and wealth managers and for becoming their specialist resource for LTCI is that many advisors don’t know how to talk to their clients about the specter of long term care. More than a dollars and cents issue, there is an emotional component that most long term care planning specialists have experienced first-hand with their own family members. The vast majority of LTCI producers have either been caregivers, or been exposed to the disorienting dynamics of having a family member living in their home (or in a facility) where they themselves have to spend regular time as a care manager.
Since 1996, the federal government, in concert with their state government counterparts, have made it quite clear that they want to privatize long term care in this country. First came the incentives associated with tax qualified plans, State Partnership, ever rising annual deductions for premiums paid offered by the IRS, as well as the level of tax-free long term care benefits—$360 per day ($10,800 per 30-day month). The level of tax-free benefits is not changing from 2017 to 2018.
Why does the government want everyone to embrace long term care insurance as a step toward self-reliance? Because the budgetary red ink that is drowning nearly every state’s largest line item, Medicaid, is only getting deeper and darker, especially as the Baby Boomer generation continues its journey into retirement, Social Security, and Required Minimum Distributions. Talk to any legislator who is involved in budgetary issues and they will have to confess to a fear of the devastation that this generation could do to the budget if all are forced to turn to the state for assistance with their long term care.
Based on industry and consumer research, the typical LTCI buyer looks like this, and the similarity to the average estate planning client cannot be clearer:
- Average age 55.
- Slightly more women than men apply (51 percent female, 49 percent male).
- Married with adult children.
- Working in a white-collar profession; not yet retired.
- College educated.
- Living in a metropolitan area with a population of at least 250,000.
- A homeowner with 11 or more years in the current residence.
- Affluent; upper middle class with a household income of $100,000 or more.
- A “planner” who is interested in financial issues; owns life insurance and other conservative investment products.
- Family oriented.
- Exposed to long term care issues; knows someone (a family member or friend) who has needed long term care services.
- Research oriented; an online user; self-educated about LTCI.
As a practitioner, my recommendations for a family are that the same average client should desire:
- For their families to be part of the plan, not to be the plan.
- That their family members act merely as care managers rather than caregivers.
- Not to exhaust their financial legacy; and,
- Not to outlive their estates and subsequently become a burden on family, friends, or society.
Consider a simple example of long term care’s potential impact on the estate of any client. The Genworth 2017 Cost of Care Survey reports that the current national median expense of a private nursing home room is $267 per day or $97,455 per year, an amount that’s been increasing by about four to five percent annually for the past five years. If the client is currently age 55 and first requires that level of care in 30 years at age 85, the first year’s cost will be about $390,000 (at five percent annual inflation). Multiplied to reflect a four-year plan of care without any additional cost increases, the total cost could exceed $1,560,000 – a staggering amount.
For this reason, long term care insurance simply makes good sense. Very modest premiums, with slowly adjusting premiums, and the ability to “re-size” or tailor the inflation protection rider, makes this a great way to leverage your client’s estate. There is not an investment vehicle that can deliver a rate of return comparable to the value associated with a LTCI policy. As a producer, nothing thrills me more than when I can design a shared plan for a couple where the annual premium for both members of the couple equates to the monthly benefit derived for just one of them, or as I like to pose it to them, “Would you rather write that check once per year, or once or twice a month?” The realization on their part is gratifying, and genuinely motivates me to get up in the morning.
There are a lot more options for addressing long term care concerns than there were years ago, ranging from traditional stand-alone LTCI policies, to life insurance policies with a long term care benefit rider, or even annuities with a long term care benefit rider. In addition to LTCI, wealthy clients may even consider more sophisticated options that include buying and owning a life insurance policy with a long term care benefit through an irrevocable life insurance trust (ILIT), allowing them to further leverage financial benefits. While many of my peers recommended these vehicles, I liked to keep things as simple as possible. The mechanics can be somewhat complicated and cumbersome since it works best when the long term care benefits are paid on an indemnity basis rather than a reimbursement. (Note: Most, if not all, traditional plans are now reimbursement plans so they can qualify for tax-qualified status with the federal government.)
Over the years we have heard the term “land rich, cash poor,” and typically equate it to historical figures like George Washington and Thomas Jefferson. It is just as applicable today and should prompt planners to review the structure of their clients’ portfolios to determine whether they have the liquidity with which to deal with a long term care crisis, or whether a LTCI policy would prevent needless, and often times expensive, liquidation of a portfolio or assets under less than desirable market conditions.
Steve Jobs once wrote, “You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something—your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.”
As estate planners, attorneys, insurance producers, and other financial professionals with a fiduciary duty to our clients, we must step up and be there to assist our clients to connect the dots in a future direction and to integrate long term care into their estate plan.