By Peter Gelbwaks, Chairman, Gelbwaks Executive Marketing Corp.
Self funding against the risks of long term care is a very common position taken by many wealthy individuals. But it is also becoming much more common for affluent individuals to consider long term care coverage as part of their overall estate plans.
The latest alternative products that combine either life insurance or annuity products with long term care coverage are being developed at a much more rapid pace since the advent of the Pension Protection Act legislation. Now in 2010, there exists some very favorable tax treatment of these types of contracts. Individuals can now reallocate assets into a “linked benefit” contract, thereby creating a greater pool of tax-free benefit dollars that then may be used to pay for long term care expenses without a negative taxable event taking place.
These programs vary in their attractiveness and are not for everyone. However, they certainly add some significant reasons for higher asset individuals to consider using some form of insurance coverage to cover the long term care risk.
Some wealthy individuals find it very attractive to transfer both the financial risk and the physical responsibility of hands-on caregiving to others. Long term care insurance carriers can be of great assistance in accomplishing this goal.
Having access to the best health care providers (home health care agencies and registries), and having the insurance carriers deal directly with these entities and services is “just what the doctor ordered” for many who expect and demand this level of service.
Advantages To Business Owners
Many of the affluent are entrepreneurial business owners. They will want to look into the tax advantaged ways of purchasing long term care coverage through their businesses. The math could well appeal to them and their financial advisors. Among the other benefits of long-term care insurance: increased employee productivity and enhanced retirement planning security. In addition, business owners can realize significant tax advantages such as deductibility of their premiums paid, state tax credits or deductions, plus tax-free benefits.
Portability is another excellent feature of these programs so that upon termination of employment, an employee has the option of maintaining his/her coverage into and throughout their retirement. Lastly, the employer has the ability to exclude certain classes of employees and carve out a rich program for upper level management.
As the baby boomers age into their middle 60’s and life spans continue to lengthen, the burden of caring for their parents and even their spouses is becoming a much more common occurrence. While some advisors still may not view long term care insurance coverage as important or needed, the wealthy individuals may feel differently. This may cause a credibility issue as the client begins to doubt the advisor, especially at the point of an uninsured event taking place.
When thousands of dollars need to be spent to hire caregivers, the credibility of the advisor can nosedive, especially if these services continue on for lengthy periods and the bills reach into the hundreds of thousands of dollars. Some planners believe they need to recommend long term care insurance coverage for “defensive” reasons and to avoid any potential liability.
There are now quite a few insurance producers who specialize in working with advisors such as attorneys, CPAs, financial planners and bank trust officers. If the individual or advisor decides to work with a long term care insurance specialist, make sure they have experience serving the affluent and that they understand how to communicate with this group.
The great majority of affluent individuals want the best care available and they expect it to be done in their own homes. Round-the-clock care generally requires at least two shifts of people and can cost significantly more than conventional nursing home care.
Why Long-Term Care Insurance May Be A Good Deal
Generally speaking, regardless of the age of the individual or the plan design, it will only take three to eighteen months of receiving benefits from a long term care insurance policy to recoup an entire lifetime of premiums.
For example, let’s use a 65-year old married, healthy person who buys coverage with benefits of $200 a day or roughly $6,000 a month. We’ve assumed a 20-year life expectancy, so $3,335 per year in premiums would total $66,700 assuming no claims are paid before age 85. The $6,000 benefit doubles with a simple 5% inflation rider built into the plan, which means the policy pays $12,000 per month at claim time. After six months, the benefits will exceed the total premiums paid.
The individual and advisor should look for a plan and a carrier that fits the person’s needs. Affluent individuals are used to having the best policies. They are generally brand conscious and want to work with a company that has excellent ratings and a good track record in long term care insurance. They may choose to add expensive options that more cost-conscious buyers forgo but make these programs even more appealing.
Flexible payment options are very attractive in the affluent market as they enable the policyholder to pay the full cost of the premiums within a specified time period. Most companies offer two types of limited pay options. The first is “10-pay” in which the premiums are paid in ten individual payments. The second is “paid up at age 65” option that enables those under age 55 to pay all premiums before turning 65 to avoid payments during their retirement years.
Among the advantages of these options is that they expose the individual to less risk of a future rate increase. They are also attractive to business owners, allowing them to provide a paid up long term care insurance policy before an executive or employee retires. If an executive or employee retires early or terminates his employment before the long term care insurance premiums are paid up, he can still retain the coverage at his own expense.
Long term care insurance has become a sophisticated planning tool in financial planning for the affluent. There are well-designed plans for business, for example, that offer both underwriting concessions and premium discounts.
A business owner, for example, can buy coverage through a “C” corporation and decide who participates, deduct the full premiums paid, and receive benefits on a completely tax-free basis. Other than “C” corporations, the other types of businesses that can benefit from special tax considerations are those that operate as self-employed or partnership/S corporation/limited liability companies.
A Risk That Needs To Be Covered
Given the availability and flexibility of today’s products, long term care insurance should be a part of an affluent individual’s financial plan. Take the case of a wealthy individual with more than $50 million in assets who purchased long term care insurance for himself and his spouse. He insures a $10 million home; a $2 million boat; $1 million in jewelry; $1 million in art and; $500,000 in cars. He came to the conclusion that the potential need for long term care was another risk that merited coverage. In fact, out of all his insurance policies, he believes he is most likely to use the benefits of his long term care policy.
