Although some high-net-worth individuals might want to self-fund their long-term-care needs instead of buying a long-term care insurance (LTCi) policy, self-funding is not always their best option. Tom Riekse, managing partner of LTCI Partners, LLC, recently shared a few points that agents should bring up for discussion with high-net-worth clients who are considering the self-funding route.
High-net-worth clients and LTCi
Here are 9 reasons Riekse offers to high-net-worth clients to consider long-term-care insurance:
Dealing with loss aversion. Riekse said that in the same way that it is less painful to pay with a credit card for a $100 dinner as opposed to laying out $120 in cash, spending money from a brokerage account every month to pay for care will be more difficult than having a third party (i.e., an LTC insurer) pay those costs. “Can your client visualize making these monthly care payments,”? he asked.
Impact on care choices. Similarly, imagine shopping at two stores, Riekse added. One of the stores has a full retail price on every item and accepts only cash while the other charges an annual membership fee, but discounts every item at 80%. “This is similar to the experience of someone having LTC insurance,” he said. “The policy gives you the comfort of purchasing additional services because much of the care is paid for by the policy.”
Underestimating the cost of care. Long-term care costs can be tricky to estimate and range widely by geographic location. In the last couple of years the cost of home care has increased dramatically. According to Genworth’s care trends study, the cost of home care increased 12.5% in 2021. Core Inflation, immigration and demographics mean that this trend is likely to continue in the future, he said.
Timing and liquidity of self-funding. For high-net-worth clients who choose to self-fund their care, it is critical that they identify the assets they would use for care. They don’t want to be in a situation in which they have to sell investments or real estate in a down market. So there is no misunderstanding, Riekse said, it’s recommended that people complete and sign with their advisor an asset identification form that tells people where the funds for care will be found. You can download a copy of this form here.
Tax considerations. Another consideration is taxes. What are the tax implications of withdrawals for paying for care? Retirement planning includes considerations of the most tax-efficient withdrawal strategies to avoid higher tax brackets and expenses. Will LTC expenses paid then be deductible as medical expenses, subject to the 7.5% of AGI rule? “A benefit of LTC insurance is that benefits payments are typically tax-free,” Riekse said. This tax guide can explain some of the tax treatment of LTCi, he added.
State payroll tax exemption. Recently Washington State implemented the nation’s first publicly funded LTC plan for all state residents. The plan is funded by a .58% state payroll tax. As a result, someone earning $200,000 would pay an annual tax of $1,160 to fund a plan that would provide a maximum benefit of one year of care. “For people who had private long-term care insurance prior to November of 2021 they were able to opt out of the tax. Will other states follow Washington and develop their own state plans? It is possible in several states, and preparing clients now will help the conversation,” he said. Here is a link to an updated list of LTC legislative initiatives.
Family considerations. High-net-worth clients who self-fund may want to consider having a family discussion about what the plan for care would look like, what assets are designated for use and what the implications may be for adult children who may be planning on an inheritance one day, Riekse said. Often the desires and finances of siblings may be very different and daughters can often bear the brunt of coordinating care. While a care event can force a family together, it can also create underlying family problems at the same time. “Families who are insured with LTC insurance find that children appreciate the planning that went into the purchase of the product and now have a third party to help with care coordination as well,” Riekse said
Protecting the “tail” risk. At the extreme end, Riekse pointed out, some care events can be very expensive. For example, he said, a 10-year severe disability requiring 24-hour care could exceed $2 million in costs. This could disrupt other planned uses for savings. “As a way to protect against this, there are LTC insurance policies with lifetime coverage options,” he said
Leaving a charitable legacy. Charitable giving is very important to many high-net-worth clients. “If they are envisioning leaving a legacy to a particular cause or causes, how will an long-term care event impact those plans”? he asked.
Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at amseka@INNfeedback.com.
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