Long-term care insurance can help preserve an estate

July 12, 2010
| By Pete Daly |
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Dan Miller’s parents both ended up living in long-term care facilities when health problems forced them out of their home. So did his wife’s parents. And both of their mothers suffered from Alzheimer’s, which can dramatically increase the number of years one spends in a long-term care facility.

Miller, who leads 65 financial advisors with the Edward Jones company in Kent, Ottawa and Allegan counties, said that for people who aren’t prepared for it, the cost of long-term care can be “the quickest way to destroy a well-designed investment portfolio.” The average cost of residing in a high-quality long-term care facility in Michigan is said to be about $212 a day, according to Miller, so a three-year stay could cost roughly a quarter of a million dollars.

Chris Wilks, a senior associate and long-term care specialist with Regal Financial Group, said many financial advisors tend to dodge the issue of long-term care insurance because it can be a touchy subject with clients.

People hesitate when it comes to considering long-term care insurance, although they don’t hesitate to buy home insurance, said Miller, noting that the odds of the house being destroyed could be about one in 300. People don’t hesitate to purchase insurance for their cars, with the odds of a claim being one in 30.

“But four out of 10 people are going to be in a long-term care facility,” said Miller, and he has heard that the average length of time spent in a facility is about two and a half years. In cases of dementia, an individual may not be able to function on his or her own and will require long-term care, but they are physically healthy enough to live for years.

“That’s where you hear about those five- and eight-year stays. It’s people who are healthy physically but not mentally,” said Miller.

Miller said some of the questions he and his advisors routinely ask their clients include: “How much of your estate do you want to leave to your children?” and “Do you want to be more in control” of the factors that determine where you would end up if long-term care becomes necessary? “More and more,” he said, “we’re looking at long-term care insurance being part of the solution. It has to be.”

Miller said that the problem with long-term care insurance is that many people won’t consider it until they are in their 60s, “and by that time, it’s just so expensive, people don’t take it.”

Data about costs of long-term care are listed on the website of the Federal Long Term Care Insurance Program, which provides that insurance option to federal employees, with the underwriter being the John Hancock Life & Health Insurance Co.

According to FLTCIP, a 60-year-old living in Michigan who buys long-term care insurance now would pay about $200 a month for a policy providing a benefit of $200 a day for a maximum of three years. The total benefit would come to about $219,000.

There are plusses and minuses to the long-term care situation in Michigan. A plus is that it costs less here than in some Eastern states, and far less than in Alaska. In Grand Rapids, the average total cost for two years of home health care assistance, followed by one year of residency in an assisted living facility, followed by two years in a nursing home, is $231,000. Those totals for other areas are: Hartford, Conn., $285,000; Anchorage, $428,000; Birmingham, Ala., $196,000; and Los Angeles, $211,000.

Wilks said one of the downsides of living in Michigan is the fact that it is not a “partnership” state like others such as Wisconsin and Indiana. In those and more than a dozen other states, individuals who buy long-term care insurance can exempt some of their personal assets from Medicaid eligibility requirements. The exempt amount is usually equal to the total benefit provided by their insurance policy.

That’s good for the state governments because it encourages individuals to obtain their own long-term care insurance. “Many of the states are starting to go that route,” said Wilks.

The U.S. Government Accountability Office did a study in 2007 of partnership programs for long-term care insurance and found that both partnership and traditional long-term care insurance policyholders tend to have higher incomes and more assets, compared to those without insurance. In two of the four states studied, more than half of the partnership policyholders over age 55 have a monthly income of at least $5,000, and more than half of all those households had assets of at least $350,000 at the time the partnership policy was purchased.

In Michigan, however, there is no partnership and none but the standard exemption of $2,500. Medicaid rules require an individual to spend all but $2,500 of their personal assets on their long-term care before Medicaid will kick in.

Some individuals are counting on their tax-sheltered retirement accounts, such as 401(k)s and IRAs, to pay for their long-term care cost at a facility of their choosing, but Wilks noted that people planning their retirement years forget that they will have to pay income taxes when they tap into the tax-sheltered accounts.

“They forget that 25 or 30 percent of that amount is going to go up in taxes,” said Wilks.

Wilks said financial advisors are seeing a “fairly substantial” increase in purchase of long-term care policies over the last couple of years, “probably because people’s (retirement) accounts got wacked so hard in 2008” when the stock market plunged.

Oddly, he guesses that only about 10 to 15 percent of financial advisors even mention long-term care insurance to their clients. Part of that, he said, is “an education issue.” But a large part of it is the “consternation” it can cause. In many cases, individuals who are over 65 or 70 and have some health problems will ask their advisor about long-term care insurance, and the advisor knows the cost will be so high, it will anger the client.

“If you’re managing a client’s dollars, you may not want to anger that person to the point where they’re looking for another advisor. And they’re really not mad at you — they’re mad at the insurance company — but they take it out on you.”

Some people who are young enough to afford long-term care insurance aren’t interested because they fear they may never need it and the investment would be a waste. Wilks said there are solutions to that: He has helped clients obtain hybrid policies that are a combination of life insurance and long-term care insurance.

The main thing is getting younger people to consider long-term insurance, when it is much less expensive. Wilks said the general rule of thumb is that every year past the age of 66 increases the cost of the insurance by about 15 percent. On the other hand, individuals in their early 50s would be “shocked at the low cost” of long-term care insurance, he said.

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