Insuring Against the Risk of Long-term Care

 Long-term care can be a huge expense and is not covered by health insurance or Medicare. But protecting against the risk is a lot more complicated than it used to be. Long-term care insurance is not as viable an option as it was. But new strategies have been created over the past few years. We talk about what they are and how to use them.

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Transcript below:

Speaker 1 (00:07):

Welcome back to 30 Minute Money, that podcast that delivers action oriented smart money ideas and bite-sized pieces. I'm Scott Fitzgerald from Roc VoX Recording and production at our studios in Bushels Basin just outside of Rochester, New York. And Steve Wershing from Focused Wealth Advisors is here, and we're gonna talk about ensuring against the risk of long-term care costs.

Speaker 2 (00:27):

Yes, we are. Scott, nice to see you again. It's good to

Speaker 1 (00:30):

See you. As always.

Speaker 2 (00:31):

We, uh, we wanna talk about this because in financial planning, one of the basic elements is risk management is, uh, protecting your financial plan against catastrophe. Mm. Um, does not make sense to, to have a great strategy and to be putting money away and have the perfect portfolio if the wrong kind of risk can come along and blow it all up because it takes all your assets. Right. And when you get into retirement, probably the single biggest risk that people face is the risk of needing long-term care of one form or another. So that could include things like a nursing home, but the most popular option, um, when, you know, most people want to age in place, they wanna stay home. Um, and if they get, you know, they may need help, they may need medical help, they may need some assistance with their daily

Speaker 1 (01:19):

Activities, like a nurse that comes in, visits them during the day, or some

Speaker 2 (01:22):

Exactly. Assistance. And so home healthcare is also long-term care as is, you know, there's assisted living and there's adult daycare and those kinds of things these days. Um, you know, so it used to be that if you went into a nursing home, it was a, a huge bill, but relatively few people went into nursing homes. Um, but now we have things like cognitive decline and we're living a lot longer. Um, you know, even when we have, even when we're compromised, even when we can't do all of our activities of daily living, we're still living longer. And so this is becoming a bigger and bigger issue. And that's why I wanted to talk about it a little bit because it's a, it's a hugely important issue when you're planning for your retirement. So let's talk a little bit about statistics here in Monroe County, New York. Um, if you have to go into a nursing home, which is like the, the most intensive level of care, um, on average in 2021, uh, a semi-private room in a nursing home in Monroe County costs $12,471 per month.

Speaker 1 (02:25):

Oh my goodness. Semi-private. So there's another person in the room with

Speaker 2 (02:28):

You. That's right. You want a private room. It's closer to $14,000 a month. Month. A month, A month. Very expensive. Wow. Again, you know, we have, we have a combination of a relatively small portion of the population and an incredibly high price tag, perfectly legitimate to say, you know what, I'm not gonna make sure I totally mitigate that because it's just too expensive to Right. You know, it's just, if it happens, you know, I, maybe my financial plan gets blown up. But what's a lot more popular, the MO than what most people really want and is actually the second most expensive kind of care is home healthcare. And a significant portion of the retired population is gonna need something like that before they pass away. Statistics currently are running something like 40 or 50%. Wow. If people in retirement are gonna require some kind of care like that for some period of time, and in Monroe County in 2021, home healthcare cost $5,720 per month.

(03:27):

So that's, geez, about $70,000 a year. Now, an additional $7,000 per year expense is enough to blow up a lot of retirement plans. Mm-hmm. . And that's why we need to worry about it. And the reason I want to talk about it, and it, it is a big risk because, you know, it's not necessarily clear to a lot of people how they would cover that cost. There's some misunderstanding, misunderstanding about that. Health insurance will not cover long-term care. Medicare will not cover long-term care. All of the standard kinds of health protections will not cover long-term care. It is its own kind of risk, and it is, as I said, it's enough to blow up a financial plan. So, uh, it's worth talking about. It's more complicated the these days than it used to be. When I was a young financial planner many years ago, you know, 25, 30 years ago, um, if you felt strongly about it and you were worried about it, you could buy long-term care insurance.

(04:26):

Um, still fairly exp even in those days, fairly expensive. But if you needed it, it was a humongous benefit. And I had a number of clients who ultimately, you know, their health declined and they went into some kind of a, uh, assisted living or a nursing home and it, it, it saved their estates. I mean, it was, it was a really big deal, not so much anymore because back in those days, you know, 25 years ago, the average life expectancy if you went into a nursing home was about three and a half years ish, thereabouts. And so when the insurance companies figured out how much they had to charge for this stuff, they figured, okay, well if, if they go into a nursing home, here's about how much it costs. And we'd probably have to pay it for about three years or so. Hmm. So that's what they based all the pricing on.

(05:15):

Then we got Alzheimer's and all of a sudden people were declining cognitively and they got to a point where they needed help, and then they needed help for 5, 10, 12, 15 years. Yeah. There were lots of insurance companies that went under because they priced it based on needing it for three years. And here they are paying it out for five years and 10 years and they went broke doing it. And if they didn't go broke, they probably cut back on offering it. It's a little bit like trying to get homeowners insurance in Florida right now. Yeah. It's just insurance companies don't want to get anywhere near it. And for those of us in the Empire State, this is the most difficult state to do insurance in the country. So in other states, there are all kinds of different options. There are all kinds of different coverages. You know, a lot of other states you might be able to choose, depending on the kind of insurance you're trying to buy, you might get to choose from between 12, 15, 20 different companies for long-term care.

(06:15):

In New York, you've basically got two. And so it's been a lot harder to get that coverage lately. And in New York it's even harder than that. So, um, you know, it's, it's not like it used to be where you could just go out and buy some long-term care insurance. We have to think of other ways to go about doing it. Um, and before we, so, so we wanna talk more broadly than just insurance because there are other ways of doing it. One way that you could do it and is advocated by some folks, some folks got real excited about this solution, then is to take a lot of your assets, maybe even almost all of your assets and put it into a trust that Medicaid can't get at. And so the idea would be you basically take the assets out of your estate, you put 'em in this trust over here, and if you ever need long-term care, you can spend down and get qualified for Medicaid.

(07:12):

Um, without getting rid of all your assets, there are some pretty significant downsides to that kind of strategy. I would think so, yeah. First is those trusts are irrevocable, you can't take 'em back again. Um, so, and, and that you can't control 'em. If you could control 'em, then Medicaid would come in and say, Hey, you can control that trust, you pay for it, I'm not gonna pay for it. So they have to be irrevocable and they have to be controlled by somebody else that causes, that potentially causes some issues. Um, you know, because if you get in, you know, if your trustee doesn't go along with what you say you want, well that could, that can cause some real problems. One of the other, one of the other challenges is you've gotta plan that far enough ahead. So if you apply for Medicaid, Medicaid will look back five years to see what you've transferred out of your, out of your name.

(08:06):

Anything that you've transferred out of your name, they will call back. Now you don't actually get the assets back, but what, what they'll do is they'll just assume that that money is there. And so they disqualify you for Medicaid for however long that money would've paid for. Hmm. So you can find yourself in a real pickle. I mean, if you transfer a lot of money out of your estate and then three years later you need Medicaid, you're outta luck, you're gonna have to figure out a way to pay for it for a couple of years, even though you don't have assets. Geez. And the other big, the other big issue is if you don't have any assets and you start needing care and you start going to facilities, they're gonna say, okay, yeah, well you seem like a nice person. How are you gonna pay for this?

(08:46):

And if you show 'em a statement of net worth that doesn't have anything on it, they're gonna be like, what are we talking about here? You know, we'd, we'd love to have you, but you can't pay for it. And so there are some real significant downsides to doing that. Now, there still is traditional long-term care insurance, um, and it has some real significant benefits. Um, one benefit is it makes you very attractive to those institutions that you may wanna get into, whether it be a home healthcare service or assisted living or a nursing home. You know, actually having an insurance policy is way better than having the money because if you walk in with 2 million on your statement of net worth, that's good. But the nursing home knows you can get rid of that pretty quick. Right. If you, if you check in, you and your family can spend that money, transfer that money, get rid of that money pretty quick, and then, you know, then there's a real question about how you're gonna continue paying for care because your objective might be to get Medicaid to pay for it.

(09:49):

The, you know, the, the, the nurse, the nursing home wants to, you know, wants to make sure they get their full rate. Yeah. So you walk in with a policy, they know there's only one thing that can be used for. They love people who have insurance because they know they're gonna get paid and they can see how long they're gonna get paid and they can see how much they're gonna get paid. So they really like to see coverage. So there's a real big advantage that way. Another big advantage is that most of those policies are designed with inflation, with cost of living increases. So you might buy a policy today, you may not need it for 15 or 20 years. Well, whatever you buy today, 15 or 20 years from now, it's probably gonna be a lot more expensive. But many, if not most traditional long-term care insurance policies have inflation riders in 'em.

(10:37):

And so the be the policy goes up and up and up. There's one, and, and, and then finally you get a case worker who helps you coordinate all that stuff. You know, when if you, if you needed care then chances and you had to arrange it on your own, then chances are your family would be scrambling around trying to figure out how to take care of it, what resources drawn where to get help on it. You know, there are a lot of stories about families that have really, it's really caused a lot of stress and, and difficulties in the family. Well, if you've got insurance, they prob they've got a caseworker that will help you coordinate all that and will do a lot of that work for you. So those are all really big benefits. There's one besides the fir the initial cost, there's one really significant downside to traditional long-term care insurance.

(11:25):

And that is that we can almost guarantee that your premiums are gonna go up probably substantially and probably on an ongoing basis. So from a financial planning standpoint, it gets to be really dicey because if we can't predict what it's gonna cost, it's really hard to figure out whether you can afford it later. Yeah. And if you don't use it, it's gone. All right. It's just like homeowners, it's just like, um, auto insurance, it's just like health insurance if you stop paying the coverage away. And so that makes it a really dicey proposition. So there's a new approach out there that really has just gotten popular in the last few years and it's called a hybrid policy and it's where they take a life insurance policy and a long-term care insurance policy and they put 'em together in one policy. Now I wanna distinguish this from a life insurance policy that has a long-term care rider on it.

(12:19):

That's another way that you can do it. One of the nice things about doing it that way is that, you know, you know you're gonna get a benefit one way or the other if you, if you buy long-term care insurance and it turns out you don't need long-term care. I don't wanna say the money's wasted cuz it's not. I mean, you bought protection and that that's what you got. You know, I pay for my car insurance every year. If I don't get into an accident, I don't feel bad about buying insurance. Right, right. It's like I don't want, I'm happy to pay for the insurance and I'm happy if I don't get into an accident. Right. . Right, exactly. So I still got value out of it, but long-term care insurance premiums are usually way higher than auto insurance premiums. And so some people just feel bad about, ah, you know, do I take this much out of my budget because I don't know if I'm gonna need it or not.

(13:05):

Well, if you buy life insurance with a long-term care rider and you need long-term care, basically what they do is they give you an advance on the death benefit. So if you get into the nursing home, they'll give you a certain percentage of the death benefit every month until you reach most of the death benefit. And then, and then it stops. If you don't need long-term care and you pass away your estate or your heirs get the death benefit. So one way or the other, you're gonna get a benefit. And in the meantime, if it's the right kind of policy like that and you decide you don't wanna do it anymore, well you can cash it in and get whatever the cash value is of the policy back no cash value in a long-term care policy. So there are some advantages there, but that's different than a hybrid policy.

(13:48):

A hybrid policy is actually designed as both of those things. And so it has the advantage just like life with a long-term care rider, that you're gonna get a benefit one way or the other. There are three ways you can get a benefit. Um, you can need long-term care and in, in the case of the hybrid, they will give you an advance on the death benefit, just like a lo life insurance with long-term care rider. But then they also have the long-term care protection on it. So, you know, if you buy a $200,000 life insurance policy with a long-term care rider and you need long-term care, they'll give you a substantial part of that $200,000 over the course of the first few years to pay for that coverage. If you get a hybrid policy and you get, you know, $200,000 worth of hybrid policy, they'll start for the first couple of years giving you an advance on the death benefit.

(14:42):

And then when you go through that, they'll start giving you a long-term care benefit. So you could get $400,000 worth of benefit from that policy if you needed long-term care. If you did not, there's a death benefit and your estate or your heirs get the death benefit. And if you decide down the road that you don't wanna do it anymore, you can turn the policy back in, they'll, it accumulates the cash value, they'll give it back. Now why is that better than a long a straight long-term care policy? Because they are more expensive than a long-term care policy. The biggest advantage is everything in that policy is guaranteed. The premium is guaranteed, the benefit is guaranteed. Unlike regular long-term care insurance, it's not gonna go up every year. It's written into the contract what, what, what the premium is gonna be, what the cash value is gonna be, what the benefit's gonna be.

(15:33):

It's all contractually worked out at the very beginning. The other benefit is most of these are structured for a limited time of pay. A lot of them, for example, are 10 years. You pay it for 10 years, you're done, you got the coverage for life, you can turn in the policy if you want to and take the cash value back. In a lot of cases, the cash value you would get back is pretty close to what you put into the policy. But if you, if you wanna leave it, it continues to accumulate some cash value and, and because it's doing that, the death benefit will often go up. So once you've gotten through 10 years, you're done, you've paid for it, you've got the long-term care coverage. If you don't need it, you've got a death benefit. That's a humongous advantage because now as a financial planner, I can say, okay, let's take a look at this in the plan because we know what it's gonna cost.

(16:21):

It's, it's given and that premium's not gonna go up. Obviously the um, the younger you are, the less expensive it is. So, you know, start, if you start thinking about it in your mid fifties, it it, it gets, it's, it is a, it's a more affordable than if you're if, if thinking about it in your mid sixties. Yeah. But it is a great way of like setting aside some of your estate off to the side in a place where, you know, you can, you can, you can guarantee that you're gonna have some coverage to pay that potentially biggest of risks, uh, in your retirement. And, um, and like I said, if you decide that you don't wanna do it later on, you can cash it in, they get the cash value out and, uh, you know, and, and you, you know, you, you will have recouped probably a fair amount of what you put in it.

(17:10):

Now, I should also say that especially if you have enough money and a lot of the financial plans I run, there's enough money that a long-term care event will take a lot of the wealth away, but it won't crash the plan. It's still possible that somebody, that one member of a couple, for example, could need long-term care and it won't ruin them. It, it will absolutely take a lot of the wealth away, but it won't necessarily bankrupt them. So looking at this and deciding not to do anything perfectly legitimate alternative, perfectly legitimate option, but from my standpoint as a financial planner, it's probably something you should look at and at least evaluate. And if you, if you look at it and see what the cost and benefits are and you decide not to do it, you've made an informed choice. But if you look at it and you, and you say, you know what? It might be worth it to do this kind of thing, to provide that kind of protection and, you know, get all the benefits in case I need it, you'll at least know what it is.

Speaker 3 (18:12):

Your retirement is at risk, not from the stock market, not from inflation. Taxes are putting your retirement at risk. I'm certified financial planner Steve Waring and I specialize in helping people create low tax retirements. Unmanaged taxes can take 30, 40, even 50% of your retirement income. Learn how to defend yourself against excess taxation. Our complimentary webinar will cover all the principles you need to know to protect your money for you and your family and keep it away from the government. This free webinar will cover how taxes are different in retirement, the taxes you pay in retirement that you don't have to pay during your working life. How to move tax savings into a tax free environment. The Widow's Tax, the Secure Act, the Secure Act 2.0 and what they mean to you. The webinar is free, but you have to register to save your spot. So go to focused wealth advisors.com/webinars and find out more and sign up right there. Even if you're not planning to retire for the next five or 10 years, this information will be critical for you. The longer you have to put the strategies into effect, the more you can accomplish. That's focused wealth advisors.com/webinars to find out more and the sign up today.

Speaker 1 (19:38):

All right, so your 30 minute action item,

Speaker 2 (19:40):

30 minute action item, check your insurances and consider what you would have to pay for care and whether or not you mitigate it,

Speaker 1 (19:48):

A lot of information there to digest. You can find 30 minute money at 30-minute dot money. Steve is at focusedwealthadvisors.com and I'm at rocvox.com. We'll see you next time on 30 Minute Money.