by Melissa Klein
When it comes to purchasing long-term care insurance, the phrase “the sooner, the better” applies, according to financial planners.
“The earlier you get it, the better,” said Sandra L. Llewellyn, a long-term care specialist with Northwestern Mutual Financial Network in San Diego. “The younger you are, the better selection of plans you’ll have, and poor health won’t exclude you from any plans.”
She added, “The mistakes most people make are waiting too long, waiting until they’re much older to acquire it, believing that their children will take care of them and denying that they will ever need help.”
As many Baby Boomers care for aging parents and approach their own retirement, the issue of long-term care has moved to the forefront.
Llewellyn noted that a few years ago, the average age at which her clients purchased LTC was 78. Last year it was 53.
“There are advantages to acting now,” said Arthur Stein, CFP, of Cassady & Co., in McLean, Va. “There are always new policies coming out and the new policies are always more expensive than the old ones. A lot of the cheaper policies available are being replaced.”
“Everybody is restructuring their prices. We’re seeing increases of up to 50 percent,” said Michael Crifasi, president of CEI Financial Planning, in Atlanta, and head of the Financial Planning Association’s insurance-benefit program. “Companies under-planned the retention rate in long-term care policies. They thought there would be a high non-renewal rate and built that into their policy prices. In reality, people don’t discontinue long-term care insurance, and that’s forcing companies to do some serious rethinking on pricing.”
He noted that CNA, one of the first companies to provide policies, has exited the market.
Planners say that the favorable tax treatment of the premiums makes the policies attractive, especially for business owners. “A lot of CPAs and planners aren’t aware of the tax breaks available to businesses that purchase long-term care policies for their owners, their employees and their spouses,” said Stein. “C corporations can buy LTC policies for owners, employees and their spouses and deduct 100 percent of the premiums as a business expense. The premiums paid aren’t taxable income to the policyholders and the benefits paid aren’t treated as taxable income to policyholders.”
Stein noted that S corporations, partnerships and LLCs that buy policies for owners, employees and spouses can also deduct the premiums. Employees don’t pay taxes on premiums paid on their behalf. For owners who own more than 2 percent, only some of the premium paid on their behalf is treated as taxable income. The amount that isn’t taxable depends on the age of the owner (see chart, p. 23).
While companies are increasingly offering LTCI as an optional benefit for employees, Stein cautioned that those policies should be weighed against individual policies. “Group policies frequently are not as good and are usually more expensive than what people can buy on their own,” he warned.
Since LTCI isn’t cheap, affordability is often an issue. While some planners insist it is a must, others say it falls low on the list of priorities, because there are so many other immediate financial needs that must be addressed.
“In my opinion, everybody needs long-term care insurance, but the question is, can everybody afford it?” said Crifasi. “People who don’t have the income to support the premium payments without damaging their financial health or lifestyle shouldn’t buy it.”
“Long-term care insurance makes sense for middle-income, upper-middle-income and wealthy clients,” said Stein. “It doesn’t make sense for people who are too poor to afford it or benefit from it. It doesn’t make sense for people who don’t have sufficient life, disability and health insurance. In most cases, long-term care insurance comes after those needs. Once you’ve taken care of your other needs and are saving enough for retirement, if you can still afford it, then, for most people, it makes sense.”
“You almost have to have the insurance unless you’ve got a few million in the bank, because care is so costly,” said Alfred C. Clapp Jr., president of Financial Strategies and Services Corp., in Bronxville, N.Y. “Unless you have no money or a whole lot of money, you should look at it and consider at least some coverage.”
Llewellyn is a firm believer that everyone should have coverage. “Medicaid is available for people who really can’t afford the premiums. That’s who the system aimed to help. Everyone else should be insuring.”
While some planners are of the opinion that super-wealthy clients are better off self-insuring, Llewellyn disagreed. “Self-insuring isn’t the way to go,” she said. “The more wealth you have, the more opportunity you have to buy a better policy.”
Crifasi is also against wealthy clients self-insuring. “Why run the risk of multi-million dollar exposure when you can afford the insurance? I can’t see a logical reason for a person who has $15 million and can pay for the policy and can probably write off some of the premium not to buy long-term care insurance.”
When it comes to shopping for a policy, there’s no one size that fits everyone. But there are a few areas that planners agree should be considered.
“Always look at the quality of the company you’re buying from,” Crifasi said. “I prefer an A++-rated company over an A-rated firm, and I won’t even look at a policy from a B-rated company.”
Among this group, the consensus was that every policy should include inflation compounding. “Buy a policy with 5 percent inflation compounding, even if it means you have to buy less coverage,” said Clapp.
“It’s expensive, but it’s worth it,” agreed Stein. “The benefits will increase 5 percent every year without increasing the premium, whether the benefits are used or not.”
Planners also recommended policies that cover all levels of service — home care, assisted living facilities and nursing home care. Otherwise, home care, which most people want, may not be covered.
“Most policies have limitations that are more serious than people realize,” said Clapp. “Home care is the biggest.”
Opinions on limited pay options — such as 10-pay plans, where premiums are paid in full in 10 years — were mixed.
“If they can afford it, I think a 10-pay option is very attractive,” said Crifasi. “The further out you go, the less predictable a person’s income stream is. What I like about it is after the 10 years are up, there’s no risk of an increase in premiums that you have with a lifetime-pay.”
Llewellyn disagreed. “I never recommend limited pay options. I anticipate that long-term care policies will get better over time, and there’s no reason for a carrier to offer upgraded benefits for a policy that’s paid,” she said.
“I’m not big on 10-year payment options, because the ones I’ve looked at are very expensive,” said Clapp. “There’s a certain safety appeal to it, but it’s giving them too much money upfront. You can end up paying the same amount in 10 years as you would pay over 25 years.”
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