Affluence is a Key Variable in Long-Term Care Considerations

By Claude Thau

Faced with different wealth-management challenges, higher net-worth clients can find value in long-term care insurance.

Consider the following syllogism:

1.) Affluent people live longer than average.

2.) People who live longer are more likely to need long-term care (LTC).

3.) Therefore, affluent people are more likely to need LTC.

Furthermore, LTC costs more for affluent people because:

a)    They live longer in general and also because they tend to want better LTC.

b)    Affluent people sometimes stay at home, no matter what it costs. If they enter a facility, they are more likely to have a private room and to select an upscale facility or one in a higher real-estate-cost community.

c)    Affluent people may be less likely to receive care from their children.  Their children often have important, demanding jobs and may have relocated for career advancement. Additionally, affluent parents are more likely to retire to a warmer climate.

Many affluent people are inclined to self-insure their LTC risk, often because they don’t like stand-alone LTC insurance’s (LTCi) “use-it-or-lose-it” nature.  

However, you can buy a product that combines life insurance and LTCi (“combo product”) to address that concern. A combo product is a better way to self-insure. You self-insure the first two to three years of LTC costs (perhaps more) with your death benefit that your heirs would otherwise receive. After the death benefit is used up, combo products provide partial stop-loss coverage inexpensively.
Surprisingly, the use-it-or-lose-it feature is actually beneficial. Consider what would happen if you do not buy LTCi and you never need LTC. Pause a moment, please, to contemplate what you would do with the money you save.

Most people tell me they would spend that money on a cruise or in another fashion.  Unfortunately, since the risk of needing LTC increases each day as you age, you’d never know when you could spend those savings. Only your heirs would know you never needed LTC.

Recognizing that any savings would inure to your heirs, LTCi has distinct, significant advantages over self-insuring, including:

a)    The first $400,000 of inheritance is generally more valuable than the second $400,000 which, in turn, is more valuable than the third $400,000.  LTCi scrapes a bit off the highest $400,000 tier to protect lower, more important tiers against your most volatile risk.

b)    Secondly, by dissolving the amount you need to set aside for potential LTC, LTCi facilitates gifting more money while still alive. It allows you to enjoy seeing the benefits your heirs receive from your years of hard work, thrifty saving, and careful investing. Moreover, you can counsel heirs on how to use the inheritance.

c)    Thirdly, LTCi allows you to spend more money on yourself without worrying about becoming physically or fiscally dependent on your children.

When people ponder these issues, they frequently conclude that it is attractive to be able to acquire millions of dollars of protection for nickels on the dollar, especially as LTCi benefits are tax-free under current law.

If you want to ever have LTCi, it is best to buy as soon as possible for several reasons.  For example, getting the compound benefit increases started is akin to opening a bank account for your grandchild at birth. Likewise, buying while young and healthy reduces the price.

Buying LTCi through an employer can produce tax advantages, price discounts (for extended relatives as well) and sometimes easier health qualification for employees and spouses. Employers can discriminate, paying only for employees and spouses they choose to cover. Employees can buy (additional) coverage at their own expense at discounted prices.

Because the industry has transitioned to gender-distinct pricing since early 2013, there are two particularly attractive current opportunities which will generate on-going savings.

•    Between tax breaks and price discounts, employers can purchase LTCi for five or more employees for roughly half the after-tax cost of standard LTCi purchased on-the-street. In addition, if at least 10 employees participate, height/weight and cancer history could be ignored for full-time employees below the age of 66 (except those who have missed more than five consecutive days of work in the past six months due to injury, illness or accident and those who have needed LTC in the past 12 months).

•    A few carriers are still charging the same prices for women as for men. So single women, in particular, would do well to purchase LTCi ASAP, no matter how young they are.

About the author

Claude Thau is a national long-term care insurance expert based in Kansas City.

P | 913.707.8863
E | claude@back9ins.com