Inflation protection: Most counselors encourage adding inflation protection to be sure benefits keep up with rising costs. However, be sure to understand the type of inflation protection you’re recommending. The two kinds are compound interest and simple interest. The cut-off seems to be around age 62. If your clients are less than 62, then recommend compound inflation protection. Know that this could well double the premiums but for most, it’s well worth it. Over age 62, simple inflation increase should be sufficient and will lower premiums.
Will your clients meet the underwriting criteria?
It makes little sense to boil long term care insurance into your client’s estate strategy if they can’t qualify. Even though underwriting criteria for long term care insurance is less rigorous than for life insurance, it is now becoming stricter. The insurance carrier you select for your clients will determine if an LTCI candidate is reasonably healthy and not afflicted with a chronic or terminal disease. Minor health problems such as arthritis usually don’t disqualify a candidate. However, they may put the person into a higher rate class.
Preexisting conditions that require long term care will probably disqualify a candidate. However, if the individual is already insured and later develops the disease, the insurance carrier must cover the cost of their long term care as stipulated in the policy. High blood pressure is a common example. Just a few years ago, if the condition was controllable with medication (any medication), the person still qualified for a preferred policy. However, today, if it takes two or more medications to control blood pressure, they probably won’t qualify for a preferred long term care plan.
Among other things, insurance carriers look at activities of daily living (ADLs) to help assess qualification and underwrite an individual. ADL’s are six simple tasks that most of us easily complete each day. If candidates require assistance with one or more of these, obtaining a long-term care policy will be almost impossible. The common ADL’s are:
- Bathing
- Dressing
- Toileting
- Eating
- Continence
- Transferring (the ability to move in and out of bed, a chair or wheelchair)
Additionally, cognitive impairments will preclude a person from obtaining long term care insurance.
Depending on one’s age and medical history, the insurance carrier may require a face-to-face assessment. Advise your client that this usually takes about thirty minutes and that undressing in not required. The assessment’s purpose is to see how the client handles ADL’s and to check for signs of cognitive impairment For example, the carrier may do a delayed word recall test. All results are confidential and sent directly to the insurance company for evaluation.
Candidates should have available their physicians' names, addresses and names of medications they are taking. Also, candidates should provide their medical history and dates of surgeries, tests that were done, and hospital visits during the last five years. The carrier will ask for this information anyway. Better to have it at hand than delay the overall process.
Selecting a carrier
As a trusted advisor, clients are likely to ask their estate planners for a recommendation on their long term care insurance policy. Which carrier should you recommend? Most long term care products have similar qualifications and benefits. The deciding factor often is the carrier’s financial stability and history in its LTC insurance business. Your clients will be involved with the carrier for decades to come. They must be solvent when the time comes to pay their customer’s benefits. When evaluating an insurance company, use the same fiduciary standards of credit worthiness that investors do when choosing a corporate bond. Any insurance company you recommend should have these ratings:
- A.M. Best: A++ to A+
- Standard & Poors: AAA, AA+ and AA
- Moody’s: Aaa, Aa1, Aa2, Aa3
- Fitch/D&P: AAA, AA+
For those carriers still in the running, determine that the company has a commitment to staying in the long term care market. If the carrier has no such commitment, any insurance application runs the risk of being rejected or receiving a less than adequate offer. Rather than just being a waste of time, it could needlessly flag your client as an unacceptable risk by the Medical Information Bureau (MIB) to whom all insurance applications and offers are reported. This disgrace will become known to every carrier in the industry. Even if the reason for a rejection is erroneous—as many are—it is extremely difficult to correct. The simple solution is to apply only to carriers that want your client’s long term care business.
Lastly, we want only those carriers with less of a history of increasing premiums on existing policy holders. It’s true. Some insurance carriers are less prone to raise rates than others. Simply ask the representative to provide the history of rate increases for their long term care products. Then compare each candidate carrier against the others. All other things being equal (the carrier’s financial stability, their commitment to the long term care market and competitive pricing) choose the one with a history of less rate hikes.
Sheltering cash assets from estate tax
Let’s say the client is wealthy. The opportunity exists to have the long term care insurance policy owned by a trust that is domiciled outside the estate. The trust pays the premiums. The wealthy client has sufficient money to pay for the care needed. However, the trust is still collecting the benefits of the long term care insurance policy. These benefits are estate tax free because they are in the trust. This is a good way to shelter benefits from estate tax. For an expensive and protracted period of care, this could run into the millions. Further, adding a “return of premium” rider to the policy will allow all or part of the premiums paid over the years to be repaid to the trust on the client’s death. This is more money going to the kids free of estate tax.
Sheltering LTCI premiums as business expenses
Through the grace of the Health Insurance Portability and Accountability Act (HIPAA), C-corporations can deduct the premiums paid for their group long term care insurance program as part of their employee benefits plan. This is particularly advantageous for client’s who own their own C-corporation companies that have highly compensated employees. For long term care insurance there are no discrimination tests as with other types of benefits. Neither are company premium payments or care benefits treated as taxable income to owners or employees.
For most company plans, the employee’s family members can purchase the same insurance at the same rate as provided to the company as a group. Individuals buying long-term care insurance can deduct the premiums as an itemized medical expense on Schedule A. The benefits when paid are also tax-free.
Sole proprietors, partners and owners of S-corporations are not out of luck either. They can deduct a percentage of the eligible premiums for themselves, their spouses and dependents based on their age and income. The percentage works on a sliding scale in ten-year increments beginning at age 40. The eligible annual premiums begin low—$450 for ages 41-50—then steadily rise to a high of $2,990 for 71 and older. The percentage deductible is generous.
Stopping rate creep in its tracks
Most carriers offer a short pay premium plan. This allows payment of large premiums for a relatively short time, then never have to pay any more premiums. This strategy works best for a C-corporation seeking to shelter premiums as an expense. It has the desired ancillary effect of eliminating any further rate increases once the premiums are fully paid. Of course, you must be certain the carrier will still be in business once the premiums are paid and it comes time to pay your clients their benefits.
Which clients need long term care insurance?
Here are some rules for identifying those clients in your practice who may benefit from incorporating long term care into their estate planning strategy:
- Estate size: Long term care insurance works best for those of moderate wealth—resources not so vast that they can pay for any amount of care for any length of time and the sheltering techniques, while interesting, are of no material benefit. We generally use an estate value of $10 million as the cut-off point. Above that amount, long term care insurance is of little benefit; below it will likely more than pay for itself.
- Form of assets held by the estate: If the majority of the assets are liquid, then these can be used to pay for care when needed. However, if most of the assets are illiquid, such as real estate or the family business, then selling them in order to raise cash to pay for extended care could seriously jeopardize the overall estate value. In this case, long term care insurance is of immense benefit.
- Family situation: Estates that must consider children, spouses, extended family and multiple marriages can employ long term care insurance to avoid depleting assets that could otherwise go to the heirs. Further, as in the example earlier, use of long term care insurance can greatly minimizes stress and family strife when future heirs see large medical bills mounting over long periods of time with no end in site.
- Retirement plan: For most people, their retirement plan cannot withstand a sudden cash drain of several hundreds of thousands for multiple years. This is where long term care insurance fills the gap between a fulfilling retirement and one where it’s a struggle each month to make ends meet.
- Family history: Certain genetic diseases (Huntington’s disease, for example) can be predicted. For families with such a history, long term care insurance can make a huge difference. However, clients must get the policy before being tested.
Specific policy strategies
There exist several wrinkles in long term care coverage that can help fine tune your clients’ strategies.
Indemnity vs. reimbursement
Consider the differences between an indemnity policy and one that provides for actual cost reimbursement. Though more expensive, indemnity policies pay the full benefit amount the carrier committed to regardless of daily actual costs. For example, say an individual had a policy that promised to pay up to $200 per day in benefits, but the actual costs are only $150 per day. The insurance carrier pays the full $200 per day. Smart policy owners use this “excess” to pay for prescription drugs or other expenses. Others will put aside and earmark their “profit” for a time when their actual costs exceed the indemnified benefit.
Reimbursement policies, on the other hand, pay only for actual proven costs no matter what the maximum amount of coverage is shown on the policy. If actual costs are just $150 per day, then the benefit paid is $150 even though the policy promises to pay a maximum of $200.
Cash payment plan
Often thought of as a super indemnity plan, this one eliminates daily costs in the benefits paid calculation. Individuals receive the full benefit payment regardless of the amount of care they actually receive. For most, this is so much easier than trying to allocate specific costs to the day on which they occurred and then haggle with the carrier about over and under days.
Return of premiums paid
This is one feature that can make a difference to clients who don’t want to pay premiums and get nothing for it. Here’s how it works: Individuals can have all premiums paid returned to the estate on the policy holder’s death. Using this approach, at worst the client is essentially making an interest-free loan to the insurance company. At best, he gets full benefits paid and his money back.
A spin-off of the return of premiums paid plan is to return premiums paid in excess of the benefits used. So if an individual paid premiums of $75,000, but was healthy and only used $50,000 in benefits over his lifetime, his estate would be repaid the difference—$25,000—on his death.
Joint vs. individual policies
If both spouses own their long term care policies individually, both can collect benefits if needed at the same time. Also, once benefits begin and for the duration they are paid, all premiums cease. Separate policies for spouses are considered the more expensive option by many. However, it provides complete flexibility since each policy is independent from the other spouse.
For joint or shared policies, both spouses are jointly covered. Additionally, both spouses can collect benefits at the same time. If only one spouse needs care, the full premium for both spouses ceases.
Strategic uses in estate planning
We’ve covered several already. However, one that many estate planners overlook is linking long term care benefits with their clients’ charitable giving plan. This is a variation on the trust concept. However, instead of having the trust receive long term care insurance benefits for disbursement to the heirs, instruct the trustee to pay these particular proceeds to a charity. If the premiums come out of the client’s own company, they have succeeded in making a donation that is non taxable to their estate while funding it with before tax dollars at what could be a deep discount to the actual payout.
Future trends
One trend is certain: Premiums for LTC insurance are increasing quickly with little end in sight. A policy for a 55year–old, five years from now is likely to be at least 25 percent more expensive than for today’s 55-year old.
The trend also seems to be moving toward the Federal government taking actions that encourage people to buy long term care insurance. The partnership program and the asset protection afforded qualifying policies is one example. The tax advantages given to premium payments and benefits received are both another example. I anticipate that long term care insurance will continue to receive even greater attention from the taxing authorities as elected officials realize their constituencies demand relief from the enormous costs of the health care that so often accompanies aging.
Estate planners who educate themselves on long term care coverage and understand how to correctly incorporate it into their client’s strategies, provide extraordinary value added. They move themselves further out of the category of legal and investment technician and into the role of trusted advisor with a handle on more of the complete picture surrounding their clients’ future welfare.
About the author
Steve Fox has over 30 years of legal, insurance and estate planning experience. He is an attorney and a CLU, CHFC. He has written over 200 Long Term Care Insurance policies during his career, many of which are for corporations and groups. Steve is a principal at Simon, Altman & Kabaker, one of California’s premiere insurance brokers. In addition to Long Term Care Insurance, the professional resources of Steve’s firm span individual and group life, health, estate planning, succession planning and consulting. Reach him at Sfox@sakinsur.com.