Making sense of LTCI for the affluent

By Peter Gelbwaks

Gelbwaks Executive Marketing Corp.


Self funding against the risks of long term care is a very common position taken by many wealthy clients and generally considered to be an acceptable decision by most advisors to this group. As we dig deeper into this topic, however, we find it is becoming much more common for affluent individuals to consider long term care coverage as part of their overall estate plan and a very cost-effective tool at this time.

We are now experiencing a much higher level of acceptance to the fact that affluent people age and experience long term care needs and events at the exact same level as the rest of our population. Because of this phenomenon, these same individuals are now more willing to prepare for a long term illness and have begun to include long term care as an important part of their overall financial plan.

The latest alternative products that combine either life insurance or annuity products with long term care coverage are being developed at a much more rapid pace since the advent of the Pension Protection Act.

Now that 2010 has arrived, we are experiencing some very favorable tax treatment of these types of contracts. Clients can now reallocate assets into a "linked benefit" contract, thereby creating a greater pool of tax-free benefit dollars that then may be used to pay for long term care expenses without a negative taxable event taking place.

These programs vary in their attractiveness and are not for everyone. However, they certainly add some significant reasons for higher asset individuals to consider using some form of insurance coverage to cover the long term care risk that exists.

Some wealthy clients find it very attractive to transfer both the financial risk and the physical responsibility of hands-on caregiving to others. Long term care insurance carriers can be of great assistance in accomplishing this goal.

Having access to the best health care providers (home health care agencies and registries), and having the insurance carriers deal directly with these entities and services is "just what the doctor ordered" for many clients who expect and demand this level of service.

Many of the affluent are entrepreneurial business owners and once they realize the many tax advantaged ways of purchasing long term care coverage thru their businesses, the math will make very good sense to this group and their financial advisors. Not only can their employee productivity improve with a long term care insurance offering, but enhanced retirement planning security will be realized. In addition, business owners can also receive significant tax advantages such as deductibility of their premiums paid, state tax credits or deductions, plus tax-free benefits.

Portability is another excellent feature of these programs so that upon termination of employment, an employee has the option of maintaining his/her coverage into and throughout their retirement.

Lastly, the employer has the ability to exclude certain classes of employees and carve out a rich program for the upper level management which only adds to the overall attractive nature of these contracts.

There's an even much more basic reason why financial advisors should become more familiar with this type of coverage. As the baby boomers age into their middle 60's and life spans continue to lengthen, the burden of caring for their parents and even their spouses is becoming a much more common occurrence. While some advisors still may not view long term care insurance coverage as important or needed, their wealthy client may feel differently. This may cause a credibility issue as the client begins to doubt the advisor, especially at the point of an uninsured event taking place.

When thousands of dollars need to be spent to hire caregivers, the credibility of the advisor can nosedive, especially if these services continue on for lengthy periods and the bills reach into the hundreds of thousands of dollars. Some planners believe they need to recommend long term care insurance coverage for "defensive" reasons and to avoid any potential liability.

There are now quite a few insurance producers who specialize in working with advisors such as attorneys, CPAs, financial planners and bank trust officers. If you decide to work with a long term care insurance specialist, make sure they have experience working with affluent clients and that they understand how to communicate with this group.

The great majority of affluent clients, want the very best care available and they all expect it to be done in their own homes. Round-the-clock care generally requires at least two shifts of people and can cost significantly more than conventional nursing home care.

Doing the math

Generally speaking, regardless of the age of the client or the plan design, it will only take three to 18 months of receiving benefits from a long term care insurance policy to recoup an entire lifetime of premiums.

For example, let's use a 65-year old married, healthy person who buys coverage with benefits of $200 a day or roughly $6,000 a month. We've assumed a 20-year life expectancy, so $3,335 per year in premiums would total $66,700 assuming no claims are paid before age 85. The $6,000 benefit doubles with a simple 5 percent inflation rider built into the plan, which means the policy pays $12,000 per month at claim time. After six months, the benefits will exceed the total premiums paid.

As advisors look for a plan and a carrier that fits their clients' needs, they should note that the affluent are used to having the best, and long term care insurance policies are no exception. They are generally brand conscious and want to work with a company that has excellent ratings and a good track record in LTCI. They may choose to add expensive options that more cost-conscious buyers forgo but make these programs even more appealing.

Flexible payment options are very attractive in the affluent market as they enable the policyholder to pay the full cost of the premiums within a specified time period. Most companies offer two types of limited pay options. The first is "10-pay" in which the premiums are paid in 10 individual payments. The second is "paid up at age 65" option that enables those under age 55 to pay all premiums before turning 65 to avoid payments during their retirement years. Among the advantages of these options is that they expose clients to less risk of a future rate increase. They are also attractive to business owners, allowing them to provide a paid up long term care insurance policy before an executive or employee retires. If an executive or employee retires early or terminates his employment before the long term care insurance premiums are paid up, he can still retain the coverage at his own expense.

As I said earlier, long term care insurance has become a sophisticated planning tool in financial planning for the affluent. There are well-designed plans for business, for example, that offer both underwriting concessions and premium discounts.

A business owner, for example, can buy coverage through a "C" corporation and decide who participates, deduct the full premiums paid, and receive benefits on a completely tax-free basis. Other than "C" corporations, the other types of businesses that can benefit from special tax considerations are those that operate as self-employed or partnership/S corporation/limited liability companies.

A planning tool

Given the availability and flexibility of today's products, it's hard to argue against making long term care insurance a part of an affluent client's financial plan. Take the case of a wealthy client with more than $50 million in assets who purchased long term care insurance for himself and his spouse. He insures a $10 million home; a $2 million boat; $1 million in jewelry; $1 million in art and; $500,000 in cars. He came to the conclusion that the potential need for long term care was another risk that merited coverage. In fact, out of all his insurance policies, he believes he is most likely to use the benefits of his long term care policy.

Affluent clients have little patience for inefficiency and are exacting in their follow through. Truly helping them -- in this case with a possible life situation that even money can't prevent -- is a rewarding experience that can open quite a few doors for your own business.

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