Benefit coordination is key to successful health care planning
By Kevin Wedmore
A2Z Annuity Marketing
Your clients are often confused about health care planning... Who pays for what services? How long will Medicare pay for care? What if my long term care insurance doesn't cover the whole cost of Mom's nursing home expense? When do I apply for Medicaid to help Dad pay for care?
You ability to answer these and the myriad of other questions your clients have is what will distinguish you from financial planners who are merely trying to sell their products through a myopic view of their clients' health care needs. A true professional in our business needs to understand what affect their estate planning and health care planning ideas will have on their clients, and this involves a thorough knowledge of "who pays for what" when it comes to long and short term care situations.
First of all, it is easy to state that everyone should have long term care insurance. On the surface, I can agree with that statement. Unfortunately, few have purchased or qualified for the coverage. So, we can get past the argument of what they should do and go to the position of what they have done. If they have long term care insurance, health care planning becomes easier -- even if their coverage doesn't cover all of the daily expenses. With the benefit of the policy proceeds coupled with their retirement income, your client is probably in a position to privately pay for a period that at the very least matches the benefit period of their policy. If they don't have long term care insurance, can't qualify for it for health reasons, or are just against the product because of the "use it or lose it" nature of the beast, then health care planning becomes a little more complicated.
Let's look at some of the options that are afforded to those who don't have long term care: short term care; hybrid life or annuities that pay long term care benefits; Medicaid; VA Aid and Attendance benefits; and finally, self-funded or self-pay. Of course, the latter can include the payment of the health care expenses by children, siblings, etc.
If they are to use any of these benefits, including long term care insurance, then some form of coordination needs to exist so that the family knows which of the programs is paying for what, and when. As part of this process, the educated planner will know the rules and regulations governing these programs and can assist them in taking advantage of every opportunity provided by our government to make sure that the client receives the best advice to preserve and maintain their estate. These rules are there for a reason: protect the lifestyle of a spouse, provide for the care and support of a dependent child, provide for a continued retirement income for the patient, etc.
First, let's look at short term care insurance. There are a number of companies offering policies that will provide benefits for home health care, assisted living, or nursing home expense for periods not exceeding one year. The purpose of this coverage is to protect against the most likely scenario your client might face -- high medical costs for an illness or injury that places your client into a care situation not covered by Medicare or other private insurance. Like long term care, underwriting requirements may eliminate some candidates, but since the benefit period is shorter, the underwriting guidelines are a little less stringent than those of long term care. The beauty of these products is that they provide the necessary funds to pay for the most likely situations.
Hybrid products are also available from a variety of companies and are built on both a life insurance and annuity chassis. The life insurance model includes more death benefit and is therefore more difficult to obtain. The annuity model may provide some tax benefits that make it more desirable than just leaving the funds in CDs, stocks or bonds. Either way, the value of the contract at the time of claim will determine how much per month is available to the client who is receiving care. These contracts are excellent for those who wish to set aside a certain amount out of their estate to pay for care.
Medicaid planning is a subject that I have been teaching for 15 years. While we don't advocate people purposely impoverishing themselves if they have the means to self-fund their health care, we certainly believe that a prudent financial advisor would share Medicaid planning techniques with the patient or his family so that a community spouse or dependent child would not suffer because the institutionalized spouse had spent down the family's assets to just $2,000. If all Medicaid patients did that, then our society would need to subsidize a lot of widows, widowers and dependent children.
The last avenue to provide funds to pay for service might be the VA Aid and Attendance program. If the client or their spouse served our military during a period of war, they have earned a "long term care policy" that was paid by their service to our country. The benefits of this program can be very generous, and when combined with other income such as Social Security, pensions, etc., it can provide enough monthly income to privately pay for services in a variety of care situations.
Now, comes the hard part: Coordinating how these various benefits work together. If you client has long term care insurance that does not provide enough coverage to pay all the bills, then current income and assets can be used to offset the difference and supply needed funds for any out-of-pocket expenses. The goal of any long term care policy is to provide at least five years of benefits with inflation riders to allow for the protection of certain estate planning techniques without interruption. Some of these techniques include the creation of irrevocable trusts, passing heirlooms or money to family members or charities, and minimizing the amount of money the patient has to pay for the nursing home.
Short term care insurance covers nursing home or home health care expenses for a period of a year or less. As mentioned earlier, underwriting restrictions are somewhat loosened since the company's exposure is less than with long term care. Again, these benefits are usually coordinated with current income and assets to pay any differences in coverage or to provide payment of services if the illness or injury lasts longer than the policy benefit period. The fact that one year (or less) of coverage is provided also allows elder law attorneys and financial planners an opportunity to do some estate and Medicaid planning to protect as much as possible from the Medicaid spend-down.
Many clients would benefit from several of the hybrid products that are currently offered. Since these policies allow 1035 exchanges and may allow for tax benefits on funds that would otherwise be taxable, they have become a staple planning tool of many financial planners, CPAs and attorneys.
Life-based products provide the highest benefit amounts, while annuity based products are easier to obtain due to underwriting. Most life products are single-premium products that provide for an immediate care benefit that is usually several times the original deposit. Of course, the policy also pays a tax-free death benefit should the patient die, and may pay long term care benefits on a tax-favored basis.
The annuity-based long term care product may also offer some tax advantages if the money is taken out and used for long term care expenses. At the same time, consideration should be used to pay for the expenses with qualified money first, since the tax issue may be offset by the medical expenses being incurred. Also keep in mind that long-term capital gains taxes are zero for those patients who qualify in the two lowest tax brackets.
Coordination of Medicaid benefits is really about what happens when someone outlives their money and must apply for assistance. With a five-year look-back in most states, new rules on annuities and how and when they become "Medicaid friendly," it is more important than ever to get and provide good advice on these matters and to work closely with an elder law attorney to assist your clients. Yes, you can purposely become impoverished to qualify for Medicaid benefits if you know and follow the rules that the state has created allowing you to gift, purchase, spend and preserve your assets. Let's remember, the Congress has created rules that include a substantial number of deductions, exemptions, and allowances when someone needs to receive care. It is important, however, that any planning includes the use of all insurance and long term care benefits, hybrid product payouts, and a review of your state's variations on the federal rules.
As for the VA Aid and Attendance benefit, every financial advisor who works with clients on issues related to retirement, estate planning and health care planning becomes familiar with this program. Veterans who served our country during a period of war (WWII, Korea, Vietnam, Gulf, etc.) for at least one day and have a total of 90 days of active duty, have a long term care insurance program already paid up. The total benefit can be in excess of $23,000 of tax-free income per year to help pay for things such as home health care, adult daycare, assisted living and nursing home expenses. It is worth reviewing the health care planning process to determine if this benefit is worthwhile to your veteran clients. If home health care will keep your client out of assisted living or the nursing home, then this benefit may be the answer to affordability. The same may be true for someone coming out of rehab and headed to skilled care in order to qualify for Medicaid. The VA Aid and Attendance benefit may be sufficient to put them in intermediary care such as an assisted living facility, thereby reducing the drain of health care costs on their estate.
All of these planning opportunities require an understanding of the overall concept of health care planning as an essential part of estate planning. Without health care planning, there may be no estate. If you are a long term care insurance agent or if you work in the Medicaid planning or VA planning areas, then it is important to take a broader approach to solving your clients' problems. Become familiar with these benefits and offer solutions that are not only immediate, but lasting.
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