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The Life Insurance Solution To Long-Term Care Planning

Long-term care is a topic that my clients have wanted to talk about more frequently in recent years.  More specifically, my clients are asking, “How are we going to pay for LTC?” Everyone knows they are living longer, and they are afraid of running out of money.

It is no wonder that paying for LTC is on the minds of so many aging Americans when you consider 70 percent of people over 65 will require some form of LTC in their lifetimes, according to the Medicare & You handbook. The U.S. Department of Health & Human Services tells us that the national average cost of a home health aide is $30,240 per year and a private room in a nursing home can set you back $80,440 annually.

Naturally, the answer to “How are we going to pay for it?” depends on the individual client’s specific needs and circumstances. But first, let’s address this question from a 30,000-foot view, and then we will focus on specific strategies.

There are three possible ways to pay for LTC. The most obvious choice is to purchase long-term care insurance. Or clients can self-insure, meaning that if they have enough money, they can pay out of pocket for any care they may need. Finally, if clients qualify for Medicaid, the government will pay for their care.

Let me pause here and debunk a popular myth. When I bring up the topic of Medicaid planning with a client, they will often say something like, “No way! I don’t want to go on Medicaid. They are going to put me in a dungeon. I don’t want to be chained to the radiator in the basement. I am afraid of the dark. I don’t like spiders.” That is not how Medicaid works. 

Let’s say you have LTCi and enter a nursing home, or you are paying out of pocket and you run out of benefits or money. What happens to you? Do they toss you out in the street?

No. If you are out of money and require a skilled nursing facility, you likely will qualify for Medicaid. The facility that you and your family have selected will keep you there in the same room with the same services as before while Medicaid picks up what you cannot pay for. They have to, by law. This happens all the time.

Sadly, in many cases, a patient failed to do the proper planning ahead of time and spent down all of their assets. Now they are broke, and Medicaid is their only choice. There is a better option.

Proper Planning

First of all, why should someone own LTCi? Most say you should purchase LTCi to pay for care if you need it. That’s what LTCi does. That is not why clients should own it. They should own LTCi to protect their assets.

Owning LTCi is a net-worth issue. Here’s what I mean. If a client’s net worth (excluding their primary residence) is:

» Less than $500,000: Clients are likely to be unwilling or unable to afford the premium necessary to purchase a quality LTCi policy, especially since the consumer who buys LTCi tends to be 65 instead of 35, when it is quite affordable.

» Between $500,000 and $2 million:  Clients can comfortably afford a quality LTCi policy. Plus, these clients have enough assets worth protecting. So, purchasing an LTCi policy makes a great deal of sense for these clients.

» Greater than $2 million: Self-insuring is a viable option. Clients have enough money, properly managed, so that even a long-term illness will not deplete their assets. In fact, clients in this worth category may never touch their principal. That is not to say my wealthy clients do not own LTCi. Some do. But for them, it is a peace-of-mind issue, not a net-worth issue.

Medicaid Planning 

Now that you know who should own LTCi, who should self-insure and why, let’s look at a critical and often overlooked aspect of your client’s LTC planning and how someone qualifies for Medicaid.

Medicaid will pay for a client’s LTC only if they have no money and only if they need skilled nursing care. However, clients are permitted to have certain assets and still qualify. These exempt assets are:

  1. Primary residence.
  2. One car.
  3. $116,000 for a married couple or $2,000 for an individual.
  4. Assets held in certain kinds of trusts. And here is the opportunity for you to help your client, their estate and their family.

The trusts I am referring to are funeral trusts and estate trusts. Since Medicaid is a federal program administered by the states, exemptions and use of these trusts may vary slightly in your state.

These trusts are usually administered by a life insurance company. The trust will own a life insurance policy on the client and/or spouse. This policy is usually guaranteed issue, in some cases to age 99. The policy is intended for paying final expenses, leaving a legacy, avoiding probate, etc.

Claims are often paid within 48 hours, without a death certificate. This is key because it creates liquidity for the family when they need it most. If a loved one dies on Monday, when does the funeral home want to get paid? On Wednesday, or in four to six weeks, when most life claims are paid?

The biggest benefit? The asset is exempt from Medicaid.

This does take a little planning, though. Assets placed in these trusts are irrevocable. Once assets are assigned to the trust, loans are unavailable and the policy cannot be surrendered. There is also a five-year look back for shelter from Medicaid.

Here are a couple of examples of how I have used these tools to help my clients.

Case Study: Margaret

Margaret is a healthy 73-year-old woman with back and knee issues that prevent her from qualifying for LTCi. If she needed care, she would have to pay out of pocket until she spends down her $200,000. If she applied for Medicaid at that point, she would be declined because she still has $8,600 in the life policy she was saving for her final expenses. She now would have to surrender this policy and spend those funds before Medicaid would approve her. Here is what we did instead.

We transferred her cash value with a 1035 exchange into a policy owned by an estate trust, guaranteeing her funeral expenses will be covered. Since Margaret also wants to leave her grandsons money when she is gone, we placed another $30,000 in a separate policy owned by the estate trust.

Margaret is fairly healthy. Barring unforeseen health issues, it is expected she will not need LTC within five years, so the look-back period is a nonissue for her. We have achieved three very important goals for Margaret:

  1. Covered her final expenses.
  2. Guaranteed a legacy to her grandsons.
  3. Exempted these assets from Medicaid spend-down.

Case Study 2: Frank and Evelyn

Frank is 82, he has no LTCi and he just entered a nursing home. Evelyn is 78, healthy and afraid she will run out of money paying for Frank’s care. They have Social Security and annuity income, a $200,000 home with a $100,000 mortgage plus $600,000 in investments.

We know that the primary residence is an exempt asset, so we paid off the mortgage. We purchased a life policy on Frank owned by the estate trust. The policy has a $100,000 single premium.

Evelyn wanted to make sure that when she dies, her daughter, who lives in another state, had the immediate liquidity to come to Florida to handle the wrap-up of her estate and not be a financial burden. So, we purchased a policy on Evelyn with a $50,000 single premium. We expect Frank’s care to cost $250,000 over the next five years. This will have to be paid for out of pocket, since this planning was not done in time to satisfy the five-year look back.

In five years, if Frank is still alive, here is what Evelyn’s situation will look like. She has a home worth $200,000 that she owns free and clear, $150,000 in exempt estate trusts and $100,000 in other exempt liquid assets as half a married couple. Frank will then qualify for Medicaid.

When Frank dies, Evelyn will have $200,000 equity in the home, $100,000 from Frank’s trust-owned life policy and $100,000 in other assets, totaling $400,000. Perhaps this is not the ideal situation, because this planning didn’t start until Frank was in a nursing home, but it’s a far better situation than potentially spending down more and never getting Frank on Medicaid.

Only about 1.8 million people in the United States have a net worth more than $2 million. That isn’t a very high percentage of the population (0.6 percent to be exact) who can self-insure. Not only are a significant portion of your clients open to this conversation, but they also are desperate for this type of planning.


John Heck is the founder of Adagio Financial Group, Fort Myers, Fla., and a member of the Project Development Team at the John Galt Institute. John may be contacted at [email protected] .

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