The model above assumes the client is now 62 years old. Change the assumptions based on your client’s situation and the margin of error you wish to build. Then each year consider adjusting for increased costs beyond the assumed 5 percent inflation to be certain the funds are there should the need arise. Don’t forget the spouse. Adding another person may double the required funds. However, a creative use of long term care insurance can reduce that substantially as discussed later.

When determining how much coverage is enough, be sure to consider the portion of the total the insurance should pay for. It doesn’t always need to be 100 percent. Many people have the funds to get by quite nicely with just 70 percent of the total estimate covered.

The Bannister’s nest egg shrinks

Both Pat and Joanne eventually recovered. However, the cost was about $300,000 to get Pat back from his stroke and Joanne walking again after her car accident. As for the son, mom and dad paid him an advance of $50,000 on his inheritance to bail him out of his failed business venture. The Bannister’s $3 million estate just shrank by 12 percent.

“One more catastrophe and we won’t be able to leave that $1.5 million to the kids,” they continued to worry. Their estate planner hadn’t considered such a dramatic drop in principal so quickly. She assumed the balance would rise due to Pat and Joanne’s conservative investment plan. Pat Bannister had reason to worry. The $1.5 million the Bannisters planned on leaving their two kids was now down to $1,325,000, or $662,500 to each child (less the $50,000 advance already paid to the son, of course).

As often happens, the kids also felt the pinch. They were both counting on that money to pay down their home mortgages that were too high to begin with. Family conflict begins. The kids saw the money the parents used to pay for their care as spending down what should have been theirs one day soon.

Had the Bannister’s estate planner provided for long term care, they would have saved the $300,000 already spent from principal. The estate would have been preserved to pass down to the kids as originally planned. Further, family harmony would not be an issue. However, now their estate planner faces a cash and income short fall that must somehow be replaced. Additionally, there’s a new issue of uncertainty the estate planner failed to recognize before—the additional health care, long term or otherwise, the Bannisters may require that their estate plan must fund along with everything else.

The fall back alternative is selling assets to raise funds. Clients with illiquid assets such as real estate or securities are at the mercy of the market for an ill-timed sale. It’s a snowballing problem that only gets worse as Pat and Joanne age. Long term care insurance offers a better way to protect against this occurrence.

My estate plans rely on Medicare and Medicaid

Bad idea. While it is true that Medicare provides some long term care payment, the amounts are very small for only a short period and are paid only under certain limited circumstances. The patient is responsible for covering the remainder. Further, Medicare pays only for the first 100 days of a hospital or nursing facility stay. Only when your client has bled their savings down to a maximum of $2,000 will Medicaid step in to provide payment.

Asset management strategies

Neither Medicaid, Medicare nor any state plan was intended to cover the needs of someone with sufficient assets to employ an estate planner. Nevertheless, some practitioners try to manage the appearance of a client’s wealth by transferring assets to make it artificially look as if they meet the Medicaid qualifications. Don’t try it. There is a look back period on asset transfers of $55,000 or more that extends back for five years. Further, there is a proposal before Congress that would extend the look back period to eight years. Not coincidentally, eight years is the average time between Alzheimer’s onset and death.

Additionally, there are exemptions on certain assets. Besides the savings account maximum of $2,000, if one has home equity of $500,000 or more, they don’t qualify for Medicaid. The message is clear: If your client is of at least modest means, do not count on any long term care help from federal or state programs. Neither wants their constituents to rely on government funding to provide the majority of their long term care expenses. Moreover, if your client does wind up qualifying for Medicaid assistance, her choices of where to live and be cared for will be severely limited. Independence and control and lack of it are important to all of us—the elderly in particular.

The Bannister’s family strife

As Pat and Joanne use assets to pay for their monumental medical bills, their two children become less supportive. They see the tremendous cash outflow as money that was promised them being withdrawn. Pat and Joanne, on the other hand, feel angry and guilty seeing their plans come apart and their children distancing themselves. Such strife between parents who failed to adequately plan and their children is all too common. The best way to deal with this issue is to confront it before it ever becomes a problem.

Many estate planners sensitive to the issue bring the children into the process. They explain how the estate and capital preservation strategy works. They answer questions related to the various sources of funds needed for everyday life, emergencies and for long term care. They set to rest any questions related to the approximate amount of the estate on the parent’s demise and how the corpus is protected from invasion by such things as a protracted illness. Once everything is out in the open and the kids see how the parents’ foresight has protected the estate, the issue of spending estate assets dissolves.

Protecting estate assets

Even in death, there’s no free lunch. With the exception of just four states (CA, CT, IN and NY), Medicaid will recover from a deceased’s estate the amount of funds distributed to them while they were alive. However, California, Connecticut, Indiana and New York have all passed legislation allowing persons who purchased qualified long term care insurance policies (called partnership policies) to access Medicaid once the policies are exhausted. These people do not have to meet the same means qualification tests as do others. Further, certain of their assets are exempt from estate recovery after the individual passes. The intent of this legislation is to promote the purchase of long term care insurance by those who would not normally do so—those who are in the mid-wealth bracket. They are not poor, nor are they so wealthy that they can afford any amount of long term care without affecting their estate.

According to the Congressional Research Service, about 182,000 partnership policies have been issued in the four trial states since inception in 2004. To date, about $2.8 million in assets have been protected from estate recovery. Recent legislation has opened up the partnership LTC plans to all states that wish to participate.

If your clients reside in any of these four favored states, use the partnership policy to your client’s advantage. Here’s how:

1. Determine how much of the client’s assets are protected from estate recovery after death. In California and Connecticut, for example, each dollar of long term care benefits paid by the insurance company protect one dollar of estate assets. Therefore, if the policy paid $500,000 in long term care benefits for the last five years of the person’s life, then $500,000 of their estate is protected from mandatory reimbursement to Medicaid for any long term care it may have provided during the person’s lifetime. Residents of New York do not have to meet any asset criteria to qualify for Medicaid. Resident’s of Indiana, on the other hand, have a dollar-for-dollar and a total asset protection scheme.
2. Allocate long term care responsibility: Determine the amount of long term care your clients should pay for themselves, their long term care insurance should pay for and the amount that Medicaid should pay for
3. Target key assets: These are liquid assets clients should have at key times in their lives to both pay for living expenses, emergencies and the long term care calculated above.
4. Target Medicaid eligibility thresholds: If you choose to use the partnership policies that apply in your state, they will reduce the asset spend-down needed to reach Medicaid eligibility should the insurance policy benefits be exhausted by then.

What clients does this apply to?

That depends on the state and how it has chosen to protect assets. The NY and IN programs which provide for 100 percent asset protection and a hybrid of dollar-for-dollar and complete protection respectively would likely appeal more to high net worth individuals. The following chart shows the assets of long term care insurance partnership policy purchasers by state:

Assets at Time of LTCI Purchase by State

* Assets of 6% of the total IN population of purchasers is unknownSource: Purchaser Surveys of CA, CT and IN. NY did not conduct purchase surveys

The conclusion is that, depending on the state you live in, a long term care insurance partnership policy is more advantageous the greater your client’s asset base.

Which insurance companies participate?

There are a number of carriers that provide qualifying long term care partnership policies in each state. The following table shows a few of them:

The foregoing table is not an exhaustive list. Companies float in and out of this market. Source: Congressional Research Service, Report To Congress, Jan. 1, 2005 Tax treatment

There is a tax benefit astute estate planners boil into the mix. If the policy is tax-qualified at the Federal level, then premiums are tax deductible as medical expenses to the extent that they, along with unreimbursed medical expenses, exceed 7.5 percent of adjusted gross income. Further, the benefits are not considered taxable income under the IRC.

Smart management of long term care insurance costs

Source: America’s Health Insurance Plans, Long-Term Care Insurance 2002: Research Findings, Washington, DC, June 2004

Most of us know that the longer one waits to buy long term care insurance, the more costly it will be. The foregoing graph shows the average base premiums of the top long term care insurance sellers from 2002. Once a client hits age 60, the annual premiums begin to spike. They will go up dramatically if a client requires a 5 percent compound inflation protector, a nonforfeiture benefit or both. The premium costs could easily increase 1.5 to 2.5 times over the base. Depending on a client’s financial status, these costs may or may not be material. Use these techniques to balance the coverage required with the costs:

1. Benefit period: The shorter the benefit period, the lower the premiums. About 27 percent of the partnership LTC policies sold in California featured lifetime coverage. Yet, according to a Kipplinger survey, only 8 percent of 70 year-old claimants will need care for more than five years. Unless a client has a family history of chronic disease, chances are they won’t need care for more than five years. Families with a history of chronic disease should purchase care coverage for longer periods. This consideration alone reduces premiums greatly from lifetime coverage.
2. Shared care policy: If both spouses need a long term care policy, shared care may provide more coverage for less money. Shared care is really a pool of benefits that can go to both or either spouse. A single five-year shared care policy yields ten years of care between both spouses to be shared any way that’s required. For example, one spouse may need three years of care, leaving the other spouse with the remaining seven years. The turning point with shared care is that people may need a shorter care coverage period, thus reducing the premiums below that of two separate, but longer care policies.
3. Elimination period: This is the waiting period before benefits begin. The longer the elimination period, the lower the premium. They usually come in monthly increments—30, 60 and 90 days. A majority of Californians buying LTCI (72%) opted for a 90 day elimination period. Keep in mind, these people must have the funds to pay for the first 90 days out of their own pockets. However, over a number of years in paying premiums, the savings could be substantial—especially if regularly invested in the securities portfolio.
4. Daily benefit: Rather than insure for the maximum daily benefit required in a nursing home, many savvy individuals take a lesser amount. They bridge the gap with a self-insurance fund or with a coinsurance policy. Lower daily benefits mean a reduction in premiums paid.
5. 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:

   1. 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.
   2. 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.
   3. 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.
   4. 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.
   5. 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.