Long-Term Care Insurance and Retirement Asset Protection

Transcription

1 Long-Term Care Insurance and Retirement Asset Protection October 20, 2008 Presented by Claude Thau, President, Thau, Inc. Opinions expressed in this presentation are those of Claude Thau and are not necessarily shared by the SOA

2 Modern Portfolio Theory Protects Against Losses: Which is a Worse $250,000 Loss? $250,000 Investment Loss $250,000 LTC Loss 2

3 A $250K LTC Loss is Worse Than a $250K Investment Loss! 1. Can t sit back and await recovery 3

4 A $250K LTC Loss is Worse Than a $250K Investment Loss! 1. Can t sit back and await recovery 2. Can t start afresh to rebuild assets 4

5 A $250K LTC Loss is Worse Than a $250K Investment Loss! 1. Can t sit back and await recovery 2. Can t start afresh to rebuild assets 3. Can t select timing of loss recognition 5

6 A $250K LTC Loss is Worse Than a $250K Investment Loss! 1. Can t sit back and await recovery 2. Can t start afresh to rebuild assets 3. Can t select timing of loss recognition 4. Can t keep spouse and kids from worrying 6

7 A $250K LTC Loss is Worse Than a $250K Investment Loss! 1. Can t sit back and await recovery 2. Can t start afresh to rebuild assets 3. Can t select timing of loss recognition 4. Can t keep spouse and kids from worrying 5. Brings more emotional & lifestyle problems 6. Creates more family stress 7

8 When someone needs LTC, families incur 3 types of problems Emotional Lifestyle Financial 8

9 Primary caregivers often suffer worse health consequences 40+% suffer depression (vs. 15% of all seniors) 33+% report they need more acute health care They become more likely to need LTC themselves As a group, they die younger than non-caregivers 9

10 Stay at Home to Be in Touch with Your Family Quality time with loved ones Natural interactions Know what is going on in their lives Provide timely advice to them Avoid their feeling obligated to visit Avoid your feeling of being abandoned Also to visit friends and participate at your place of worship 10

11 Stay at Home to get Better Care Home is the Ultimate Private Room More control of decision-making Care from loved ones; maybe neighbors Your choice of commercial caregivers Less turn-over in caregivers Care when/where you want it Timely (constant) attention Keep your own doctor 11

12 Stay at Home for a Better Quality of Life Stay in your comfortable surroundings Eat what you want, when you want Bathe how/when you want Continue traditional avocations Listen to and watch programs you like No strangers as room-mates Visit friends; attend places of worship 12

13 Financial Planners should discuss LTC with their clients LTC has a major volatile impact on your client and their family. FP needs to know client s intent, so FP can advise as to liquidity & cash flows. Ask what they would do if they were the survivor of their marriage. 13

14 Should your clients self-insure instead of buying LTCi? Self-insurance is a relatively simple and appealing concept: Insurance is an expense. Why spend money on insurance if you can afford to cover the risk with my assets and income? 14

15 2.5 Years May Understate Average Length of LTC Reflects stay prior to interview, not future stay Does not reflect prior home care or ALF 63% of NH (73% of ALF) entrants received prior LTC services Data is facility-specific (2 facilities ) Short stays bring down averages Many die in first 90 days; irrelevant for 90-day EP Many are convalescent, not LTC 15

16 Historical Average Length and Cost May Not Apply Trend toward earlier start of commercial care And later end (extended life span, especially for wealthy) Multiple family members may need care May not be satisfied with Motel 6 Will LTC costs inflate faster than general inflation? Might want to stay at home no matter how expensive. The purpose of insurance is to protect against the UNEXPECTED, not against average needs! 16

17 The Difference Between Concept and Reality People who self-insure often do NOT get the care they need, or the care which would be most comfortable for them 17

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19 Fear of Outliving Assets 19

20 Fear of Outliving Assets Won t Spend Kids Inheritance 20

21 Fear of Outliving Assets Won t Spend Kids Inheritance It ain t worth more than $5. 21

22 Fear of Outliving Assets Won t Spend Kids Inheritance It ain t worth more than $5. Staunchly Independent 22

23 Actuarial Research Shows Impact of LTCi on Working Caregivers If they have LTCi, elders are 33% to 50% less likely to move in with a younger generation. LTCi lets them get the care they need at THEIR home when younger relatives can t be there. Derived from MetLife Study (March, 2001) 23

24 The Impact of a LTC Event on Assets Under Management (AUM) Insurance people encourage FPs to consider LTCi because it retains assets under management. Let s look at that issue. 24

25 The Impact of a LTC Event on Assets Under Management (AUM) Is a client s LTC likely to be funded by AUM? If so, then LTC could draw down a significant portion of your AUM for that client. LTCi would protect against the risk of LTC drawing down those assets under management. (For middle class people, the Partnership programs could add some additional protection for AUM.) 25

26 Paying the Premiums with Investment Income $250,000 investment earning 4% after-tax = $10,000 annual income. About 39% of that income ($3,900*) might fund more than $250,000 of LTCi coverage for EACH of two married 60-year-olds. *Presumes both are preferred risks; initial daily benefit of $220 with 5% compound increases, 3 year BP after a 90-day deductible period. Average of Genworth, John Hancock 2008 and MetLife per Broker World magazine, July

27 The Impact of a LTC Event on Assets Under Management (AUM) But overall, premiums (plus interest) must exceed benefits or the insurer loses money. So IF the premium comes from AUM, in the long run, LTCi would lower AUM. If premiums come from another source, LTCi protects AUM. Conclusion: AUM impact is unclear. 27

28 The Impact of LTCi on Bank Revenue LTCi may help build client relationships, including for subsequent generations. LTCi commission revenue: Much greater than investment spread, but Paid only once for each $1 of premium. 28

29 How Trusts and LTCi Interact Trusts to provide care to the grantor LTCi to cover the cost of the grantor s care LTCi to cover the cost of beneficiaries care Premium could be paid by beneficiary Premium could be paid by trust Premium could be gifted by grantor separately Charitable gifting ideas Maximizing $ for younger generations 29

30 Discussing LTC Planning It s the principle, more so than the principal. It s emotional, more so than financial. The topic is LTC, more so than LTCi. It s a FAMILY issue. Encouraging family discussion can result in new clients. 30

31 Ongoing Government Actions to Encourage the Purchase of LTCi Own Your Future State Partnerships for Long-Term Care Tax Breaks: I ll limit myself to Federal tax 31

32 Own Your Future Program Letters signed by Governors Mailed to people age Purpose: encourage personal responsibility for LTC planning Recommends consulting an independent advisor and comparing several LTCi carriers 6% response rate is not uncommon Fulfillment: booklet and DVD 32

33 Partnerships for Long-Term Care Government knows that if you have LTCi, it is very unlikely that you ll ever need to rely on Medicaid to pay for your LTC. So government is willing to give you an incentive to purchase LTCi to reward you for buying LTCi. 33

34 If you have LTCi You are unlikely to need Medicaid to pay for your LTC. But what about the risk of being one of the unlucky people who uses up their LTCi policy and still need LTC? 34

35 Example: You receive $400,000 before using up your LTCi. The insurer paid $400,000, saving you from having to spend your own money. The state allows you to protect that $400,000 from Medicaid. You can qualify for Medicaid without having to spend that money first. That money is also protected from being collected by the state after you die. 35

36 Example: You receive $400,000 before using up your LTCi. If you have only $400,000 of countable assets, they are all protected and will not interfere in receiving Medicaid benefits. With $425,000 of countable assets, you have to spend $25,000 of your own money before you might qualify for Medicaid. What if you have $1,300,000 of countable assets? 36

37 Partnership for Long-Term Care The Partnership is an additional back-end safety net to reward middle-class people for buying LTCi. 37

38 Individual LTCi Tax Deductions, 2008 Age Maximum Deductible Amount * Not yet 41 $310/year 41, not yet 51 $580/year 51, not yet 61 $1,150/year 61, not yet 71 $3,080/year 71 or older $3,8500/year *Medical/Dental expense; only about 4.5% of individual tax returns have deductible M&D costs 38

39 Rare Triple Play in C-Corp Taxes 1. Fully tax-deductible to corporation 2. Not included on employee s W-2 3. No taxation when claims are paid Plus, No requirement to cover everyone Applies for tax-qualified policies only Also eligible to be purchased with MSA or HSA dollars But 125 and salary reduction plans do NOT qualify The tax information herein provides a general overview interpretation and should not take the place of professional tax advice. The author, and his sources, do not provide legal or tax advice and nothing herein should be so construed. 39

40 Pass-Through Entities 1. Same as C-Corp for non-owner employees 2. Tax-free premium is age-capped for owners 3. No taxation when claims are paid Plus, No requirement to cover everyone Applies for tax-qualified policies only Also eligible to be purchased with MSA or HSA dollars But 125 and salary reduction plans do NOT qualify The tax information herein provides a general overview interpretation and should not take the place of professional tax advice. The author, and his sources, do not provide legal or tax advice and nothing herein should be so construed. 40

41 Pass-Through Entity LTCi Tax Deductions Caps, 2008 Age Maximum Above-the Line Deduction Not yet 41 $310/year 41, not yet 51 $580/year 51, not yet 61 $1,150/year 61, not yet 71 $3,080/year 71 or older $3,850/year 41

42 Cost Depends on Your Age Bought at 45 $ 771 Bought at 55 $ 909 Bought at 65 $1472 Annual Price Basis: per spouse, assuming both buy; average of top 3 carriers as of 31Mar 08 in Missouri. Lowest cost health classification. Benefit up to $3600/month, increasing 5%/year beginning after 90 or 100 days; full benefits can be paid for 3 years 42

43 Current vs. Future Benefits Presuming 3 Year Benefit Period Maximum Daily Benefit Maximum Total Benefits Today $120/day $138,080 In 20 Years $318/day $365,911 43

44 Buying Equivalent Benefits in the Future $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $

45 Of course, I know my house is on fire! That s why I want to buy home insurance now. 45

46 Health Qualification is Critical. We re More Likely to be Refused Coverage As We Age 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

47 Health Qualification is Critical We re Less Likely to Get Preferred Rates As We Age 70% 60% 50% 40% 30% 20% 10% 0%

48 Don t Ignore the Employer Market The average LTCi buyer is 58 years old Execs and employees are young and healthier than their elders Tax breaks are particularly attractive for C- Corps or people age 51+ Evidence of health may be less stringent Premium discounts can apply Excellent opportunity for commission revenue and client-building (less AUM-focused) 48

49 Thank you for coming! Please remember to fill out your evaluation form 49