Fac­ing Up to Long-term Care

It’s one of the tough­est con­ver­sa­tions with clients, but ad­vi­sors must ex­plain the op­tions.

Financial Planning - - Contents - BY CHARLES PAIKERT

It’s a con­ver­sa­tion clients don’t want to have, but ad­vi­sors must ex­plain the op­tions.

When ad­vi­sors try to broach the topic of long-term care with clients, they of­ten hit a brick wall of de­nial. This makes it even more ur­gent that they do ev­ery­thing pos­si­ble to break down re­sis­tance.

“What I hear most of­ten is, ‘It won’t hap­pen to me,’” says el­der care at­tor­ney Robert Flem­ing. “And then it’s, ‘I’ll off my­self if it does, or go on Med­i­caid if I can’t go through with it.’ You’ve got a lot of plan­ning by de­nial go­ing on out there.”

Clients are un­likely to bring the topic up on their own — un­less they’ve seen some­one close to them have to deal with de­clin­ing health, says Kyle Depasquale, a wealth ad­vi­sor for Senti­nus in Oak Brook, Illi­nois.

“Ideally, it shouldn’t take some­thing like that to get the ball rolling,” Depasquale says.

Be­sides the fact that death and ill­ness are never easy sub­jects to in­tro­duce, the sta­tis­tics are daunt­ing. Clients who re­tire this year at age 65 will need to come up with about $280,000 to pay for health care and med­i­cal ex­penses through re­tire­ment, ac­cord­ing to Fi­delity. That’s up 75% from Fi­delity’s first es­ti­mate of $160,000 in 2002. At the same time, the mar­ket for long-term care in­sur­ance has been in

free fall. Pre­mi­ums have sky­rock­eted, of­ten dou­bling. Buy­ers are pay­ing more but get­ting less cov­er­age.

Even if a 60-year-old cou­ple could af­ford an­nual pre­mi­ums of around $3,500 for what the Amer­i­can As­so­ci­a­tion for Long-term Care In­sur­ance says might be a typ­i­cal LTC pol­icy for that age group, only a dozen or so com­pa­nies still pro­vide the cov­er­age, The Wall Street Jour­nal re­ported in a lengthy ex­am­i­na­tion of the mar­ket.

A so-called sil­ver tsunami will oc­cur as a wave of baby boomers need long-term care.

De­nials aside, the odds that a client turn­ing 65 this year will need long-term care are around seven in 10, ac­cord­ing to the U.S. De­part­ment of Health and Hu­man Ser­vices.

But less than 16% of adults have long-term in­sur­ance to pay for care, ac­cord­ing to a study by the Life In­sur­ance Mar­ket­ing and Re­search As­so­ci­a­tion.

Avoid­ance, the Plan­ning De­fault

It’s no won­der avoid­ance is the plan­ning de­fault — which is ex­actly why ad­vi­sors need to sit down with clients and have a talk about long-term care, ex­perts say.

“It’s crit­i­cal that fi­nan­cial ad­vi­sors have a con­ver­sa­tion about long-term care with clients, with doc­u­men­ta­tion,” says New York-based el­der care at­tor­ney Bernard Krooks.

“An­nu­ity hy­brids are giv­ing the mid­dle class an op­por­tu­nity to cover them­selves,” says Sa­man­tha Chow, se­nior an­a­lyst at Aite Group.

“Not only are you pro­vid­ing a nec­es­sary ser­vice for the client, you are pro­tect­ing your­self from be­ing sued by the client’s adult chil­dren, who, if things turn out badly, may say, ‘You should have talked to Mom and Dad.’”

The con­ver­sa­tion should be about more than just money, says Jean­nette Ba­jalia, pres­i­dent of Pet­ros Es­tate & Re­tire­ment Plan­ning in Jack­sonville, Florida.

“I talk to clients about well-be­ing, about lifestyle and pro­tec­tion,” she adds.

“I’m also very bru­tal. I force cou­ples to talk to each other about how they plan to deal with de­bil­i­tat­ing ill­ness, lost in­come and whether they want to age in place or move to a fa­cil­ity.”

Ad­vi­sors also need to have a dis­cus­sion with clients about ”what ex­tended long-term care could mean for their es­tate and the sur­viv­ing spouse,” adds Jared El­son, man­ag­ing part­ner at Re­gent Wealth Man­age­ment in Mor­gan Hill, Cal­i­for­nia.

Even­tu­ally, of course, the con­ver­sa­tion must turn to money. What are the op­tions avail­able, and how will the care be paid for?

The Self-fund­ing Op­tion

Self-fund­ing is a le­git­i­mate op­tion for high-net-worth clients — es­pe­cially ul­tra­high-net-worth clients.

“The very best plan­ning for longterm care is to amass great long-term wealth,” says Flem­ing, a part­ner at Flem­ing & Curti in Tuc­son, Ari­zona.

If clients are con­sid­er­ing self-fund­ing, ad­vi­sors need to help them “run the math,” says Kim Gar­cia, prin­ci­pal of Di­ver­si­fied Trust in Greens­boro, North Carolina.

“Imagine the worst-case sce­nario,” Gar­cia urges. “Fig­ure on eight to 10 years of full-time care. How much will that cost and how will that num­ber im­pact the port­fo­lio?”

If clients place a high pri­or­ity on hav­ing in-home care, us­ing the in­come from a re­verse mort­gage is a vi­able self-fund­ing op­tion, Ba­jalia says.

“It’s part of a lifestyle choice,” she ex­plains. “I use re­verse mort­gage as a ve­hi­cle that can be very cost-ef­fec­tive to bring care into the home. If stay­ing at home is im­por­tant to the client, I ask them if they think their son or daugh­ter is go­ing to change their di­a­pers. Oth­er­wise, how are they go­ing to pay for the care they need?”

But Depasquale ad­vises against self-fund­ing.

“Clients are us­ing their own money ver­sus us­ing lever­age with in­sur­ance,” Depasquale says. “Why pay re­tail when you can get it at dis­count? You can self­in­sure your car, but who does that?

she adds. “Fixed de­ferred an­nu­ities with health care pro­vi­sions are af­ford­able, serve more than one need and can be part of a holis­tic ap­proach to fi­nan­cial plan­ning.”

In­deed, ad­vi­sors are gen­er­ally en­thu­si­as­tic about these prod­ucts.

“They can help pro­vide for nurs­ing home care, in-home care, skilled nurs­ing as well as be a source for life­time in­come,” El­son says.

“Another nice thing is that they’re not life in­sur­ance — you don’t have to pass a med­i­cal exam,” he adds. “And they can be placed in­side an IRA so clients don’t in­cur ad­di­tional taxes.”

A ma­jor caveat for most clients think­ing about self-fund­ing longterm care: They shouldn’t ex­pect to leave much, if any­thing, to their heirs.

Ba­jalia, whose books in­clude Plan­ning a Pur­pose­ful Life, says she likes the hy­brid an­nu­ities so much that she owns two her­self.

“It’s a beau­ti­ful way to fund some long-term care pro­tec­tion,” she says. “There are mul­ti­ple ben­e­fits, in­clud­ing an in­come stream.”

She es­pe­cially likes fixed de­ferred an­nu­ities with in­dex fea­tures and long-term care pro­vi­sions that con­tinue the dou­bler pay­ments even if the cash value of the ac­count ze­roes out.

Cau­tion: Ex­am­ine Poli­cies

But Ba­jalia cau­tions that ad­vi­sors must in­sist clients ex­am­ine the poli­cies care­fully. Some an­nu­ities, she warns, may not pay out the dou­bler rider if ac­cessed too early and the ac­count value goes to zero.

Another caveat comes from Flem­ing, the el­der care at­tor­ney.

“An­nu­ities sold in ad­vance of in­sti­tu­tion­al­iza­tion are al­most al­ways a bad idea,” he says. “There’s a po­ten­tial in­come tax hit if the an­nu­ity

has to be cashed in. And [the de­ci­sion on] how to use the an­nu­ity is be­ing made at a time when some­one’s men­tal ca­pac­ity may be di­min­ished.”

Care Com­mu­ni­ties

A com­bi­na­tion of in­de­pen­dent liv­ing, as­sisted liv­ing and a nurs­ing home with on-site med­i­cal care and an em­pha­sis on com­mu­nity, Con­tin­u­ous Care Re­tire­ment Com­mu­ni­ties are growing in num­ber and pop­u­lar­ity.

The catch is the cost: The av­er­age en­trance fee is around $250,000, ac­cord­ing to in­dus­try es­ti­mates.

And that’s be­fore monthly fees, which can range from $1,500 to $10,700, de­pend­ing on such fac­tors as the terms of the con­tract, type of hous­ing, size of the fa­cil­ity and ser­vices pro­vided, ac­cord­ing to the U.S. Gov­ern­ment Ac­count­abil­ity Of­fice.

For those who can af­ford these com­mu­ni­ties, the em­pha­sis placed on so­cial­iza­tion is a ma­jor ben­e­fit, es­pe­cially as peo­ple live longer, Ba­jalia says.

But she cau­tions clients to study whether the fa­cil­ity has a his­tory of rate in­creases and whether the con­tract pro­tects an es­tate by re­im­burs­ing money if the client dies un­ex­pect­edly.

When mak­ing a visit, clients should ask peo­ple there what their ex­pe­ri­ence has been and “un­der­stand the white space be­tween the con­tract lan­guage,” Ba­jalia coun­sels.

While a care com­mu­nity can be a good op­tion, Gar­cia adds, they don’t elim­i­nate all costs and “only last as long as the client’s money does.”

Out­side Help

Is­sues in­volv­ing es­tate pro­tec­tion, taxes, trusts, char­i­ta­ble gift­ing, heirs and a sur­viv­ing spouse are in­te­gral to long-term care plan­ning.

In this ca­pac­ity, el­der law at­tor­neys can be an in­valu­able re­source for ad­vi­sors.

“It’s a rel­a­tively new and still evolv­ing field with laws that vary state by state,” says Flem­ing, a for­mer head of the Na­tional El­der Law Foun­da­tion. “We see more at­tor­neys work­ing very closely with ad­vi­sors all over the coun­try.”

Re­gent Wealth Man­age­ment refers clients to el­der care at­tor­neys on a reg­u­lar ba­sis, El­son says. “It de­pends on the es­tate, and what they’re try­ing to ac­com­plish.”

“If you’re deal­ing with Med­i­caid and want to pro­tect as­sets, it’s vi­tal to have an el­der care at­tor­ney,” he adds. “If there’s not as many as­sets in­volved, it’s not as im­por­tant to work with them.”

Para­dox­i­cally, it’s mid­dle-class clients who have the most to lose if long-term care is needed, El­son says.

“The folks in the mid­dle are the ones with the real ex­po­sure,” he notes. “The change in lifestyle can be dra­matic, es­pe­cially for the sur­viv­ing spouse. They can use the most help.”

Con­tin­u­ous care com­mu­ni­ties are a good op­tion for some re­tirees, but they “only last as long as the client’s money does,” says Kim Gar­cia, prin­ci­pal of Di­ver­si­fied Trust in Greens­boro, North Carolina.

Ad­vi­sor Jean­nette Ba­jalia owns two hy­brid an­nu­ities.

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