Planning for long-term care expense has become an integral component of overall financial planning.
While we advocate a consistent process with each client, our recommendations for appropriate coverage vary as each client’s health, wealth, asset location and financial goals differ. It is only in reviewing these four factors that we are able to recommend prudent funding solutions focused on our clients’ best interests.
Health — Long-term care insurance products are medically underwritten. Health history will determine carrier, product and ultimately the cost of a policy.
Determining insurability is the key to the entire process. Generally, the younger we are the healthier we are. As a result, age is also considered as we look at overall health.
Some clients can pass underwriting requirements well into their seventies and occasionally mid-eighties. But as we age, insurability becomes more challenging and premiums more expensive. Ideally, applicants should be between 45 and 65 years of age.
Of the long-term care insurance (LTCI) products in the market today, standalone pool-of-funds products, which comprise about half of policies sold, have the strictest underwriting guidelines.
Life insurance based products tend to be more lenient. It’s common for a carrier to issue a policy to an applicant with some medical conditions and charge a higher premium.
Annuity products offer the most lenient underwriting because applicants are paying
higher premiums for these products and offsetting much of the carrier’s risk.
Wealth Level — People with liquid assets between $100,000 and $5,000,000 should explore LTCI as a risk management strategy.
People purchase long-term care insurance for a variety of reasons: access to care, asset and income protection, quality of care, wealth transfer and not outliving income.
Motivations change with wealth levels. For example, access to care is closely aligned with lower levels of wealth. Affordability is the goal and income is the key. As a guideline, the National Association of Insurance Commissioners recommends that a LTCI premium should not exceed 7% of annual income.
Further, the National Association of Insurance Commissioners defines product suitability requirements related to assets and income. LTCI has more than a 99% persistency rate. In other words, 99% of policyholders keep their coverage in force. As people age, LTCI becomes more and more important. Clients need to be able to afford premiums now and years into the future with the potential of rate increases.
At higher levels of wealth quality of care and wealth transfer become the key motivators. Levels of coverage may vary from more coverage to mirror an above average lifestyle to less coverage as insuring against catastrophic loss becomes the objective.
Asset Location — Many clients have already set aside rainy day funds. Understanding asset location can help clients conveniently fund a policy, save premium dollars and/or minimize taxes.
The Pension Protection Act allows for tax-advantaged funding of a compliant annuity or life insurance based LTC policy using the cash value in an existing nonqualified deferred annuity or permanent life insurance policy.
Policies can also be paid for using qualified money such as funds in an IRA, 401(k) or pension plan. Knowing where assets are located helps us recommend appropriate product and funding solutions.
Financial Goals — What clients want to achieve with their wealth also plays a part in recommending a prudent long-term care funding solution. Financial goals drive coverage.
If preserving assets for wealth transfer is the key objective, the amount of coverage needs to be appropriate to protect assets. If not outliving income is the objective, then coverage that protects income producing assets becomes the focus.
It is our experience that each of the four factors must be taken into consideration to determine if LTCI is the appropriate funding option for a client and to recommend an appropriate product solution:
Together these factors provide a comprehensive approach to long-term care expense planning and appropriate insurance solutions.