Protecting Your Legacy from the Cost of Caregiving – Part 2

Over the last couple of months, we have discussed aspects of legacy planning, first looking at what elements make for a strong legacy plan and last month starting a discussion about how caregiving can impact what is left from your legacy and the options you have to pay for the cost of care. We finished last month’s issue considering the option of transferring cost obligations to an insurance company to lessen the impact of caregiving costs on your own personal funds. Because there are a variety of ways to transfer that risk, and the options have evolved over the years, we wanted to take this issue of the newsletter to go into a little more detail on some of the more popular approaches to using insurance protection to address what can often be the substantial cost of caregiving. Each of the options have their own features and benefits, so determining which one(s) may be a good fit for you will be situational based on your personal circumstances.

The Traditional Long Term Care Insurance Policy
Many people are familiar with traditional long term care insurance policies, and if they know anything about them, the one thing they likely have thought is that the costs of premiums can be sizeable. Traditional long term care insurance typically provides reimbursement of care expenses incurred up to a daily or monthly limit, which is how the policies are written. For example, you may have a policy that is rated to provide coverage for $100/day or $3,000/month for 5 years. Such a policy would offer a pool of benefits equal to $180,000 that meet those daily/monthly limits, so if you sought reimbursement but did not need the full amount of the policy limits, you would be able to receive reimbursement beyond the stated time period until your entire pool of benefits were exhausted. Many policyholders of these policies opt to include an inflation adjustment or automatic increase benefit, which increases the dollar value of the limits when you would need reimbursement, understanding that those costs will tend to rise over time. In addition to the premium cost, another concern often expressed about these policies is that if you don’t have a long term care need, you would have paid those premiums without receiving any benefit for them. These policies usually have an option for return of premium through the use of a benefit rider, which would increase the amount of the required premium.

Accelerating Death Benefits from a Life Insurance Policy
Among the options to address long term care costs outside of traditional long term care insurance is to essentially get an advance of the death benefit from a life insurance policy. This option may be available in permanent life insurance policies, although some term policies may have such a benefit, and it is typically termed a living benefit or accelerated death benefit because the money is being used for the benefit of the insured person on the policy prior to their death. This type of benefit can be obtained as a policy rider (an add-on benefit for which you pay an additional amount to your premium), or it may be a standard benefit of the policy. It may be called a long term care rider or a chronic illness rider, but the common requirement for using the benefit is what is generally considered a long term care diagnosis: not being able to perform at least 2 of the 6 activities of daily living. Those 6 activities are bathing, dressing, eating, toileting, transferring (getting in and out of a bed or chair), and continence. In some cases, there are additional requirements to access the benefit, such as the inability to perform the activities of daily living expected to be a permanent condition. When using this type of policy provision, each insurance company will have its own method of determining how much of the death benefit you can access and if there is a maximum allowable amount in a given year. More often than not, the benefits are considered indemnity payments, meaning you don’t have to submit for reimbursement of actual expenses, but instead you are paid out a lump sum amount that can be used at your discretion. Using an option such as this gives the life insurance dual purpose: a death benefit for your beneficiaries and a mechanism to improve your quality of life should you need it.

Accessing Contractual Income from an Annuity
There are a couple of primary ways that annuities can serve as an instrument to meet long term care needs, both of which use riders to yield the benefit. The first of those is taking your investment amount and multiplying the available amount for use as a long term care benefit, typically 2 to 3 times the investment amount. While you have access to the increased amount of money to be used for long term care, there is usually a maximum amount that can be withdrawn in a given year. In that respect it mirrors the traditional long term care insurance policy, where you have access to a pool of funds but are capped in how much you can use over a given period of time. While it acts similar to traditional long term care in that respect, you still have the account value that can be used if needed for other reasons, or if you don’t use the entire account value, what remains can pass on to your beneficiaries.

The other main way an annuity can be used for long term care is through a withdrawal benefit. At its core, an annuity is an investment that contains insurance protections, but the name indicates what it is intended to do: provide a lifetime of income through annuitization. Annuitization means you are turning a lump sum amount into an income stream. The positive of that situation is that you can receive permanent income, but the potential negative is that you give up the control of the underlying asset either as money you could use yourself as a lump sum or as money that would transfer to your beneficiaries upon death. Determining whether you get the short end of the stick or reap more benefits in that scenario is a function of how long you live. Today, annuities have provisions that allow you to still receive a lifetime income amount without having to annuitize the investment, which address the issue of losing control of the investment. These provisions are benefit riders and are typically called Guaranteed Minimum Withdrawal Benefits (GMWBs) or Guaranteed Minimum Income Benefits (GMIBs), and they set a maximum amount that you can withdraw in a contract year, and as long as you stay within the guidelines, the insurance company promises to make those contractual payments to you. Some annuities have an enhancement to such a rider that can increase the amount of the contract year limit if you qualify as needing long term care, sometimes up to doubling the contract year withdrawal amount. Similar to the accelerated life insurance death benefit, using an option such as this can give the annuity additional capability. The annuity is still an investment that you can use either for lump sum or ongoing income needs, and it can add to your income to help cover the cost of long term care.

Accessing Contractual Income from a Combination of Life Insurance and Annuity
As the insurance industry has evolved in seeking to meet needs for long term care protection, what are called hybrid insurance products have become a more prevalent option. The hybrid refers to combining life insurance and an annuity into one package that yields a benefit that can provide income to address long term care expenses. The structure of the product and how the mechanics of them work vary from one insurer to another, but they typically are using the premium payment to purchase life insurance, and that life insurance benefit can be accelerated for long term care income payments and/or to fund an annuity to provide additional income payments for a more extended period of time. There often are options that allow the policyholder to receive inflation adjustment on their benefit for an additional rider charge. There also can be flexibility in how the policy is funded, using either a single initial premium of making periodic premium payments over a period of years. You may also have the option of using retirement plan funds to make premium payments, which can be helpful if a larger percentage of your investment assets are held in retirement plans.

The landscape of obtaining protection from long term care is varied, but its evolution provides solutions that can meet the needs of people under different circumstances. With the reality of people living longer and often having the need to pay for caregiving needs, having a plan in place for this possibility is something everyone should strongly consider.

Stewardship Emphasis

Most of us want to live a long life, but we’d rather avoid the affects of aging. With proper planning, those golden years can still be comfortable even if your health isn’t perfect.

The Empowerment Channel |Volume CCXII | Dedicated to Promoting Financial Education through Stewardship