Written by: Kyle Rizzo | Babcock Financial
A complete retirement plan should include a strategy for longevity and the impact that long-term health care will have on family, income, savings, lifestyle, and legacy…consumers agree. Read any sentiment survey targeted to retirees/pre retirees and notice you will find “cost of health care in retirement” at the top of the list. Long term care planning has been a deeply problematic area with equally problematic solutions for consumers for many years and will continue to be a pillar of retirement planning moving forward. So, what does the advisor need to know & how can you approach the conversation with your families.
Understand the problem & know the stats.
Here is a free Cost of Care by zip code calculator published by Genworth as numbers do vary significantly by geographical region:
A few key stats:
- 48% Percent of people turning age 65 will need some type of paid long-term-care service in their lifetime. For a married couple, the math says one of you.
- For women the average duration of a long-term care need is 3.7 years. For men, 2.2 years.
- 41 million people in the United States as of 2015 are providing unpaid care for family members.
- The Median increase in household net worth over a nine-year period for married people ages 70+ who did not require long-term care was 20%, while the Median decrease in household net worth over that same period for those who had a long-term-care need was -21%
- An estimated 9% percent of individuals aged 65 today who will incur out-of-pocket long-term-care costs will exceed $250,000 during their lifetimes.
Understand what is happening at the state & federal level.
The problem of longevity and declining health is increasing the number of people needing help with daily living activities or requiring supervision in old age. Several states are considering taxing residents who do not own a qualified Long-Term Care Insurance policy. Washington State has implemented such a plan that goes into effect in 2023. The Washington Cares Fund is a payroll tax on residents who do not own a qualified Long Term Care insurance policy. Employees in Washington state pay $0.58 per $100 of earnings without a cap. Employees who do not own private long term care insurance will contribute, and employers are responsible for collecting the tax and remitting to the Washington Cares Fund.
Despite only a limited time to purchase coverage and only in one state, the sales in Washington that year increased the LTC Insurance marketplace in the entire country by over 200%. One question is whether other states will give their residents any advance notice to obtain Long-Term Care Insurance to avoid the tax and since it generally takes 3-6 weeks sometimes longer to apply and get approved for coverage, many people in Washington ran out of time to obtain Long-Term Care Insurance subjecting themselves to the additional payroll tax which in some cases will exceed what the private insurances premium costs would have been anyway and with substantially lower benefits!
As of this writing, California, Michigan, Minnesota, and New York, are advancing closer to their social welfare LTC solution while other states are actively considering such a tax including Alaska, Colorado, Hawaii, Illinois, Missouri, North Carolina, Oregon, and Utah.
On the federal level, the Long-Term Care Affordability Act, the WISH Act & the 21st Century Long-Term Care Caucus have been discussed, proposing alternative solutions such as enabling tax-free distributions from qualified retirement plans for qualifying costs.
Identify When to address LTC planning with families
It will be critically important to work with state specific families as their legislation comes near to secure private insurance before it is too late. Regardless, like all insurance planning earlier is better due to increasing premiums, stringent underwriting standards, and insurability risks as we age…LTC is no exception. Below are application decline rates by age:
- 19.4% age 40-49
- 21.9% age 50-59
- 28.7% age 60-64
- 37.0% age 65-69
- 46.2% age 70-74
- 53.6% age 75+
Considering it may take a several educational discussions & strategy evaluations between advisor and client before implementation of a long-term care funding plan for the family, our firm introduces LTC education to every household no later than age 50 with the objective to have a plan in place by age 60 at latest.
The average age of an LTC policy purchase nationwide is 57.7, however considering the legislative push at the state level, to avoid additional taxes it may force people, even younger ones, to obtain coverage sooner pushing the average age lower in the years ahead.
Understand the private insurance marketplace
The good news is the federal government, and the states regulate Long-Term Care Insurance. Tax-Qualified Long-Term Care Insurance that meets federal guidelines under Section 7702(b) of U.S. code includes several consumer protections and uniform benefits that are clear cut between insurance companies.
Additionally, in recent years there has been an explosion in hybrid product structures combining aspects of traditional long term care insurance, life insurance, and annuities through different chassis and use of riders. While there is no “best” universal solution, there will be better options for each families specific personal and economic needs. Today’s advisors need to understand the product marketplace, tax considerations of premiums and benefits, and help families identify funding sources whether it be income, or re-allocation of existing assets such as 1035 exchanges.
There has never been a time when Long Term Care planning has been more top of mind for consumers, more in the crosshairs of legislators, and advisors have had more tools at their disposal to help families protect against longevity and the impact that long-term health care will have on family, income, savings, lifestyle, and legacy.
Kyle Rizzo, CFP®, CLU® is a lead advisor at Babcock Financial, a wealth management & financial planning firm located in Denver, Colorado serving clients nationwide. He serves as the trusted advisors & counsel to families when it comes to their long term strategic financial decisions.