Jason and Bob talk about how to protect your retirement from long-term care using asset based long-term care contracts.
Below is the full transcript:
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Announcer: Welcome back America to Sound Retirement Radio where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for, and transition through, retirement. Now, here is your host, Jason Parker.
Jason: America, welcome back to another round of Sound Retirement Radio. So glad to have you here with us today. You’re listening to episode 113. The title is Asset-Based Long-term Care. This was something that was really popular in my book, in my chapter on long-term care. With some of these alternative strategies on how to plan for long-term care.
We’re finding that they’re actually becoming more and more popular in the environment that we’re in today. We’re going to have a whole episode on this. I’m really excited about it. Bob, before we get going … Oh by the way, it’s my good fortune to have Mr. Bob Harkson, certified financial planner, retirement income certified professional, certified in long-term care. It’s just one of the things I’m excited about.
Bob: And certifiably crazy, I would have to say too.
Jason: You’ve got all kinds of certifications going on. It’s the long-term care piece. This is something that you’re passionate about, but before we get into it, I want to start out with a verse, and I have one here for us. This comes from Psalm 59:16. Way to renew our mind here this morning. It says, “But I will sing of your strength in the morning. I will sing of your love, for you are my fortress, my refuge in times of trouble.”
I think that’s appropriate given our topic today of long-term care, but then I’ve got a joke, Bob. Something to put a smile on your face if you’re going to be going to visit with the grandkids for Thanksgiving this year. This might be a good one, Bob. It says, “Which side of the turkey has the most feathers?”
Bob: I have no clue.
Jason: The outside.
Bob: That’s pretty clever I’d have to say. That was better than your last one by a long shot.
Jason: I’m getting better. I’m getting better every day, Bob.
Bob: You been going to joke school or getting your degree?
Jason: Dude, I have a certification for that.
Bob: I hope not.
Jason: All right. Asset-based long-term care. First of all, why don’t you just take a minute and kind of share why you’re passionate about this. You have a pretty powerful story from your childhood growing up. I think it’s important that our listeners know where you’re coming from with this.
Bob: Yeah, my mom had a series of TIAs and small strokes starting at age 55. At age 62, she collapsed in a grocery store with a massive stroke, which took away her speech and all movement in her body except her left arm. She was confined to a nursing home. Mom lived for 19 years. That was 19 years of private pay from my dad. Not including inflation and the cost of what you could make … probably $900,000.
Jason: 19 years of long-term care.
Bob: 19 years.
Jason: How old were you when all this started happening?
Bob: I was probably in my late 30s I think. Late 30s, in fact it was … I was 34 years old. We were driving on a trip, and we got the phone call. It was just … She wasn’t supposed to … expected to live, but she did.
Jason: After the major stroke?
Bob: After the major stroke, she had a strong will to fight, and it was not a good quality of life. It was this long, slow, downward spiral.
Jason: Nineteen years.
Bob: Nineteen years. The last facility she was in was a great faith-based facility. In 2008 she passed away. A room shared with 4 people, $72,000 a year, in 2008 so you can multiply that by whatever factor you want. It’s not cheap. Now my dad is in his … starting his 4th year in a facility.
Jason: How old is he now?
Bob: He’s 91.
Jason: Look, there’s just this tough … It’s a tough topic to talk about. We lost my father-in-law this year, and I remember those couple of days leading up to the moment when he passed away, sitting in the nursing home. It’s very, very emotional. It’s very powerful.
None of us ever want to think that’s going to happen to us but from a planning perspective, one of the things I hear a lot from the people that we serve is they say, “Jason, I never want to become a burden to my family, physically or financially.”
This is one area where even if you’ve saved a couple million dollars, if you need care for a long period of time … I just saw the recent average cost of care somewhere up around $8000 a month right now, and that’s an average. It can be a lot higher than that.
Bob: In different parts of the country, Alaska, New York, is significant.
Jason: The thing that I think most people have come to recognize is that we’re living longer, which is a really good thing. There’s a chance, today, with medicine, science, technology, people taking really good care of themselves, they say 60 is the new 40 right?
Bob: It sure doesn’t feel like that. Not that I’m 60 or anything.
Jason: On my way home the other day on the plane, the gentleman … I was talking and I shared with him that I was going to be 42 here any day and he said, “Boy you look like you’re in your 30s.” I really appreciated that. I wish more people would tell me that.
Bob: You get carded where ever you go.
Jason: I don’t anymore.
Bob: You don’t even drink alcohol, that’s what’s amazing.
Jason: Carded for my sparkle in my ginger ale.
Jason: Asset-based long-term care. One of the reasons I want to talk about this, one of the reasons you and I are both excited about this, some kind of ugly stuff happening with long-term care insurance right now in terms of rate increases. Share with out listeners some of what you’ve heard, and I’ll kind of chime in here as well.
Bob: What’s happened is when these policies start coming out in the early 90s, they used … they tried to model the life insurance and life expectancies based on life insurance and one of the critical mistakes, they underestimated the longevity of people. The other thing they underestimated was the fact that they figured, “Oh maybe 15, 20% of the people will cancel their policy.”
Long-term care policies are the last policies people cover. The cancellation rate is almost nil. Plus, we had the great recession, and what happened to interest rates? They dropped to the floor. Long-term care insurance companies have to be very conservative on their investments, and they’re mostly interest-rate-based investments, so they got hit in a couple of ways.
The first one they were responsible. They got into price wars. You can’t do that when you price long-term care. Then the third thing that’s happening is every time there’s a new mortality table, we’re living longer, and longer, and longer.
Jason: Then there was this … Some of my clients actually dropped by an article that was by Michelle Singletary in the local newspaper. She writes a column called Your Money. The title of the column is long-term care insurance still worth it? One of the things she says in this is that …
I’ll just quote her. I’ll actually read this right out of her article. She says, “Federal employees and retirees who participate in the Federal Long-term Care Insurance Program have until September 30th to decide whether to accept higher premiums that, on average, will be 83%, or $111 more per month.” 83% increase? That’s just in one year?
Bob: Yeah. I think the real thing to do is if you’re in that situation, the first thing is don’t panic and make any rash decisions, because [inaudible 00:07:27] will often offer you the ability to say, “Look …” For example, some of these increases came with people who took out policies that were lifetime policies. By reducing the term you can bring the premium under control.
Most of these policies had inflation protection riders which means the value of your policy went up 5% a year in terms of the daily or monthly benefit. Sometimes we’re reducing it to the 3% or to the price index.
Particularly if you’re older, you don’t need to have that kind of inflation protection, necessarily at 5%. You could live with a CPI, Consumer Price Index, or 3%. The combination of that will often bring that policy down to what the premium was before.
Jason: Number one, don’t panic if that happened, but number 2, and this is where we think asset-based long-term care, one reason it’s very popular right now. One of the reasons we want to talk about this too is November is Long-term Care Insurance Awareness month. This is timely in that sense. We’ve got a webinar coming up. I should probably mention that. On Wednesday, November 2nd at 1:15 in the afternoon, we’re going to be hosting a webinar on long-term care.
The good news is even if you miss the live event, if you sign up, if you register for the event, we’ll make you access available to the replay. We want to encourage you, even if you don’t make it to the live event, sign up for the replay, and you’ll be able to learn about asset-based long-term care.
Bob, one of the reasons people are looking at asset-based long-term care is then they’re not going to be subject to these rate increases right? If you just pile up money down to purchase one of these long-term care plans that are asset-based, and we’re going to get into more of the specifics on these in just a second here, it’s a single-premium product so you don’t ever have to worry about paying more premiums.
People that have maybe experienced a couple of these rate increases, they know they still want to have insurance in place, they’re starting to explore some of these alternatives just to make sure that 20 years from now, they’re not continuing to have these rate increases.
Bob: The great part is it’s a win-win-win. What I mean by that is you take, for example, a 68-year-old woman and a 68-year-old man, husband and wife. If they were to put $50,000 into this contract, it’s actually … It’s a life insurance and long-term care combined policy. In the event of the fact that somebody doesn’t use the policy, the death benefit would be $70,000. The heirs will get $70,000.
Jason: They put $50,000 in and no matter what happens … If they never use it, they never use it, the death benefit is $70,000. Tax free?
Bob: Tax free. The other part of it that’s really interesting …
Jason: Income tax free I should say. There could still be estate taxes, state or estate taxes if they’re over the thresholds.
Bob: The other part of it is that on these policies, if you have to pay for long-term care, it’s 4 times… It can range from 3 to 4 but in this couple it’s 4 times the $50,000.
Jason: You put 50 grand in and it’s going to leverage your money. It’ll give you $200,000 worth of protection for long-term care.
Jason: See that’s pretty nice leverage because the problem most people have with buying traditional long-term care insurance is they say, “Jason, I’m going to spend all this money, every year for the rest of my life, and if I never need it, then it was just money I’ve thrown down the drain. There’s nothing to show for it.”
Bob: That’s what insurance is. That’s what car insurance is, homeowners insurance, if you don’t use it, you lose it.
Jason: But asset-based long-term care takes away that concern.
Bob: You don’t … Absolutely.
Jason: If you don’t use it, your heirs not only are going to get the $50,000 that you put in, they’re going to get a death benefit that’s $70,000 and the life insurance is tax-free. It’s a tax-free way .
Jason: If you’ve got money sitting in the bank that’s not doing anything for you … Now the key is health. These policies are from a health underwriting standpoint. They’re not quite as hard to qualify for as traditional long-term care insurance.
Bob: You have to be in pretty good health. There’s still a qualifier there. You can’t be on the one foot in the nursing home trying to get …
Jason: You can’t be carrying around an oxygen tank when they come to interview you. Obviously there are things that are going to disqualify you. I think the thing that I really like also that if you have an old life insurance policy that has a lot of cash value, the law allows you to do a 1035 exchange into this policy, and use that cash to leverage …
Jason: So you still have a long-term care, you still have a death benefit …
Bob: Death benefit.
Jason: But now you also have a long-term care benefit that comes along for the ride.
Bob: Exactly. There are even some policies that are not based on life insurance, but maybe like an annuity. You put money into this tax-deferred annuity, and you maybe put $100,000, it’ll give you $300,000 for care and maybe $150 a day benefit, but in the event that you don’t use it, your heirs get the money, and if you have an annuity, you can do a 1035 exchange in that and the long-term care benefit comes out tax-free.
Jason: Tax free. That’s the piece that I think a lot of people don’t realize. The Pension Protection Act that was passed way back in 2006, but went into place in 2010, so for people out there that have these old annuity contracts, and they’re saying, “Do I really need this thing?” Some of them don’t want to change them because let’s say they put $100,000 into an annuity and that thing’s grown to $250,000.
The problem with annuity contracts is when you pull money out of those contracts, they’re ordinary income tax rates, so you’ve got … It’s LIFO tax treatment, Last In, First Out, so as you’re taking money out of an annuity contract, it’s coming out your gains first, until you get down to your basis.
Because of the Pension Protection Act that finally went in completely into place in 2010, let’s take that same scenario, you put $100,000 into an annuity, it’s grown to $250,000. You don’t really need the money, so you don’t want to take the money out of the annuity contract and have to pay all those taxes. You can do a 1035 exchange, which people who are familiar with real estate are familiar with 1031 exchange.
It’s just a like-kind exchange. You can take money out … not take it out, but transfer it from one annuity contract to one of these new hybrid LTC annuity contracts, and then not only do they get the leverage with the hybrid LTC contract, but they also have a tax-free benefit now because Congress says, “As of 2010, you don’t have to pay taxes on the gains if it’s being used for qualified long-term care facility.”
Jason: That is a cool tax strategy, Bob. That’s not just a cool way to protect yourself from this risk. It’s a way to say, “Hey, I’ve got money that’s tax-deferred. How can I get it into a tax-free position and leverage up that asset for my heirs? Now, if you die and you never use it, there’s still going to be a tax liability on the gains, right, because there’s …
Bob: I’ve had clients who say, “I don’t want to pay $500, $600 a month in long-term care premium, so we’re going to set aside a couple hundred thousand dollars of our estate to pay for care. We’re not going to spend it, and if we don’t spend it, it goes to our heirs.
I said to them, “How would you like to make that be $800,000 or $600,000 for the purposes of long-term care?” It was a no-brainer for them because they said, “We’re not going to spend it anyways.”
Jason: There are people right now that are sitting there with money in the bank, bank accounts, and money markets, and certificates of disappointment, that are earning almost nothing on that money. It’s not doing anything for them. It’s dead. They want the money to be safe, but they don’t want … It’s just for an emergency fund.
Then you ask them, “What’s the emergency?” Most of the time, it’s probably a health care concern so one of the other reasons we’re really excited about this is because if you’ve got money that’s just sitting there, and you’re thinking, “Hey this is going to be my money for an emergency some day or for a health care event,” this is a way to leverage those dollars up.
I can’t over … under… or overstate that point that you made in terms of the leverage, Bob. We’re talking 3 to 1, 4 to 1, so you put a dollar in, you get $4 of coverage. You put $50,000 in, you’re going to get $200,000 of potential long-term care. The numbers aren’t always going to work out exactly that way, but it puts you in the ball park.
Bob: One thing to keep in mind is we all think we need to get coverage that will cover the full amount for a nursing home, which is really expensive, but most of us will have income and retirement.
Jason: Like Social Security.
Bob: Social Security, or pension, or 401K, or IRA that you’re spending. Mainly what you need to do is something that makes up the gap. That’s where these fit in really well. It’s not to cover all the costs, but it helps offset the costs so you don’t deplete your portfolio.
Jason: And it gets you out of that trap of having to be in a position so for people that have long-term care insurance that are experiencing these really high rate increases on these annual renewing policies, if you have enough assets where you can afford to take some of your money and set it aside … I think it’s important that people realize, this is not a good tool for IRA money.
Bob: No, you’d have to take the money out of the IRA and pay tax.
Jason: This is for non-qualified assets.
Bob: This is non-qualified money. This is money you have in the savings account or in a brokerage account. You’ve got to ask yourself the question, “Would I rather have $50,000 that I’ve set aside that I can never have access to, but if I die, my kids get $70,000?”
Jason: Wait a second. That’s not the case. They do have access to it.
Bob: They do. Exactly. In other words, you may pay a little small surrender fee or you may be able to get a rider where you could say, “I want to cash in and get all my money back.”
Jason: One of those. We were looking, reviewing some of these contracts just recently for some perspective clients. One of the contracts said, “If you put $50,000 in, you’re guaranteed you can take $40,000 back out,” so there’d be a penalty that you would pay initially. That was one.
The other one that we were looking at said, “After 5 years, if you put $50,000 in, you get all your $50,000 back, You wouldn’t have earned any interest, and you wouldn’t have that long-term care feature there anymore, but you’ve got some liquidity in case you every needed to access that money for a different reason. The kids come home and they say, “Hey, we’re trying to buy a house and we need a down payment. Mom and dad, can you lend us some money?”
They could go access it. It’s not like the money’s completely gone, I guess is the point. There may be some penalties to get to it in the short term, but they can get to it.
Bob: If you hold the policy, let’s say, over 10 years, some of them actually you’ll get more back than what you put in if you cash it in and haven’t used any of the benefits or taken money out of it before.
Jason: I think this is going to be one of the most hotly attended webinars that we’ve ever done. I just want to remind our listeners, Wednesday, November 2nd at 1:15, even if you can’t be on the live event, because I know a lot of people like to ask questions during the live event, but even if you can’t be on the live event, when you register, we will send you a link out so that you can watch the replay so you have access to this because this is …
Let me share with our listeners why … one of the reasons why this is so important. You talk to anybody that works in the hospitals or nursing homes, and ask them how quickly they see people spend through a lifetime of savings. They’ll tell you.
Here’s some of the recent facts. According to a recent projection, Bob, 70% of people 65 or older will someday enter a nursing home. Number 2, if you need nursing home care, your friends and family may not be able to help you pay for it. The Genworth Financial 2015 cost of care survey notes that the average annual cost in 2015 for a semi-private room was $80,300. Semi-private.
Medicare, now this is interesting, Medicare will not take care of your long-term care needs. Medicare pays only for approved charges. Only for skilled and rehabilitative care. Only after 3 days and nights of hospitalization, and only for maximum of 100 days per diagnosis.
Just because you have Medicare doesn’t mean that you have really any long-term care protection, because unless you hit these qualifiers ahead of time, you may not qualify. I have to tell you, Medicare, they try not to keep you in the hospital for 3 nights, specifically because …
We really had to fight for this with some family members to say, “No, you’re not kicking them out of the hospital on the second night just because Medicare doesn’t want to have to pay for the rehabilitative care. He needed to be in the hospital for that 3rd night. You’re not kicking him out just because Medicare doesn’t want to reimburse it.
Bob: Medicare’s reimbursed a flat fee for whatever the predicament is so if they keep you longer, the hospital, it’s out of their pocket.
Jason: The other thing is Medicaid here. Medicaid will pay for required care only after you’re existing assets have been spent down to meet state and federal guidelines so it’s important to remember that yes, we have the safety net, but for most of the people we serve, high net worth people, if you’ve saved a million dollars, you’re going to have to private pay for that care for a long time before you get to the place where Medicaid kicks in because what do they let you keep these days, Bob, like $90,000?
Bob: Right. Then maybe your spouse will get to keep a couple thousand for income so there’s a term they call it. It’s called artificial impoverishment. That’s the term that they use to say you have to artificially impoverish yourself, spend down your assets, so you get to keep maybe …
Jason: That’s not artificial impoverishment, that’s real impoverishment.
Bob: The point is…
Jason: The attorneys will try to play a game with the artificial…
Bob: Exactly and the point is that you’ll maybe keep your home, one car, personal belongings, some cash, and then the rest goes for care.
Jason: Yeah. I think the other thing is a lot of times people, when they hear long-term care, they think nursing home, but the reality is the bulk of people needing care are not going to nursing homes anymore. They’re doing this in in-home care. They’re doing this in adult family homes. They’re doing this in assisted living care facilities.
I know that a lot of assisted living facilities are doing a lot more for people than ever before. The bottom line is this, nobody ever wants to think that they’re going to get old. Nobody ever wants to think that their health is going to change.
Everybody would rather procrastinate and say, “Hey, this is something I’ll take care of 5 years from now, 10 years from now. I’ll wait until I’m 60 to do this. I’ll wait until I’m 70 to do this. I’ll wait until I’m 75. I’ll wait until I get the bad news and then I’ll go try to buy a long-term care.” Bob, can you buy insurance on your house when it’s already on fire?
Bob: No you can’t.
Jason: You’re telling me that if my house is burning down, I can’t buy insurance on it?
Bob: I can’t get in a car accident and then try to buy my insurance afterwards.
Jason: You can’t do that, huh?
Bob: It’s not like health insurance, if you’ve got a problem, you can go buy it. You can’t do that with long-term care.
Jason: Only because of Obama Care can you go buy it. That’s why all insurance companies are going broke because they say, “Hey, we can’t play this game.” You can’t not go without insurance your whole life and as soon as you get sick, go buy insurance and expect that system to work for very long. Sorry President Obama, that’s just unsustainable, and that’s why people are getting 70% rate increases in their health insurance.
That’s why people are getting these fines from the IRS because low-income people can’t afford $700 a month for their health insurance premiums. Don’t even get me started on that one, Bob, but anyways …
Bob: Let’s do it because I like how red your face turns. Just kidding.
Jason: Asset-based long-term care, there’s so many little nuances. People have these old life insurance policies. People have these old annuity contracts. People are sick and tired of these rate increases on these annual renewable long-term care policies. There’s a huge swath of people out there that need to be looking.
People that have money sitting in bank accounts that say, “This money’s not working for me anymore.” All these folks should be thinking about asset-based long-term care. I want to say one more time on November 2nd, 1:15 PM, we’re doing a webinar. We’re going to teach people how these different contracts work.
We’re talking some pretty nice leverage, 4 to 1, 3 to 1 leverage on life insurance or annuity contracts that can help you protect against this risk.
Jason: Bob, we’re just about out of time. Any final thoughts from you on long-term care before we wrap it up?
Bob: We’re here to help. Let us know.
Jason: Bob’s passionate about this. Once you’ve experienced this with your own family, and I’ll just say again, I remember. I was sitting in that nursing home this spring with my father-in-law, and he’s in a shared room. Fortunately we were in a wonderful facility, but the gentleman in the room next to us was really young. His cognitive ability was gone, and he had this OCD.
He just had to keep getting up and checking on his stuff and wandering around. There’s a lady down the hallway that’s screaming obscenities. These nurses, I can’t believe how compassionate these nurses are. I would be burned out after like 3 days of doing their job, and they just keep showing up, changing bed pans, and cleaning up the floor. This is really rough.
Bob: Hard enough seeing your spouse go in a nursing home. It’s even harder if you lose all your assets.
Jason: We’re out of time. We’ll finish with that happy note.
Jason: This is Jason Parker and Bob Harkson signing out.
Announcer: Information and opinions expressed here are believed to be accurate and complete, for general information only and should not be construed as specific tax, legal, or financial advice for any individual, and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company. Investing involves risk. Jason Parker is the president of Parker Financial, an independent fee-based wealth management firm located at 9057 Washington Avenue Northwest Silverdale, Washington. For additional information, call 1-800- 514-5046 or visit us online at soundretirementplanning.com.