Advisors’ LTC Planning Options Require Tough Decisions

By Brian O'Connell

With the cost of long-term care skyrocketing, some advisors say insurance and/or annuity riders are a smart strategy to cover those costs ahead of time.

It’s a fair question to ask, given that the monthly cost of a home health aide stands at $4,099, and a 30-day stay at a nursing home costs $8,121 in 2017, according to Genworth.

Additionally, 70 percent of Americans are estimated to require long-term care in retirement.

A growing amount of financial professionals believe riders can play a key role in paying for long-term care insurance, along with other viable financial tools.

“When it comes to the issue of funding for long-term care, three main options seem to come to mind every time -- self-insure, long-term care insurance and life insurance with a long-term care rider,” said David Kanani, president of Kanani Advisory in Irvine, Calif.

Here’s how Kanani breaks it down:

1. Self-insure. “For some, they are fortunate enough to have sufficient assets or income above and beyond their annual needs so they are able to fund their own long-term care costs,” he said.
2. LTC Insurance. Insurance is always the best solution to protect against long-term care costs.
“Long-term care insurance can also have many ancillary benefits, such as cost of living increases, funds for therapeutic devices, respite care and many others,” Kanani said.
3. Life Insurance with LTC rider. If your client cannot afford long-term care insurance premiums or perhaps cannot qualify due to poor health, then consider a life insurance contract with a long-term care rider, he added. Life insurance comes with more lenient underwriting than applying for long-term care.

“These riders provide part of the death benefit of a life insurance contract as a long-term care benefit,” Kanani said. “This way, you might feel you’re getting a better bang for your buck. It also satisfies the long-time argument that if I don't use the benefits, I've thrown all my money out the window.”

'Good Options'

Advisors should warn clients that long-term care insurance with an LTC rider can be pricey.

“Long-term care riders in life insurance policies are good options for people who want fixed guaranteed premiums and the protection of traditional life insurance,” said Raquel Murphy, vice president of individual life insurance with HUB International Northeast, a leading global insurance brokerage, in New York City.

“However, premiums for life insurance with LTC riders are usually higher than the premium for a traditional LTC insurance policy and state tax credits may not be applicable for life insurance policies with LTC riders,” she noted.

Additionally, advisors and their clients should know that all riders and policies are not created equal.

“Many LTC riders that consumers are purchasing are merely chronic illness riders with much narrower benefits than federally standardized true long-term care riders,” said Rona Loshak, a specialist at Karp Loshak Long Term Care Insurance in Roslyn, N.Y. “These consumers will be in for a shock at claim time when the condition needs to be permanent rather than just needing care for two out of six activities of daily living (ADLs) for 90 days with a true LTC rider.”

Also, many companies do offer LTC riders in some states with the same plan design but not in other states, Loshak said. “We’ve been astonished at the lack of education from general financial advisors on this difference.”

Long-term care riders can also be a two-edged sword, insurance experts say.

“I love long-term care riders because they aren't use it or lose it,” said David Rae, a wealth manager at DRM Wealth Management in Los Angeles. “Either you end up needing care or you pass away. Either way your family will get some value from the policy.

On the other hand, LTC policy owners who die without needing any care “have spent thousands of dollars on premiums and have nothing to show for it,” Rae said.

Some Downside Risks

As for downside risks, watch out for big premium hikes, Rae said.

“My biggest concern with LTC policies is that the premiums will continue to skyrocket and people won't be able to keep paying the premiums and will be left without coverage when they need it the most,” he said.

Investment advisors mulling over a long-term care LTC rider should take the necessary time to examine all plan options – and all plan limitations.

“There are cases where a rider makes sense,” Loshak said. “The death benefit is the motivating factor for the purchase. In some cases, people also cannot qualify for true LTC riders due to health conditions so chronic illness riders, although a weak second best, are easier to qualify for.”

The big concern is that non-LTC experts are telling people they are covered for LTC costs with these riders without understanding their limitations, Loshak said.

“Clients may be alright with that, but most will not have the choices they think they have, or know there are other options in the marketplace if a rider doesn’t fit their needs,” she said.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].