In Plain Sight: An Important Tool for Advisors with Clients in Need of Long-Term Care
Financial advisors work diligently to help seniors achieve post-retirement safety and security. But there is one area of financial planning that has become so great a concern it has, literally, been labeled an American “crisis”: The Long-Term Care Crisis.
While news outlets, government agencies, and researchers ponder how to change the course of this crisis, there is one fact advisors need to know: selling a life insurance policy can be a solution for many seniors who need to fund long-term care services and supports.
But first, some background on the crisis:
The PBS Newshour ran the sobering feature, Why Long-Term Care for U.S. Seniors is Headed for ‘Crisis’, reporting that 70 percent of Americans age 65 or older will need some form of long-term care for at least three years during their lifetime.
A Yale University study called the long-term care crisis the “older brother” of the health care crisis, presumably because they have the same parents – ignorance and inaction. The report, citing a major public research survey, found that “two-thirds of Americans over 40 have done little or no planning for their care needs. Three-quarters think their spouse will care for them, and almost half think their children and grandchildren will care for them.”
A 2016 report by HealthView Services on the costs of long-term care estimated that a healthy couple aged 65 who retire today will need almost $300,000 to pay for their health care services, or more than half of their social benefits for the rest of their lives. The costs skyrocket when serious health conditions emerge.
The US Long-Term Commission’s 2013 report to the President and Congress outlined the severity of the crisis and categorically listed some 28 recommendations, of which almost none have been addressed.
Compounding this crisis is that long-term care insurance, which was popular among Baby Boomers just a few years ago, has largely gone away, with more than half the top insurers abandoning the market and raising premiums beyond the ability for policyholders to afford them. The high costs of health care delivery and the sustained low-interest rate environment have made it impossible for insurers to offer reasonably priced premiums.
How will Seniors Pay for Long-Term Care?
The need for costly long-term care services and supports can be unforeseen and immediate. For more than 75 percent of nursing home residents, entering the facility was relatively unexpected, with an injury or illness making it impractical to return home or care for themselves. And the first question they’re asked when arriving at a facility is a big one: “How do you plan to pay?”
The problem, of course, is that the majority of people haven’t planned to pay. The vast majority of Americans have neither budgeted nor saved for their own long-term care. And while Medicare (and the alphabet of supplemental plans) can cover a significant chunk of a senior’s health care costs, few realize that Medicare does not cover long-term care costs.
Medicaid, however, does cover long-term care costs (but, importantly, not all). But, in order to receive Medicaid, the senior has to exhaust a significant amount of their financial resources—retirement savings, inherited property, money in the bank, etc.
Importantly, in all but a handful of states, in order to qualify for Medicaid applicants are forced to terminate their life insurance policies to access any significant amount of cash value those policies may have in order to spend that money down before they are eligible for Medicaid. Even if the policy has little or no cash value, it is either impractical or impossible for the senior (or their spouse or children) to maintain the policy.
In other words, billions of dollars of life insurance are lapsed or surrendered by arcane Medicaid rules that force seniors to terminate their policies.
Advisors and the Long-Term Care Crisis
It is against this backdrop that financial advisors have to try to help seniors build a “nest-egg on top of a nest-egg” just so that long-term care needs can be met.
This is where selling a life insurance policy for its fair market value can be a life saver for seniors and their families. Selling – rather than terminating – a policy and using the proceeds from the sale to pay for long-term care has numerous benefits.
For one, having their own money means the senior can choose the level and type of care that best meets their needs. It may be most appropriate for the individual to receive care at an assisted living facility but, in most states, this isn’t an option for recipients of Medicaid. It may also mean that an elderly parent doesn’t have to move in with their adult children. It means, too, that they don’t have to rush to sell off assets just to pay for long-term care.
When it Comes to Your Money, Does the Truth Hurt?
“We’ve been arguing about this for year, and here we are in our 50’s. It’s time to stop!” Laura said empathically.
Paul’s downcast eyes and silence spoke volumes.
Laura continued, “We’ve worked with several advisors who have tried to help us invest our money in a sensible way. Then whenever the market goes down, Paul calls the advisor and tells him to sell everything! In all these years, no matter how much we work to build our financial security, we’re always playing catchup.”
Her words hung like a rain cloud about to burst when Paul began to speak. “I know, I know. I just can’t help it. I get nervous that we’re going to lose all our money. When the market goes down, I scramble—in my thoughts and in my actions. The driving force behind it is: At least if it’s in cash, the balance won’t go down.”
This is the moment where I felt I could lend my advice. First, I needed to learn about this particular couple and their values. Then, I could begin helping them take control of their finances.
“Tell me Paul,” I said. “What did you learn about money growing up? What messages did you hear as a child about money? From your father? From your mother?”
Paul’s eyes moved up and to the left, indicating his mind was reaching for memory. “My parents never talked to us kids about money, really. The one thing that stands out is my grandfather talking about The Great Depression and how it was such a tragic time. My parents both worked, but they never made a lot of money. They fought about money sometimes.”
“Any other memories about money?”
“Actually, yes. I remember when my father took me to the bank to open up a passbook savings and how exciting it was. The bank manager typed the passbook on this old manual typewriter and gave it to me. He showed me how the interest on the account added to the amount I deposited. I felt very grown up that day! But I guess that was the sum total of money training from my parents.”
“Can you help me understand how you and Laura make financial decisions?”
The question couldn’t be more impactful if a boulder had landed on his head. While Laura looked at Paul with a mildly accusatory glare, Paul searched for something to say that would keep his well-conceived protective fortress from crumbling. I interjected to ease the tension. I could feel the guilt in the air.
“Let me frame that another way, Paul and Laura. We all do the best we can as we live our lives. Let’s face it, our lives are filled with responsibilities in our families and our jobs, not to mention outside interests, health, and friends. While financial issues are important, unless you either have the knowledge and experience—or the help, most people avoid getting too deep into the confusion of managing their finances by doing the very least they can. What we don’t know scares us. So we defer, delay, make rash decisions based on our lack of time, knowledge, desire. Add a dash of fear to that equation, and you have a formula for financial problems. I want you to know, you are not alone. It’s more common than you could even imagine. The question is, do we allow the truth in so that we can move forward?”
It’s important to admit the truth behind our actions in order to rectify past and future mistakes or regrets. Living in denial only perpetuates making decisions that could potentially lead to financial disaster.
“I hate to admit it,” Paul said. “I guess in my desire to protect Laura from stress, I’ve made decisions that have hurt us, and I’m sorry. Michael, you hit the nail on the head. You defer, avoid, and allow your emotions to take over. And as a result, bad stuff happens. I think I’m ready to ask for help.”
Laura’s expression softened, and said, half-kiddingly, “You think?”
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