[podcast src=”https://html5-player.libsyn.com/embed/episode/id/4843564/height/360/width/450/theme/st andard/autonext/no/thumbnail/yes/autoplay/no/preload/no/no_addthis/no/direction/forward/” height=”360″ width=”450″]We are all living longer than ever before. As we age, well, things start happening with our bodies. We need a little extra help, a little extra care. We need long-term care insurance. The question becomes is it cost effective to purchase long-term care insurance and if so at what age? Is it even worth the money or are there other alternatives? This week’s Susman Insurance Agency podcast helps you answer these questions and more. The transcript follows:
JIM: Hello, and welcome to this week’s Real Wealth. Today, we’re going to talk about a topic that nobody wants to talk about and that’s long-term care planning. A lot of times I know when people think about long-term care planning they’re always thinking nursing homes, and that’s probably getting further and further from the trust as care solutions continue to change and evolve. Today joining us we have Michael Staeb. (SP?) It’s kind of interesting, he’s kind of a young guy and he’s dealing with a product that normally is associated with people as they get older, and Michael, I know you’ve spent a lot of time in the insurance industry, even when you were in high school, how did you get involved in something like long-term care?
MICHAEL: Well, as you mentioned, in high school I was working for my mother, who is a disability income protection specialist who works with advisors like I do, and so I kind of got insurance in my blood early on. While I was in college I was working for a general agency, one of the big mutual companies here in the Seattle area, and they, in particular, weren’t huge in the long-term care market. But as I got further into my career I kind of saw that this was such an underserved market. There were lots of advisors out there who understood the risk that long-term care presented but weren’t comfortable talking about it so they didn’t bring it up. As I moved from being in a career agency to moving into independent brokerage, I kind of picked up the mantel and wanted to become an educator for long-term care to advisors so that they were comfortable talking with their client.
JIM: I have to reiterate what you just talked about. I’ve been in the business for 30 years, and it’s probably the most needed and least talked about product or service that we offer, and I think it’s because none of us want to face the issue of getting old. I know they talk about 80 is the new 60 and 40 is the new 20, and all this and we’re all striving to stay young and young looking and all that, and long-term care is usually just something that happens to somebody else, and it’s easy to kind of put that aside, but when you see the devastating impact it has on families, it can truly be a problem. When we talk about this, I always emphasize the word planning, and that doesn’t necessarily mean insurance. Although insurance can play a vital role, I think every family is going to probably face this with somebody they know or themselves personally, and to not have a plan just means you’re planning on winging it. Talk about how you perceive the need for a long-term care plan.
MICHAEL: Oh, I agree with you completely. Long-term care planning doesn’t automatically mean insurance. It tends to be the most advantageous way to do it, but it’s certainly not the only way. You mentioned, our own federal government, the long-term care segment of Medicare, has put out statistics and studies that say of American’s who are 65 and older today, 75%, or three out of every four, will need long-term care services before they die. There’s no insurable risk in the American economy as great except for maybe health insurance, which we’re all required to have. I wish that we had a similar m andate for long-term care because the risk is so great, and as you hinted the impact on clients and their families can be astounding. I can give you a quick example of a client I’m currently working with, a young lady, young-ish, she’s in her early 40s, recently divorced, is financially independent herself, but she came to me asking for more long-term care coverage on top of what she already has because her father, who was diagnosed with Parkinson’s and lived with the disease for 21 years, her family, which fortunately was relatively affluent was able to pay out-of-pocket for his care. Over that 21 years his care totaled approximately $1.6 million, which is an astounding figure for just one person.
JIM: I dealt with it in my own family. All four gr andparents died in a nursing home after anywhere from a five to seven year period of time, and then my mom, she received home health care, she had terminal cancer and she needed round-the-clock care and spent three weeks in a nursing home when we just didn’t have enough people available. The thing that I talk about with a long-term care plan, insurance isn’t the end-all, although it can play a very important role, but having family members, having different choices, where do you want to be when you receive the care, do you want to be able to stay at home. Here in my state, I think the home health care is just narrowly past assisted living and nursing home is a distant third. It used to be most long-term care was in a nursing home, so we’ve definitely seen the dynamics change. One thing I’d emphasize to people from a personal note, when my mom needed the care, there is five of us in the family, five of us kids, and four of them live out of state. I’m the one that’s here in the state where my mom was when she needed the care, and what we did is me being the one here we did all the running around. We would have taken her in and had her at our home, but she didn’t not want to die in front of her gr andkids. That was something that she just wouldn’t hear anything of it. We ended up renting a house for her, she did not want to be in a nursing home, and us five kids pitched in and she actually ended up being on Title 19 because she never saved any money, and Title 19 paid for a lot of her medical care but they were very limited on what they would do for home health care, and they only covered somebody coming in once a day for a couple hours and she needed 24 hour assistance, the rest of the time she needed somebody there. Well my siblings all took time off of work; I took time off of work. We had cousins, sisters, brothers, friends, everybody was taking time to be there with my mom, eventually we ran out of shifts, and speaking for myself, I’m in business for myself and my siblings were starting to say hey you can take off of work, you work for yourself, you can control that, you should be able to be there, we can’t take off of work. Well the thing is, as a business owner if I take off of my business, my business won’t be there, and the interesting dynamic we had is we started to get tension among family members as people started pointing fingers, and I’ve seen that happen time and time again because there wasn’t necessarily a plan in place. I’m sure you see that all the time.
MICHAEL: Absolutely. There’s another example of a family member on my in-laws side where my gr andfather-in-law is dealing with late-stage dementia. He’s had it for I believe roughly about 10 years now. Fortunately for his family he has six children who divvy up their time to be with him because it’s not particularly safe for him to be on his own. That of course creates tension just like you mentioned among siblings. One person might have one opinion of what proper care and attention is, which might be completely different from what another sibling feels it should be. That is certainly a difficult point, actually when it’s family or informal care as the industry calls it when it’s given by a nonmedical trained family member.
JIM: That’s something you should take care of before it starts raining. I always talk about the leaky roof syndrome. You know when the sun’s shining you don’t need to fix the roof, and when you get someone who’s sick that’s where one of the steps has to be naming a healthcare power of attorney and having those documents set up ahead of time to help try to at least reduce some of those hard feelings, and I’m a big advocate too of family meetings where you discuss with your family what your wishes are to try to mitigate against different family members thinking different things, and a lot of times that happens because there is no discussion and all of a sudden you are faced with decisions and nobody really knows for sure what mom or dad would have wanted because it was never written down and the legal authority was never made clear.
MICHAEL: Exactly. You mentioned earlier your own mother being eligible for Title 19, so she was receiving Medicaid benefits is that correct?
MICHAEL: That’s a common misconception with clients when I’m meeting with them and their advisors, is they believe, many of them, that the government will take of them. When it comes to long-term care services that just unfortunately isn’t true. We’ll talk about Medicare first. Medicare does actually have very limited long-term coverage. It is 100% coverage but only for the first 20 days and the insured has to pay from days 21 through 100 for the first $140/day of services and Medicare covers the excess. That said, Medicare only covers the first 100 days, and you have to be able to get into a Medicare facility which there are waiting lists for in most part of the company. The average long-term care claim from an industry st andpoint is about 2.93 years, and of course it varies a little bit based on age, so 100 days is not even close to covering what an average long-term care event is going to cost. Let’s say someone says alright I get my 100 days of Medicare and then I’m going to go on Medicaid. Medicaid is intended, at least Medicaid long-term care is intended for people who are effectively destitute. The spenddown requirements are very, very high. You can keep your primary residence, you can keep a vehicle, you can keep $2000 a month of income, but you effectively have to sign over to your state Medicaid program the bulk in anything in excess of that, or you have to spend it down first before Medicaid will start paying. Like you mentioned this evening, most people don’t want to go into a nursing home, which is the only thing Medicaid pays for. You cannot receive Medicaid benefits for home care, assisted living, or anything that is not a Medicaid classified nursing home facility.
JIM: When you talk about being able to keep the home, there are certain restrictions, you have to have a likelihood of getting back to that home or a community spouse, but that doesn’t mean your home asset is protected, at least not in my state. In my state they’re going to put a lien on that house, so let’s say for the sake of discussion, you’re in the nursing home for three years and it’s $80,000 a year and it’s $240,000 and your house is worth $150,000, they’re going to go after the estate and they’re going to take that $150,000 because you had a $240,000 balance that was paid on your behalf, so a lot of people, and I know what you’re saying there, they have these misconceptions it’s all going to be taken care of, but it’s only going to be taken care of once you have nothing left for all intents and purposes. Now if you’re a spouse of someone that goes to a nursing home, they let you keep a certain amount of assets, but it still has a devastating impact financially and even though they allow the community spouse to keep a little bit more, it’s still going to be somewhat restricted and limited. They’re certainly going to have a step back as far as quality of life. Why don’t we take a short break and when we come back I know there’s very few sources. People got to use their own personal sources or count on something like Medicare or Medicaid in the extent that they’ve gone through all their assets, let’s talk about when we get back what are some of those options and how can they plan for it and make sure that their quality of life is protected but also protecting the family. Please stay tuned.
JIM: Welcome back as we continue to visit with Michael Staeb (SP?) who has really focused his practice in the area of long-term care planning. Before the break we were talking about some of the issues that face people when they need long-term care and what happens when you don’t have a plan. Let’s talk about having a plan. A lot of times we’ll talk to people that might be in a little bit more of a fortunate situation, and I know when I do the math you almost can’t have too much money when it comes to the cost of long-term care. At what point do you feel someone might be self-insured where they don’t really have to look at doing too much planning, they can just rely on their resources?
MICHAEL: Really I look at it as kind of a two-pronged approach when someone can afford to self-insure. I kind of created a formula based on my own opinion of what it takes to fund a long-term care need, and you might want to adapt these numbers based on the median income for the area in which you live or what long-term care costs in the area you live. In the Seattle Metro area the way that I look at it is it’s not really a net worth thing, so someone who has a net worth of $10 million versus someone who has a net worth of $500,000, may or may not meet this formula, so here’s how I look at it. I look at it as you need to have in a cash or cash like asset, $300,000 per person, so $600,000 if it’s a couple, it needs to be able to grow on a guaranteed basis, 3% compound, it needs to not be allocated for any other purpose such as retirement savings, housing wealth, education funding, so it’s not allocated for any other reason that you’re going to use down the road, and most clients, even multi-millionaires, may not have $300,000 set aside that meets all that criteria. The reason being is even if you do have $300,000, in order to guarantee yourself 3% growth you’re going to have to be putting money into that account from somewhere else, and even if you do have $300,000 and you can afford to add 3% compound to that every year, is that really the best leverage for your money.
JIM: I’ve been kind of skewed in a sense where I look at that and I think that would take care of a lot of cases, but one thing I found to be true, and I’m sure you found the same thing is the average stays have been increasing due to two reasons, one is more people have long-term care and we’ve seen a lot of rate increases in the general long-term care space because they didn’t anticipate the amount of people that would be needing long-term care, and one of the big reasons is, if they have insurance they won’t beg, borrow, steal, and kill themselves to stay out of a nursing home, so one thing is they’re going in sooner because of the insurance, but because of medical technology we’re living longer and becoming more susceptible to things like Alzheimer’s and Parkinson’s and other issues that could require us to need to stay. But I do remember one case where I volunteered for a couple that were kind of homebound, the wife had a stroke, she was in a wheelchair and things like that, her husb and was taking care of her, and we kind of adopted them as gr andparents in the grade school that I went to and I did the snow shoveling and stuff like that. They ended up in a nursing home and they lived in that nursing home for over 20 years as a couple. The wife passed away eventually and the husb and died shortly after, but 20 years in a nursing home. I think back to when I first got involved in the business, there were a couple companies that had come out with nursing home policies, and I remember them having $10 and $15 a day benefits. When those policies first came out, that was the first nursing home policies, that was enough to cover the costs of a nursing home, and now we’re looking at facilities that might be $300 or $400 a day depending on what part of the country you live in, so if we fast forward that 30 years we might be looking at with just normal inflation $20,000 or $30,000 a month might be the average cost, and when you look at that it literally can get to be in millions of dollars. The way I look at insurance or whether or not to self-insure, you look at anybody with money they don’t self-insure their house, they don’t self-insure their factories, they don’t self-insure their cars, even though they could afford to write out a check for any one of those things to replace it, and something like long-term care where the sky is literally the limit. Because of medical technology they keep you alive for 10 or 15 years and you’re in a facility at $10,000, $20,000, $30,000 a month, while it doesn’t take too many of those months before not only are you into hundreds of thous ands of dollars, you could get into millions, and you talked about the case just earlier in today’s show, $1.6 million, that’s no chicken feed to be able to pay for. When you look at long-term care insurance I’m a huge believer that insurance companies they’re designed for situations like this.
JIM: Long-term care is part of the plan, where you’re going to be at is part of the plan, who is going to help, what family members are available, we got all these different things to consider, so if we’re looking to transfer the risk to an insurance companies, I know there’s new options now. We have Traditional, we have linked benefits, we have what’s happened in history, what’s happening today, what do you see people doing and what do you see as some of the things that people should be looking at with their insurance professional as options?
MICHAEL: When I’m meeting with advisors and clients, I usually start off by given them a broad overview of all the types of long-term care policies that are out there, whether it’s traditional linked benefit or what have you. I don’t want to go into a meeting assuming that what I like best is going to be what they like best, because that automatically assumes I’m taking what I want and putting it on them, which doesn’t always work. I go in presenting a little bit of everything. I show them what a traditional policy looks like and we talk about the pros and cons. The biggest con of course is as you mentioned rate increases on traditional products have been horrendous and that’s probably putting it mildly. Quick example of a rate increase that I dealt with a few years ago, there was a 52-year-old woman who had purchased a policy 11 years prior. It had accumulatively doubled in cost because of her rate increases over time, and buying comparable coverage from a different carrier at that time was still double what her premium was today. I couldn’t recommend that she replace it in that scenario. Even clients that are coming to me with existing traditional products, ninety-nine percent of the time I’m recommending they keep them, because even if the price had doubled as it had in that one example, it’s still far more cost effective than switching to a new carrier today. When you get into linked benefit products I break it into really two categories, asset based long-term care and rider based long-term care. Both of these are based on a life insurance chassis, but with an asset based product we’re usually paying for it over a specified amount of time. It could be all at once, it could be over five years or ten years but usually not longer than that. We call it asset bases because most of the products in that category have some sort of a return of premium component where if you pay $100,000 over the course of 10 years and you decide 20 years down the road that you think that was a bad decision or if you need the money back, you have that guaranteed provision to get it back. In the rider base space we have more flexibility because this is where we’re adding a long-term care rider to an otherwise st and-alone life insurance policy that you could buy without the long-term care rider. I’m seeing probably about 80% of the cases that I’m working on going to this rider base space, and usually that’s for a couple reasons, one, we’ve got guaranteed premiums, which are also true in the asset base space. No one in traditional space had a guaranteed premium, and because of how those products are built I don’t expect that we will probably ever see guaranteed premiums in that space again. In the rider base space, usually we’re talking with clients who have a life insurance need anyway, so they’re already planning for, pay for, permanent life insurance, and by adding a long-term care rider, the incremental cost is dramatically less than a traditional long-term care policy. The way companies can price for that is, so let’s say, Jim, that you’re an actuary in an insurance company, you’ve already priced what it’s going to cost you to provide $250,000 of permanent life insurance guaranteed for a 55-year-old female. Now all you have to price for is what is it going to cost you to pay that out in a monthly installment early. Does that make sense?
MICHAEL: Once I’ve explained that to clients they underst and why those products are so popular, and of those three segments that we talked about, traditional, asset based and rider based, while the traditional space continue to shrink, we’re really down to what maybe seven or eight companies left in the traditional market?
MICHAEL: In the rider based space, that segment is actually growing. There are more companies entering that market every day. We’re probably up to I’d say half a dozen that have a true long-term care rider and probably another dozen that have some variation usually called a chronic illness rider.
JIM: I’ve seen different statistics for median stays and things like that, and when you look at that space you can get the Cadillac coverage that will cover you for just about everything. Maybe you don’t need just about everything covered, maybe you want to cover a shorter stay or the linked benefits, really can help fill the gap and buy time. Especially if you have a couple, having that extra help and having an extra source of cash that you don’t need to live on, because as you talked about earlier, having money that’s not supporting all the other things, and if you have to set aside money for a long-term care plan it buy options to say the least. Let’s talk about some alternative funding of long-term care outside the insurance. Are there other ways to take care of it?
MICHAEL: There are, so beyond self-funding or shifting the risk to a long-term care insurance company, there’s a couple methods that we’re seeing certainly growing, I won’t say growing dramatically, but the IRS has changed some of their rules regarding use of qualified funds to cover long-term care without incurring an income tax, and obviously a client is going to need to work with their CPA or their tax professional about how to make that work, but that is certainly a growing segment of long-term care planning is using qualified money, particularly for the baby boomer generation, which has a massive amount of qualified money relative to any other generation so they have those assets. The second that’s kind of an alternative funding is using home equity. If we go back to, I’ll use my parents as an example, my parents are right about 60, and their parents were expecting to leave their home to their kids. I look at myself and my younger brother, neither of us are really expecting or even wanting our parent’s home. We love the home we grew up in, but I’m on my second him, my younger brother is probably going to be buying his first home in the next couple years, and my parents are only 60 so they’re still going to be in that house another 15 to 20 years, so it is very likely we don’t need that housing wealth because we’re not going to move into it.
JIM: We h ad a guest a while back about modifying the home and making it safe so that a spouse could take care of her husb and, in this case I think the spouse might have been 110 pounds dripping wet, taking care of a 270 pound husb and who was immobile and they were able to install life systems throughout the house so she could safely help move her husb and around and take care of him versus the alternative going to a nursing home and ending up on title 19, they were able to do that through private pay, and that was one of the resources that they used. I know we’ve gone over. I could talk about this forever. I’m very passionate about it and it’s good to hear other people who are passionate. The moral of the story here is there are a lot of options. Long-term care is a reality for many Americans, and just ignoring it does not make that reality going away. You should be sitting down with your insurance professional, you should be looking at these alternatives, and making sure you have a long-term care plan. You may plan to just take your lumps as they come, but if you just take the time to look at, with some of the solutions that you talked about it’s really literally taking money from your left pocket, putting it in the right pocket and that money is earmarked for long-term care, and with some of the solutions that are out there you can leverage your dollars to help better weather the storm of a long-term care stay or needs for you or your spouse. Any other final talking points you want to bring up, Michael.
MICHAEL: It is such a huge liability for our country coming up and grossly uninsured, and the important part as you mentioned is clients need to be working with advisors who can help them, and if the advisor isn’t comfortable talking about long-term care, there are plenty of resources out there that the advisors can reach out to and find.
JIM: Well thanks for joining us Michael. It’s always good to have a reminder for people planning, especially when we’ve got $10,000 baby boomers a day retiring. This is an issue that every single one of them should be figuring out what their long-term care strategy is and make sure they’re ready to face that if it comes into their lives. Thanks Michael.
MICHAEL: Thank you Jim, it’s been a pleasure.
JIM: Thanks for joining us this week, and tune in again next week as we explore another phase of the Real Wealth process. Remember, if anything you heard in today’s show you’d like to get more information about, contact your Real Wealth advisor.