Traditional Long-Term Care Insurance Explained

Join Kelly and her guest co-host, Nic Nielsen, as Kelly explains traditional LTC insurance.

In this episode:

🔹 What is traditional long-term care insurance?

🔹 Who is a good fit for traditional long-term care insurance?

🔹 Who is NOT a good fit for traditional long-term care insurance?

🔹 LTC insurance tax deductions

Watch this episode on YouTube:
https://youtu.be/RSmx2tTEwCQ  

For additional information about Kelly, check her out on Linkedin or www.SteadfastAgents.com.

To explore your options for long-term care insurance, click here.

Steadfast Care Planning podcast is made possible by AMADA Senior Care and Steadfast Insurance LLC.

Come back next time for more helpful guidance!

Transcript

Kelly Augspurger: [00:00:02] Hey everyone, welcome to Steadfast Care Planning, where we plan for Care to live well. I'm your guide, Kelly Augspurger. Today I have a guest co-host, Nic Nielsen, who is joining me. Nic is a Certified Financial Planner and co-owner of Know My Plan. Nic, thanks so much for being here!

Nic Nielsen: [00:00:18] Kelly, super excited to be here, and it's always great to talk about long-term care and all the awesome stuff that you're going to talk about.

Kelly Augspurger: [00:00:24] Thanks, Nic. Well, today we are talking about long-term care insurance, specifically about traditional long-term care insurance. We're going to talk about what it is, how it works, who it might be a good fit for, potential tax deductions, and Nic is actually going to be asking me the questions today.

Nic Nielsen: [00:00:42] Awesome, so, Kelly, without further ado, what is long-term care insurance and how does it work?

Kelly Augspurger: [00:00:48]  Well, traditional long-term care insurance, Nic, is really pure insurance, also known as standalone long-term care insurance. It's going to work similarly to like your home or auto insurance. There's not an added benefit if you don't need care versus like a hybrid policy where there is an added benefit, okay, this is simply pure insurance. It's going to pay benefits if you're unable to perform without substantial assistance from another person two out of six activities of daily living. These are transferring, toileting, bathing, dressing, eating, or continence. So that's a physical impairment. Or if someone has a cognitive impairment and needs substantial supervision, so that's an Alzheimer's, dementia, Parkinson's, something like that. And then their expected need of care is more than 90 days. So that's when a qualified traditional policy is going to pay out. It's really the most cost efficient way to purchase a long-term care insurance policy because you're getting really the biggest bucket of money for the smallest amount of premium typically, and because you're not paying for that extra benefit of life insurance or cash value from an annuity. So it's very cost efficient. It's also going to provide tax-free benefits. Who doesn't like tax-free benefits?

Nic Nielsen: [00:02:07] Right. I'm all in on tax-free benefits. Let's go. You had me at tax-free.

Kelly Augspurger: [00:02:12] That's right. From a financial planner's point of view, they love that and so it's going to provide either a daily or a monthly benefit over a period of time, and that period of time typically is going to be between 2 and 6 years, but we do have a carrier on the traditional side who still offers lifetime benefits. There's also going to be an option to purchase inflation protection, which means your policy has the ability to grow over time, which is important, especially if you're younger. There are also shared benefits available. So if you have a partner or a spouse, you are able to also share benefits with them. Partnership eligibility is pretty important too, which we're going to touch on a little bit later, Nic, but the partnership policy is really, really important that only traditional policies have. Okay, so we'll get to that later. Also, traditional policies are generally going to be reimbursement policies, although we have one company that will allow and actually pay out benefits 25% in cash instead of 100% reimbursement, but this means that you are paying for these invoices or these care expenses and then you're getting reimbursed by the company. So that's how that most traditional policies work. Premiums are not guaranteed with traditional policies, but current policies sold do have stable prices, unlike previous policies that were issued before. And the reason behind this, Nic, carriers have more data than ever before.

Nic Nielsen: [00:03:40] Yeah. When they originally priced, they wildly miscalculated what the cost of long-term care would be or how long people would need care. Correct?

Kelly Augspurger: [00:03:48] Exactly. Exactly. They didn't know. They were really looking at disability policies. They were looking at life policies or they were looking at home and auto. And so they were looking at data and it just wasn't matching up from how actually policyholders were behaving once they had a long-term care insurance policy. So long-term care insurance policyholders, what are they doing? They're holding onto their policies a lot more often than other types of insurance. So we actually have a less than 1% lapse ratio in the long-term care insurance world, which is unheard of in any other insurance policy. So people are holding onto their policies, people are using their policies, and they're staying on claim longer than what was originally expected. So because all this, you know, they have more data, they are pricing them more accurately. But still, premiums are not guaranteed to stay the same. Now, along with that, with premiums, we carriers are going to offer like your typical, you know, monthly, quarterly, annual premiums, but we do have two carriers that offer a ten pay option, meaning you have ten payments and then your policy is completely paid up. And we do have a carrier that also has a single pay as well, but typically your monthly or annual premiums, that's going to be pretty darn standard. Okay. The underwriting. Okay. as far as them assessing the health risk. This is going to be the strictest health underwriting compared to any other product when you're buying long-term care insurance, meaning it's going to be harder to qualify for, particularly if you're looking at like a hybrid policy where they combine life insurance. Health and medical history are really important here. As far as ages go, the max age typically is 79. So if you're 90 years old, you're not getting a long-term care insurance policy. It's just too late, but the younger you do it, the healthier you are when you do it, the less expensive it will be and the more options you will have. So health is really important here. Nic.

Nic Nielsen: [00:05:48] Yeah, absolutely. It seems like there used to be I don't know, maybe 15 years ago in the industry, people used to start talking about long-term care at 60 or 65, and now that's certainly, I think, gone much younger, right? Starting to talk to people in their in their 40s about long-term care.

Kelly Augspurger: [00:06:02] Yeah, you're right. That's absolutely the case. We have some carriers that actually issue policies much lower than 40 years old. So it is important to look at this when you're younger and healthier and you're financially obviously able to afford it, and to do it, it needs to make sense. As far as, you kind of carriers, how many carriers are in this market. There are less than ten carriers that sell traditional long-term care insurance and some of those options, they are captive agents, meaning they only sell their proprietary product. They don't have the ability to look out in the marketplace and see what other options, what other carriers are available. So they're aren't 100. They're aren't a bunch like there used to be, but the carriers that are in the market are very dedicated to the market, Nic, and they have a solid, solid policy. So they're still definitely high quality options out there. Some other important things to consider when we're looking at traditional and even just long-term care insurance in general is that you're able to stay in control of your care options because you're able to receive care wherever you call home at home, in assisted living, adult day care, a family member's home, a skilled nursing facility if you have to, but again, you're staying in control of your care options. And that's key, right? Doesn't everybody want that? You want to be able to choose what you want, and so you can do that with a policy.

Kelly Augspurger: [00:07:26] A couple other things to consider, Nic, with a policy are other benefits. So you've got care coordination, typically respite care, home modifications, caregiver training, other really valuable things, resources that are coming with a policy. Traditional policies often have these things included on top of that which we're going to get to in more detail later, potential tax deductions. So as a financial planner or if you are an accountant, your ears are probably perking up about this, but definitely some things that are available. So, Nic, let me kind of recap here: with traditional long-term care insurance, let's talk about the pros. You've got pure long-term care protection, right? Valuable benefit for the least amount of premium. You've got plan design, flexibility, being able to add things. You've got shared benefits for couples and you've got partnership eligibility. What about the cons? Premiums are not guaranteed unless you actually do a single pay they are, right, because it's just a one time payment. But actually one of the carriers that has that ten pay option, they do fully guarantee that ten pay. So it depends on, again, what carrier, what mode of payment you're doing. Another con, if this is important to you, there's no cash value, right? It's just simply insurance protection and then there are no benefits if long-term care benefits are not used. Although there is a return of premium rider available sometimes depending on the policy, but it does increase the cost of the policy quite a bit.

Nic Nielsen: [00:08:54] Kelly That's awesome. That's an amazing summary of what long-term care insurance is. Throughout that last question, two other types of long-term care insurance that you brought up were the hybrid life insurance with a long-term care rider or the annuity based chassis that has a long-term care rider to it? You know, when it comes to specifically traditional standalone, long-term care, who is a good fit for that type of product?

Kelly Augspurger: [00:09:16] Right, well, overall, you have to be in fairly good health. You have to be able to pass underwriting and you're going to need to be under the age of 79. So those are all going to be important things. Your primary concern is long-term care planning, right? Again, you're getting the max amount of benefits for the least amount of premium. You are concerned about long-term care. So if you think you'll need care, this is something that you want to look at. If you're price conscious, if you're looking again for that maximum benefit, lowest premium, this is something to consider. Not looking for a guaranteed premium and you understand the possibility of having a rate increase, you have to be okay with that. Then this is something to consider. And then if you have a smaller estate, you don't have assets to reposition and again it's partnership qualified, then you're able to protect from Medicaid spend down. That's going to be important. And if you're a business owner, this is going to be something to consider because of potential tax deductions. So, Nic, let's take a look at a case study. Okay.

Nic Nielsen: [00:10:16] I love case studies.

Kelly Augspurger: [00:10:18] Okay. Let's put this into real life. So clients of mine and we're going to call them Andy and Lori just to protect their privacy here. Andy and Lori are 55 years old. They're in average health. They live in Columbus, Ohio. They have two grown kids that are out of the house. They are getting pretty darn serious about retirement, right? They're really in that retirement red zone. They are serious about it. They have a combined income of $175,000. They've got a retirement already of $750,000, but they still have a mortgage of $250k. Why are they interested in buying long-term care insurance and getting having a plan in place? Personal experience, which is usually the number one reason I hear from my clients. They both have at least one parent that currently needs care and they're actually helping to coordinate that care and help out physically occasionally. So they don't want to be a burden to their kids and they know care is expensive. So they said, "Kelly, we want to look at a solution where, again, we're getting the most benefit for the least amount of premium. We're in pretty darn good health. Can we qualify for traditional policy?" And I said, "let's take a look." So they did a pre-screen. Sure enough, they both qualified for a traditional policy. So what we did is we looked at the cost of care. They are planning to retire in Columbus, Ohio, we looked at the cost of care. We looked at what they had. We looked at their concerns and they decided that they were comfortable with buying a policy with a $5,000 monthly benefit.

Kelly Augspurger: [00:11:45] Okay. Starting today with coverage of three years each with a 3% inflation protection rider and shared care also has partnership protection. Which what that means is if let's say they spend down their assets and they have to qualify for Medicaid, what Medicaid will do is they will actually let you disregard assets dollar for dollar based on what was spent out in benefits in your long-term care policy. But again, it has to be a traditional partnership, qualified policy. So let's say their policy had $200,000 that was paid out, Nic. They are able to protect $200,000 worth of assets and still try to qualify for Medicaid. Okay. As long as they meet the other qualifications for Medicaid. So that's the partnership portion of it. So with that $5,000 monthly benefit that Andy and Lori have, it's starting out at $5,000, their total long-term care bucket year one is $180,000 each that they have in protection. They've got 3% inflation. In just 25 years, so at age 80, each of them are going to have, Nic, over $10,000 of a monthly benefit and their total bucket each is $365,000 of protection. Again, can dip into the spouse's bucket if they run out of benefits because we have shared care on there, which means they're able to use some of their spouse's benefit if they use all of theirs and guess what their total premiums are? Take a wild guess.

Nic Nielsen: [00:13:20] We're going to say $3,500.

Kelly Augspurger: [00:13:22] What is that each or total? What are you guessing?

Nic Nielsen: [00:13:24] I'll go with total. No, no, I'll say each. $3,500 each.

Kelly Augspurger: [00:13:27] $3,500 each. Okay. You're pretty close. So that's actually a total premium for both of them is $6,277 total or $565 per month for that kind of protection. So we're saying that they are spending $6,200 a year and out of the gate they have over $180,000 each of a bucket to pay for potential care. That's huge, right? The leverage there is outstanding. And then in 25 years, having over $365,000 worth of benefits.

Nic Nielsen: [00:14:04] And that's about the average like time period when you see someone going on claim, right? I know maybe it's skewing a little bit younger, but I've seen, I think, some surveys that say maybe as early as 78 to 82 is kind of the average of when claims are happening.

Kelly Augspurger: [00:14:16] That's right. So typically based on claims, we're looking really about 80 to 85 in general is when we're seeing people go on claim. And so at age 80, you can be guaranteed to know that I've got over $10,000 of income that's able to come in, because after all, we know that if you need care, it's really an income problem. Of course it's a family problem. We know that, right, Nic? But it's an income problem. You could have tons of assets, but if you don't have income, how are you going to pay for that? And then if you have to convert those assets to income, they're often consequences, right? Tax consequences with that. So having that guaranteed income is really important. And so that's the kind of leverage that that a traditional policy can provide.

Nic Nielsen: [00:15:01] Yeah, that's awesome, Kelly.

Kelly Augspurger: [00:15:03] And now for a brief message from our show sponsor, The Steadfast Care Planning podcast is sponsored by the CLTC, Certified in Long-Term Care training program, which gives financial advisors tools to discuss extended care planning with their clients. Look for the CLTC designation when choosing an advisor.

Nic Nielsen: [00:15:21] Now, you talked about who is a good fit for traditional long-term care, who might not be a great fit for traditional long-term care?

Kelly Augspurger: [00:15:28] So going back to health. So if you're not in decent health and you're over the age of 79, it's not going to be a possibility for you. In order to know for sure, you really need to really some health questions. So something that I do with my clients, I have all of them fill out a prescreen form that I review and then I discuss with my underwriters to figure out, okay, is this a viable option? And so that's really how you're going to know. For a good idea to actually pursue? Second, if you don't have a reliable or decent income or even assets to protect, then it's not going to be a good fit. If you have less than, I'd say $500,000 of assets and low income, you could potentially be Medicaid likely in the future, and so you're most likely going to have to depend on what you have already saved and then maybe even rely more heavily on your family to provide care for you. Also, if you want guaranteed premiums, if that's absolutely a must for you, this is just not going to be a good fit because they're not guaranteed even though they're stably priced, they're not guaranteed.

Nic Nielsen: [00:16:31] Yeah, absolutely. One thing that always comes up is long-term care tax deductible for individuals. And what about those business owners out there?

Kelly Augspurger: [00:16:39] Yeah, yeah, this is a great thing. This is not a reason to buy long-term care insurance, but it's a nice bonus. So I want to put a disclaimer out there. It's always best to consult a tax professional, talk to your CPA, but here are some general guidelines. If you are an individual, it's going to depend on if you itemize your deductions. If you don't itemize your deductions, there is no deduction for your traditional long-term care insurance. Okay? you do itemize your deductions, this is going to be treated as accident and health insurance. So it's going to be limited to the lesser of either the actual premium that you paid for your long-term care insurance or what they call the eligible long-term care insurance premium. Okay. what those eligible deductible premium limit amounts are, they're based on age limits. So in 2023, these eligible long-term care insurance premium limits are for 40 or under, the limit is $480 per year. If you're 41 to 50, it's $890 per year. If you're 51 to 60, it's $1,790 per year. If you're 61 to 70, it's $4,770, and then if you're 71 and older, it's $5,960 for 2023. So you can see that it's more favorable the older you get and you can deduct to the extent that medical expenses, including long-term care insurance, exceed 7.5% of your adjusted gross income. So this could be tricky to get a deduction if you don't have a large amount of medical expenses, right, because it has to exceed that 7.5% of AGI. So something to consider. What about business owners? This is going to depend on the structure of your business. Let's talk about the most advantageous way. What type of business gets the most? Well, it's going to be C Corp's including personal service corps So actually LLCs that are taxed as C Corp, they're going to have the greatest advantage and benefit because they can actually deduct 100% of the premium, and they are not limited to any type of age based limits like I just talked about. So this is huge! So if you are a C corp, you need to look into long-term care insurance to see don't currently already have it because you know it is valuable not just for the tax benefit, but of course, for the protection too. Now, what about other types of businesses? Let's talk about the self-employed. So when we're talking about self-employed, we're talking about those sole proprietors, Partners, S Corp, if you're greater than 2% shareholder, and then if you're a member of an LLC or a PC taxed any of those. So what they do in this case, Nic, is they look at what they call the eligible for self-employed health insurance deduction. This is going to be taken above the line is what it's called on line 16 of that IRS form 1040, schedule one. So basically, you can include a spouse or other eligible tax dependents and you're going to be limited to the lesser of that actual premium that was paid or the eligible long-term care insurance premiums based on that age that we talked about earlier. But here's the key. The deduction is not limited to 7.5% of your AGI threshold like it is if you're an individual tax holder. So that could really be a great advantage because I think, let's face it, probably not most Americans are going to have medical expenses above 7.5%, right, of AGI.

Nic Nielsen: [00:20:14] And it's probably really hard to qualify for long-term care if you have medical expenses already in excess of 7.5% of AGI.

Kelly Augspurger: [00:20:22] That's right. That's right. So being self-employed, you are not limited to that 7.5% floor above AGI threshold.

Nic Nielsen: [00:20:32] You still have the same eligibility. You still have that same cap age, that age based range, right?

Kelly Augspurger: [00:20:37] That's right. We're still looking at the ages, but you're not limited to that 7.5% Of AGI. That's right.

Nic Nielsen: [00:20:42] Kelly, so much incredible advice in such a short amount of time. Any other advice that people should be doing to plan well in retirement?

Kelly Augspurger: [00:20:51] Yeah, well, look into long-term care insurance, right, for yourself. I think that's pretty much a given here, particularly if you're over 40, you have life and disability in place, you're doing a good job of saving and investing. The key here, Nic, younger and healthier, you are, the more options you have at a lower price. So look into long-term care insurance. Also take care of yourself, right? And I know you say this.

Nic Nielsen: [00:21:12] Play pickleball.

Kelly Augspurger: [00:21:13] That's right. That's right. Nic, I know you talk about invest in your health.

Nic Nielsen: [00:21:17] Right.

Kelly Augspurger [00:21:17] Right. Do things to keep yourself healthy, exercise, eat well. What are some tips that you have, Nic?

Nic Nielsen: [00:21:25] Well, we always tell people if there's any place within your financial plan where you should be splurging, it should be investing in your own health, and that's going to mean different things to different people, right? That could be you spend a little bit more money to eat organic food. It could be that you get the unlimited yoga membership or you enjoy meditation, but, you know, just get active, move your body, do healthy things. That's the best investment that you can make in yourself, because if you don't invest in your health now, it becomes an expense at some point in the future.

Kelly Augspurger: [00:21:52] Oh, for sure. Absolutely. I totally agree there, Nic. Also, in addition to taking care of yourself and looking at long-term care insurance, you want to have a plan for extended care in general, and that will include who's going to provide care, where you want to receive care, and then how will you pay for that care. And the bottom line here is that the traditional policy can help pay for that plan. It can help and it may not cover 100% of your costs. You know, we don't know how much care you're going to need, if you're going to need care, for how long are you going to need care, but at least it can provide a meaningful benefit and it can help to pay for some of those expenses.

Nic Nielsen: [00:22:30] And I know there's different types of long-term care, as we've talked about briefly, but I guess for for some people, it's not all one or the other.

Kelly Augspurger: [00:22:38] Right.

Nic Nielsen: [00:22:39] Right? You can mix and match a couple of different things together based upon someone's individual circumstances and their own kind of financial dreams, wishes and aspirations. Right. It's not a it's not an all or none option.

Kelly Augspurger: [00:22:50] No, absolutely. Most of my clients, Nic, and I think you're probably in the same boat here is they end up getting a policy that covers a good chunk of what their potential care costs could be. Maybe it's $5,000 a month, but if their care expenses are $8,000, what are they doing? They're co-funding, right? They're self-funding the remaining, but at least they're guaranteed, okay, I can count on this bucket right here, this amount of money to pay for my care and anything above that, I'm going to self-fund with my savings and investments and other other things that I have.

Nic Nielsen: [00:23:21] One of my favorite things that you mentioned about that case study with kind of the young, healthy 55 year old couple, is inflation protection, right? One of the greatest risks we have within our own financial plan is just that grinding power of inflation, right over time. So the younger you are, the more important that inflation protection is going to be.

Kelly Augspurger: [00:23:41] Absolutely. Yeah, definitely need to have that because $5,000 today is not $5,000 in 30 years.

Nic Nielsen: [00:23:47] Not at all.

Kelly Augspurger: [00:23:47] So you need to consider that. Yeah, it will increase the price of your policy, but when you look at the growth that you receive in the policy, it's definitely worth it.

Nic Nielsen: [00:23:56] Absolutely, now, Kelly, there's people that have been fortunate to spend some time with you this afternoon. If there are people who want to immerse themselves in all things. Kelly, how can people find out more information about you and your company?

Kelly Augspurger: [00:24:08] Yeah, well, they can visit our website. It's www.SteadfastAgents.com with an "s" or you can check me out on LinkedIn. Or I do have a podcast steadfast care planning where you are right now. So you can actually go to even other episodes and listen to some other episodes if you want to find out more information on another subject. What about you, Nic? Thanks for being here. Where can people find more information about you?

Nic Nielsen: [00:24:31] Kelly, it's always a pleasure to be here. The best way to connect with me is on LinkedIn, and I have a crazy last name, Nielsen I before E. So connect with me on LinkedIn or you can visit our website at KnowMyPlan.com.

Kelly Augspurger: [00:24:45] That's right. And Nic with a C no K, right.

Nic Nielsen: [00:24:47] That's right because there's no K in Nicholas. So that's how I remembered it in preschool, which was a very fun parent teacher conference at four years old.

Kelly Augspurger: [00:24:57] I can imagine. Oh that's hilarious. And you also, Nic, have a wonderful book. I want to give you a plug here, Visual Finance, and that's on Amazon, right?

Nic Nielsen: [00:25:07] Yeah you can find that at Amazon or wherever you enjoy books. It might be the best book that you've never read because it's literally just pictures. So it's 30 pictures with QR codes. If you scan the QR code, it takes you to a short YouTube video where I kind of give more information about a certain topic.

Kelly Augspurger: [00:25:24] Yeah, and I'll tell you what, Nic is the master at illustrations in a very simple, simple way that explains a lot in great detail. So Nic, thanks so much for being here. Always a pleasure talking with you. Have a great day!

Nic Nielsen: [00:25:37] You too, Kelly. Stay healthy.