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Long-Term Care: Not If, but When

Figures the U.S. Department of Health and Human Services show that nearly 70 percent of people turning age 65 will need long-term care at some point in their lives.

Yet, according to a study by the Associated Press–NORC Center for Public Affairs Research, only 54 percent of Americans age 40 and older have planned for long-term care.

It’s likely not a matter of if your clients will need long-term care—it’s a matter of when.

“As we age, the likelihood of needing long-term care services increases, so as our population ages, we will certainly see a burgeoning demand for long-term care services,” wrote Jamie Hopkins in a recent Forbes article titled “5 Long-Term Care Planning Lessons from ‘Willy Wonka and the Chocolate Factory.’”

The first step, Hopkins advised, is to talk to your clients and their families about what they want and what they can afford, then move toward developing a plan together.

According to FedSavvy Educational Solutions, clients have several options to fund long-term care expenses. Planning options for clients may include:

A traditional long-term care policy. This route may be expensive. InvestmentNews reported that as of 2016, rates were up as much as 126 percent since 2015.

A hybrid life and long-term care policy. These universal life policies typically have a chronic care rider.

Self-insuring. This option is often for people who haven’t planned and who are very wealthy.

Co-housing or communal living arrangements. This could include home sharing (renting out a room in their home) or living in a co-housing community where people share in the care and daily living tasks, such as grocery shopping or cleaning.

Qualifying for Medicaid. Some states have expanded Medicaid under the Affordable Care Act, so check your state’s income qualifications. Though stay up-to-date on the current health care debate.

“There is a real need to be prepared ahead of time,” Hopkins wrote in Forbes. “Failing to plan for the eventuality of long-term care leaves the financial security of a family completely up to chance.”

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Ana Trujillo Limón is associate editor of the Journal of Financial Planning and the editor of the FPA Practice Management Blog. Email her at alimon@onefpa.org. Follow her on Twitter at @AnaT_Edits.


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Integrating Insurance Products

At its core, a wealth plan is simple. It models a funding source at a given point in time against a funding use. More funding sources than uses leads to increased wealth, but more uses than sources leads to failure unless corrected.

Common sources used to fund a client’s needs and goals are cash and income (working or retirement) for short-term needs, and wealth in the form of portfolios and property for the mid- to long-term horizons. Often sitting orphaned in the investment plan are a client’s insurance products be they property and casualty, disability, life and long-term care.

Incorporating adviser-focused insurance products affords the adviser an opportunity to develop an added-value component to the overall investment plan.

Protective Value
The concept of spreading risk for a catastrophic event across a large number of people, with each individual contributing a relatively small amount of money compared to the protection provided, is one of the great inventions for wealth sustainability. It’s not a stretch to say that our ability to live with much less anxiety, and, even, for our economy to function efficiently, accrues through various insurance applications.

For those who have suffered the loss of a home to fire, a lengthy illness or caused a serious car accident, insurance protection is not a concept but a literal wealth saver.

Since clients may forget the value insurance provides, it’s essential to produce scenarios that illustrate the gaping hole left in the family’s wealth should a catastrophic event occur with no insurance coverage. The insurance money paid at these times has enormous monetary value on par with any other financial program.

Conflicts to Usage
Nearly all insurance has an event trigger such as an accident, illness, incapacity, or death in order for financial benefits to be delivered; these benefits flow into the wealth plan as a direct financial resource to compensate for what was lost. It’s a double-edged sword: “I get a financial benefit, but only when something bad happens.”

Moreover, life insurance and annuity products often come with many obstacles that sap the benefits they deliver. Sales commissions, complexity and loss of control keep advisers from embracing these products as important tools in delivering the investment solutions clients need.

Embracing Added Value Benefits
Life insurance and annuity products are quickly evolving with an emphasis on fee-based advisers. Indeed, the soon-to-be-implemented DOL fiduciary rule is speeding the shift from commission-based compensation to AUM-based fees aligned with a fiduciary standard. And, these products come with low costs and simplicity.

Variable products (dedicated portfolios backing the insurance or annuity benefit) with stripped down expenses and adviser-compatible compensation keep the adviser as the wealth shepherd and not the insurance company. This control is essential for an adviser to deliver a practice management solution that forms a total investment program based on its ability to solve a client’s needs, anxieties and aspirations uncovered during the wealth planning process.

Loury_March 2016This table identifies the many benefits an adviser-focused variable universal life policy (VUL) provides in addressing key planning tasks for an adviser’s high-income clients.

With these benefits supporting multiple planning needs, while producing financial benefits, the adviser can draw a common thread from service application to a client’s ROI.

Life Insurance as a Funding Source
Comprehensive wealth management drives to an executed solution that considers all available tools from cash management to investment products to insurance to trusts.

VUL is a portfolio container in which its structure and associated benefits are created through laws and regulations; this is the same formation for mutual funds, 529 plans, IRAs and 401(k)s.

Unlike these other vehicles, VUL allows tax-free cash access via premium withdrawals and/or loans against the cash value (i.e. the policy owner borrows from him or herself), and this opens up a number of high-efficiency funding options for other wealth needs. VUL is like a Roth plan without restrictions.

Connecting the Generations
As noted in the table above, the flow of adviser-focused VUL benefits can touch not just the primary client, say, mom and dad, but downstream generations through beneficiary designations or the parents paying the premium for adult children’s policies. Note that such strategies are best discussed with the client’s insurance consultant and/or trust and estate attorney.

These wealth transfer and planning tasks keep the adviser as the builder, manager and monitor of the policy’s underlying portfolio. In this way, insurance shifts from an orphaned position to one that is fully integrated in the investment plan’s execution.

Kirk Loury

Kirk Loury
President
Wealth Planning Consulting Inc.
Princeton Junction, New Jersey

 

Editor’s Note: Other Financial Planning Association content that may be of interest to you includes: