Ep. 9: Understanding Asset-Based Long-Term Care: What it is and How it Works
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With the number of baby boomers rising, more men and women are struggling to find appropriate ways to provide for long-term care.
In Dayton, Ohio, it’s not unusual in 2023 to see assisted living care costs go as high as $8500 per month, and it’s not unusual to see nursing home costs exceed $12000 per month.
With a medical inflation rate that is above the already-high regular inflation rate, the cost of care is clearly going to double in as little as ten years.
In this episode of Repair the Roof, Attorney Ted Gudorf discusses everything you need to know about a little-known, but powerful option to navigate the rising cost of care.
It’s called asset-based long-term care, and it utilizes either a whole life insurance policy, a universal life insurance policy, or an annuity as its foundation.
Our goal at Gudorf Law Group is to have your asset-based long-term care policy pay for at least 50% of the cost of care.
How exactly can you make this unique option work for you? Listen in and find out!
- The rising baby boomer population coupled with rising long-term care costs (3:09)
- The limitations of Medicaid and other government healthcare programs (5:10)
- Deciding where you want care to be provided (7:44)
- An introduction to asset-based long-term care (10:18)
- At what age should you consider asset-based long-term care? (14:50)
- How does asset-based long-term care work? (16:08)
- How to get your own asset-based long-term care policy (23:42)
- Gudorf Law Group
- The Ohio Estate Planning Guide - Free Book
- Gudorf Law: What We Do and How We Help Webinar
- Don't Go Broke in Nursing Home Workshop
- When a Loved One Dies: A Legal Guide - Free Book
- Subscribe on YouTube
Transcript: Prefer to Read — Click to Open
Welcome to today’s show, this is episode 9, Asset Based Long Term Care. Today we are going to discuss a very unique option. For those of you who are looking for ways to pay for the rising cost of long term care. You know, let us take a look at the demographics that are facing our country today. Most of you probably have heard this statistic that 10,000 Americans are turning age 65 every single day. In 2023, we have over 56 million baby boomers between the ages of 58 and 76. The statistics tell us that on average 70% of adult Americans will need some form of long-term care. For men, the average period of time is roughly 2.5 years, but for women, the length of care goes all the way up to 3.7 years. What’s interesting, when you look at the statistics, though, is that of those individuals who end up needing long term care. Surprisingly, a 25% need care for more than five years and of that one half will need care for more than seven years according to the stats.
Let us talk a little bit about the cost of care. In the greater Dayton, Ohio area, it is not unusual in 2023 to see assisted living care costs go as high as $8,500 per month and it’s not unusual to see nursing home costs exceed $12,000 per month with some as high as $15,000 per month. With a medical inflation rate that is above the already high regular inflation rate, the cost of care is clearly going to double at a minimum in 15 years, but perhaps it may double in as few as 10 years. With the cost of care that high and with the number of baby boomers rising, individuals are struggling to find an appropriate way to provide for care. Interestingly, with many families, that burden has fallen upon the daughters in the family more so than the sons. We see that happening somewhere between 65% to 70% of the time and that does create some family tensions. Our increased reliance upon family members to care for us and that burden being placed upon daughters has resulted in more and more family tensions. That’s the framework that we have to address this issue with, I will tell you in my own family, we faced this issue in the 90s when the cost of care was significantly less, and it caused some struggles, some tension within our own family trying to figure out how best to care for my father, after my mother had passed away from cancer. When we have Alzheimer’s like my dad did, you can throw the stats that I mentioned out the door, because the average stay for somebody with Alzheimer’s exceeds eight years. Well, I can tell you that having had this personal experience in my own family with my own father and being intimately involved in trying to sort out his care and how to pay for it, as an estate planning attorney, I have made sure over the last 20 years to address this issue head on with all of my clients. While it’s true that we have an Elder Law Department that does focus in on crisis care, and can provide government benefits, the truth of the matter is that the current government benefits whether it be Medicare, or Medicaid, or Veterans Benefits, those benefits do not allow for significant or substantial care to be provided at home.
Interestingly, when I pull my clients and ask them, “Where do they want to be cared for?” Almost everybody says they would prefer to be cared for at home, rather than a facility. Yet, ironically, the government programs, in particular, Medicaid are designed to provide benefits for somebody who goes into a facility and in particular, a nursing home facility, as opposed to assisted living. Once again, I am thankful and grateful that Medicaid will pay for care in a nursing home, having said that, I think they got it a little bit backwards because my clients want to be cared for at home or worst case in assisted living, where they can maintain some degree of independence.
To make sure we understand the difference between assisted living and a nursing home, a nursing home is there to provide skilled care and an assisted living facility is not. In an assisted living facility, they are there to do exactly that. They are there to assist with the activities of daily living for a client to help them maybe get dressed or get bathed or take medication. They live in their own apartment with their own furniture. Typically, you can bring furniture from home, your bed, your TV, your recliner, you can bring that into the assisted living facility. Meals are generally provided in a common area and there are activities that are also provided for those who want to participate, but there is certainly no requirement to participate, but the staffing levels on a 24/7 basis are significantly less and not skilled care at an assisted living facility. That is what you get at a nursing facility is skilled care. We have to understand the difference and there are facilities that have both a nursing home and an assisted living facility and sometimes that causes confusion.
So first and foremost, we got to understand where do we want care to be provided? Do we want care to be provided at home, in assisted living and in a nursing home? Do we want to maximize the degree of independence we have, or are we willing to go to a facility? That fundamental decision has a direct impact, one upon the cost, and two, how we are going to pay for this? If the goal is to maximize our care at home, an assisted living compared to a nursing home, more likely than not, the cost is going to have to be privately paid for a significant period of time, if not all the time, depending upon the amount of assets that we have. Furthermore, to complicate things more, if we have large retirement accounts, you know, the baby boomer generation has grown up since the late 70s and has been able to defer a significant amount of tax by putting money in IRAs or 401(k)s, and we did that because we didn’t want to pay the tax. The downside to that, in most states but not all, those large retirement accounts, maybe you have 200,000; 400,000; a million dollars in your retirement account, those assets in most states are accountable for purposes of determining your eligibility for Medicaid to pay the cost to your care, say in a nursing home, or after a private pay period in an assisted living facility. Those assets more often than not are going to prevent you from receiving government benefits. More often than not, the government is going to require that those assets be spent down, you are going to have to withdraw them from the IRA, withdraw them from the 401(k), the 403(b), the 457 before Medicaid would ever kick in. So for those of you who want to be cared for at home, for those of you who have large retirement accounts, let us say anything over $300,000 and for those of you who for other reasons, would just assume privately pay for your care, rather than relying upon uncertain government benefits in the future. If you are like me, then we have a unique option that our office would like to share with you. I came across this unique option 15 or so years ago, and it is called asset based long term care.
Asset based long term care utilizes either a whole life insurance policy, a universal life insurance policy, or an annuity as its foundation. Now, this is a private sector solution to the long term care issue. These products are brought to us by the private insurance industry, but they are utilizing well established chassis, so that when we buy our purchase this benefit, if we never use it, we get all of our money back plus some earnings. What do I mean by that? Well, go back and think about the traditional premium based long term care. Most of my clients did not care for premium based long term care. Why? Well, in large part because the premium was not locked in, the benefit was not locked in and over a period of time, those premiums went up. Furthermore, maybe you pay a premium of $3,000 a month, and you never utilize the policy during your lifetime and let us say you buy it when you are age 55, but by the time you are age 80, the premium has doubled. You don’t want to give up the policy, you keep paying the premium, you never end up needing care. You are one of the fortunate 30% who doesn’t need care, you die and all the money that you’ve spent on that premium based long term care is gone. Since you didn’t use the policy, you lost the money. It’s for that reason that premium based long term care really never caught on in this country. To the extent it did, the lapse ratio on those policies did not meet what the actuaries had said it would and therefore, some of the premium based long term care insurance companies went out of business.
Well, somewhere about 20 years ago, the industry responded and came up with what I consider to be a far better solution. The far better solution is asset based long term care. Remember again, it is built upon a chassis of a traditional life insurance policy or an annuity. Now when we compare the life insurance policy with the annuity, please understand that the life insurance policy if you can qualify for it. Now remember, both the life insurance policy and the annuity are medically underwritten and you have to qualify for this medically. Got to be healthy enough to get it. Now, it’s been interesting for me to participate in the underwriting process with my clients over the last 20 years, because I have learned that I cannot predict who will receive an offer from the insurance company and who will not. I have had people for instance, who have had cancer in the past, typically, there’s a waiting period of at least five years, but I have had people been diagnosed with cancer be able to get the asset based long term care. While I have had other people with other disorders not be able to. It is being written more so for a disability than it is for death and that’s an important distinction to understand. But having said that, there is a distinction between the life insurance and the annuity, just understand that the one that pays the best benefit is going to be the life insurance, but that means you are going to be healthier. If you are less healthy and cannot do the life insurance option, then it’s going to be in your best interest to do the annuity, which still provides surprisingly, substantial benefits for somebody who’s even older.
Now, let us also talk about the age at which you should consider asset based long term care. In our office, we recommend that anybody age 55 and older, consider having a long term care proposal presented to them, most of our clients come to see us to do estate planning after they retire, so they do not get around to looking at asset based long term care until they are over the age of 65. The average age of a person who buys long term care through our financial services company is somewhere around 68 years old. You can purchase asset based long term care all the way up through age 80. Of course, the benefits are going to decline, the older you are, but I think you’ll be a little bit surprised at what the benefits are even for somebody who is age 75. Clearly, the benefits for somebody who is 55 are much greater than somebody who is 65 versus somebody who is 75. So it is age base and you have to be reasonably healthy in order to qualify for the life insurance policy.
Now let us talk about the company that we typically utilize, there’s a handful of companies that provide asset based long term care, but the company we like to utilize has substantial assets such that they have now received an A plus rating from AM Best, it doesn’t get much better than that. They have substantial cash assets on hand to afford them that rating and that’s one of the reasons why we like to utilize them. Number two, because it is asset based, you can pay for it in one of two ways. The policies are either done on a single premium basis, that will get you the biggest bang for the buck, that will get you the biggest both death benefit and long term care benefit or you can pay for over a term of years, typically a 10-year period. You can use what we call non-qualified assets or you can use what we call qualified assets. What’s the difference? Non-qualified assets or non-retirement assets, it might be cash in your checking account, it might be CDs, it might be an existing life insurance policy or an existing annuity that you want to trade in on this new policy, you can do that. Or you may decide that after age 59 and a half, you would like to utilize your IRA or your 401(k), you can do that and you can do that over a period of years to minimize the ultimate Income Tax that you would have to pay.
So how does this asset based long term care work for somebody who is a married couple? Let us talk about that. You know, if I have a married couple, and let us say that they are age 65 years old, we normally would like to have a shared policy. If both are reasonably healthy, we can utilize one of their IRAs to pay for the cost of care. That will cover both the husband and the wife. Let us talk a little bit about the benefits for somebody who is age 65. If a client does not utilize IRA money, and let us say they want to commit $100,000 to the long term care policy at age 65, the life insurance company in 2023, will issue them a second-to-die life insurance policy with a death benefit of $163,958. In other words, if the couple never utilizes this policy for long term care, the family, the kids are going to get a 100% of their money back, plus some interest. But if this couple needs Long Term Care, the company will agree to issue $327,915 paid out over 66 months, at a little bit under $5,000 per month, for the 66 months for every $100,000 that gets invested. So if a 65 year old couple, instead of putting in 100,000, put in 200,000, the death benefit would be $327,917, while the long term care benefit would go all the way up to $655,834. Now let us compare the 65-year-old couple with a 60-year-old couple. The death benefit goes from 163,000, all the way up to 189,000 and the long term care benefit goes up from 327,000 to 379 just by purchasing the policy at age 60, as opposed to age 65.
Now this particular company will allow that monthly long term care benefit, if you remember, for the 65-year-old couple, it’s a little bit less than $5,000 per month per 66 months, for a small additional fee, the insurance company will guarantee that that $5,000 per month payment can go on for the lifetime of the married couple. Most of our clients who purchased this policy like that continuation benefit, that lifetime coverage. Not everybody does it, but many do. Most of our clients will invest somewhere between 100,000 or 200,000. Somewhere in between those two numbers are our goal for our clients is to have the asset based long term care policy, pay for at least 50% of the cost of care. Typically, we are going to use our social security, our pension, and maybe some of our RMDs to pay for the remaining portion of our long term care. Now the beauty is once again, if we never use the policy, we get all the money back through a death benefit that’s paid at death. One of the other unique features of this particular policy is that during our lifetime, the insurance company will give us 100% of our money back as a refund, anytime we want it with no surrender charge, and no penalty period. Now why do they do that? Well, the reality is, in the 20 years that we have been affiliated, we’ve never had a client ask for their money back. It simply does not happen. Having said that, for most of my clients, I think they would agree that they appreciate the fact that if they did need the money for whatever reason, maybe some family emergency, they could get all of those funds back.
One of the other side benefits of an asset based long term care policy is as a life insurance product, as an annuity product, the individual state insurance fund will typically stand behind these policies as well. These policies are available in all 50 states. Our firm has been licensed in multiple states because we have clients in multiple jurisdictions who have asked us to prepare illustrations, showing them the benefits of this type of policy. Now, if you are interested in pursuing or looking at asset based long term care, how would you go about it? Well, the easiest thing to do would be to schedule an appointment with our firm, so that we can, based upon your age, prepare an illustration for you and we can prepare that illustration, utilizing whatever funds you want to designate, whether that be non-qualified assets or qualified assets and also take a look at what additional cost there might be to make this a lifetime policy. Now, for those of you who are younger, say you are age 55 and you answer the healthcare questionnaire with no significant health issues, no significant medications, no significant surgeries, the probability is that your application once it’s submitted, will get approved. Now, the reality is, is that it doesn’t cost you any money to find that out. We don’t charge a fee to prepare an application or to prepare an illustration. The insurance company doesn’t charge a fee to do the underwriting. So for no more than having to put up with answering some healthcare related questions, you can find out whether you are even eligible. Once you find out whether you are eligible or not, then you can make the final decision whether you do or do not want to pursue the case, acquire the policy and how much you want to invest in it, that can come down the road. Typically, this process can be accomplished within a six-week period.
Now, there are circumstances in which as they go through the medical questionnaire, the more medical issues you have, there may be a need to look at physician records, there may be a need to do a cognitive evaluation. That will be done by the underwriting team at the insurance company, they will communicate directly with your physicians, you will have to identify them their names, their addresses, their phone numbers, so that the underwriting team can reach out and acquire data. They also may ask for blood work, they may ask for a urine sample as well. It will depend upon what the medical questionnaire discloses to the underwriting team and they will make all of those decisions at the insurance company level.
Asset based long term care is the future of long term care, you have the ability to enter the private insurance market, buy something that will allow you to stay at home because it pays for your care at home, in assisted living, or in a nursing home and as you see, even at age 75, you can leverage the insurance. The numbers here, age 75, you put 100,000, you get $225,000 worth of long term care even at age 75. So you are leveraging the private insurance market. They have the large numbers on their side, we individually do not. Well, our goal for you is to pay for 50% of your care at a minimum, if not more through this mechanism, while retaining the ability to get all your money back in the event that you do not need long term care. I describe this oftentimes as moving money from your left pocket over to your right pocket.
Well look if you have questions about asset based long term care, feel free to give our office a call. We have become experts in this area. We understand the product, we understand how to apply for it and how to secure it for our clients. Have a great day, stay warm out there, hope to talk to you soon.