Personally, I have met with dozens of advisors including attorneys, CPA’s, financial advisors (fiduciaries) as well as clients themselves who believe the best way to pay for long-term care is to set assets aside and self insure. Not only is this advice misguided, it is the least efficient and most costly way to pay for a long-term care situation.
So why do so many people believe this is a sound option? My experience has taught me that it stems from false assumptions about the true cost of a long-term care situation and not knowing about the new options that are available. Let’s review:
False Assumptions:
Not understanding the true costs of an extended care situation is often a reason many individuals and their advisors will not put a long-term care plan in place. Although the costs will vary depending on the amount and the level of care being provided, many people are simply not aware or prepared for the ongoing expense of a prolonged care situation. Many people also believe long-term care is something that “might” happen sometime in the distance future but it will probably only be for a short amount of time and they can simply pay for it without having any real consequence on their financial situation or their family members. Statistics don’t support that view. Nearly 3 in 4 adults will end up in long-term care during their retirement years and many of those will burden their family and deplete their savings paying for care. According to a Genworth study in 2015, 41% of all claims are paid to people under 65. Long-term care situations are not limited to old people and can happen at any time.
Income vs. Assets:
Income pays expenses, not assets. Many individuals often assume because they have assets, they will be able to afford to pay for their long-term care expenses. However, often overlooked are the many problems that come from trying o convert assets into income. Taxes often eat away at the value of the assets when they are sold or converted to income. Market timing will also play a role when someone has to sell assets in a down market and emotional issues become a factor when a family home or business has to be sold to pay for an ongoing care situation.
New Options:
The Pension Protection Act went into effect in 2010 and changed the way we can use assets to fund long-term care insurance plans. Today we have the option to take a portion of our assets and move them into a Pension Protection Act approved plan and not only get insurance, but also avoid paying unnecessary taxes. The simplest plans work like a savings account with an insurance contract built into them. The money you deposit will earn a tax-deferred rate of interest and grow over time. If you want your money, you can access it. However, for every dollar you have in your account, you will receive three dollars back tax free to pay for long-term care expenses. The long-term care benefit is guaranteed from the beginning and will grow over time as your cash value grows. Not only does the money come back tax free for care, you don’t have to pay taxes on the interest you earn each year like you do with traditional savings accounts and CD’s.
Self insuring is obsolete due to recent rule changes and new programs now available. You can have your cake and eat it too when it comes to long-term care planning. Before you simply decide to set assets aside to pay for care, learn about the new programs available that can help you protect your assets and the people you care about most from the high costs of long-term care. Learn more at our website: 525LongTermCare.com