For the past few weeks, we have been discussing longevity issues on Fridays with Fisher and as a part of the Leading Tomorrow with OneAmerica speaker series. I want to expand that discussion a little bit and challenge you to consider some scenarios.
A few months ago, I shared some information in a Fridays with Fisher titled “Your Clients’ Aren’t Average“. Simply, I shared that average planning could lead to adverse consequences if a truly long duration event occurs. Simply, benefits would run dry before the need was no longer present.
I want to revisit that again – particularly following the conversations over the last 3 weeks about aging, longevity, and Alzheimer’s Disease. My challenge to you is to revisit your philosophy about long term care funding and consider which is more damaging … having a plan that provides benefits that you may not need or having a plan where the benefits run out too soon?
Let’s look at this scenario – Aunt Doris was single when she retired at 65 and was in great health and very active. She also benefitted from superb planning during her life and was able to retire with both a pension of $5,000 per month and a nest egg of $450,000 in mostly non-qualified money. A small cash value life insurance policy was earmarked for her final expenses. Everything seemed to be in good order.
That is until her 76th birthday when she was diagnosed with dementia after a period of declining health and erratic behavior. As time passed, her condition worsened; she moved in with her niece where home health care was received for 4 years before moving to a nursing home for the remaining years of her life. She died at the age of 92. Meaning that for the last 15 years of her life, she received care due to her cognitive and physical decline.
Aunt Doris was real – she was my great-aunt.
Let’s examine who three potential funding strategies could influence this scenario if it played out today. Those scenarios will be focused solely on the impact of how long someone needs care relative to the insurance solution that they elect. In other words, this is NOT a cost comparison but a benefit comparison.
Our baseline assumption will be this. Four years of home care will cost $50,000 annually followed by 15 years of nursing home care at $100,000 annually. Inflation will not exist for the ease of the numbers.
SELF-FUNDING We all understand that the most costly funding for this would be that of self-funding. Simply, every dollar was consumed by her healthcare. Utilizing this strategy would erode her capital leading to impoverishment. On top of that, she may be facing a difficult time qualifying for Medicaid given the income that her pension provided. Self-funding for long duration is simply costly on multiple levels – financially, physically, and emotionally (for everyone involved).
AVERAGE DURATION PLAN In this case the LTC Insurance policy provided $10,000 a month for 4 years. Simply, the pool of money created was $480,000 to fund the extended healthcare services that she required. In this case, the policy provided tax-free benefits into the sixth year as the cost for the services in the early years was lower that those incurred in the care facility.
But, after year 6, the policy was exhausted and her savings and income was tapped heavily for her care. Even if her savings and investment pool had grown to $600,000 – the cost of care in her final years would have wiped it out leaving only the life insurance proceeds and whatever personal possessions remained to pass to her niece (if she had planned properly).
MODERATE DURATION STRATEGY Like the average duration approach above, the monthly benefit of $10,000 created a good sized pool of money – $720,000. Just like the earlier scenario, the pool extended beyond the stated policy duration of 6 years until it was exhausted part way into year 9. As with the earlier solution, she was then forced to utilize her investment pool. At the end of her stay in the nursing home, even if her investments had performed exceptionally well, the aggregate expenses of her need for care was $1.5 million which wiped out all of the assets again.
LONG DURATION STRATEGY As you are aware, OneAmerica’s Asset Care is the only asset-base LTC solution that offers a lifetime benefit duration option. Applying this solution to Aunt Doris’ situation and using the same monthly benefits as the other plans, the tax-free LTC benefits provided by the policy never ran out. That means that the Asset Care policy would have paid a total of $1.7 million of benefits for her care and not wiping out her estate and legacy.
To summarize, a long duration care event will have a significant impact regardless of the long term care funding strategy employed. However, a funding solution that provides an unlimited duration benefits is the ideal solution. And, only OneAmerica is the only asset-based carrier that offers lifetime benefits with both Asset Care (life insurance) and Annuity Care (deferred annuity).
So, the next time that you work on developing a funding strategy think about the story of Aunt Doris who, by the way, was my great-aunt.
The ideas and information shared by Fridays with Fisher is for use by financial professionals and is not intended for distribution to the general public.