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Managing Another Pervasive Risk - Michael M. McDonough, Inc.
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Managing Another Pervasive Risk

Managing Another Pervasive Risk

“It’s an old habit. I spend my life trying not to be careless.

Women and children can afford to be careless, but not men . . . “

Don Vito Corleone, The Godfather

The effort and attention required to manage a business and its attendant risks can leave little time and energy to address risks of a personal nature. Preoccupation with business matters often supersedes personal financial objectives and planning. While managing the staggering economic risk to loved ones from their premature demise or disability with appropriate insurance, business owners may be only tangentially aware of the powerful, omnipresent correlation of health and wealth. Specifically, many underappreciate the threat to their retirement and/or legacy plans a long-term care (LTC) event could pose.

Following is a look at factors surrounding the clear but not necessarily present peril of one or both spouses requiring LTC at some point in their lives, the range of magnitude such an occurrence may represent, and alternatives for mitigating the risk.

Odds of a person needing LTC at some juncture often reflect how the question is framed. The “National Medicare Handbook” estimates 7 out of 10 in the US will eventually require LTC services (for some period). At a recent Estate Planning Council of Pittsburgh luncheon a leading healthcare actuary and LTC specialist mentioned approximately 1/3 of humans have some form of Alzheimer’s gene, with symptoms eventually emerging if we live long enough. When pressed for odds that a LTC insurance policy would pay off, he placed probability of “at least one” of a healthy couple – both 65 needing care for more than 90 days (the standard policy elimination period) at approximately 57%.

Actuarial odds of at least one spouse needing LTC may approximate 57% – while annual costs will, by any measure, be substantial.

Genworth’s June 2017 survey showed the annual median nursing home cost in Pennsylvania exceeded $120,000 and $111,000, respectively, for private and semi-private rooms. At the same 4% compounded rate of inflation experienced over the past five years, those annual costs would grow to $263,000 and $243,000, respectively, in 20 years – when today’s 60 – 65-year old’s are more likely to require care. The average duration of a nursing home stay is 2.2 and 3.7 years for men and women, respectively; some stays will be briefer and some longer. The actuary conservatively sees 10% of us needing care for five years or longer.

Options for paying for LTC services include self-funding, governmental programs, Traditional LTC insurance (LTCi), and hybrid insurance solutions. Self-funding entails consuming personal resources, which can conflict with legacy objectives. The event precipitating a LTC need is often unpredictable, and requires immediate access to illiquid assets. This may necessitate a fire sale and an attendant loss of principal. That wealthy individuals can self-insure, does not necessarily mean they should do so.

Options for paying for LTC services include self-funding, governmental programs, Traditional LTC insurance (LTCi), and hybrid insurance solutions.

The main governmental program paying for LTC is Medicaid (welfare for the indigent) – not Medicare, since Medicare was not designed to cover LTC needs and, in fact, provides only limited coverage for some post-acute care services under strict eligibility requirements. Presently picking up the tab for 64% of the nation’s nursing home residents, the Medicaid system is under enormous fiscal pressure as it buckles under the weight of demographic realities. Forthcoming Federal tax cuts do not figure to bolster solvency.

Elder law practitioners often illuminate a path for less-then-poor ‘middle class’ individuals to legally circumvent entitlement rules. This may be encouraging some to see Medicaid as a viable solution for them. However, for the middle class under age 70 today such loopholes are likely to be closed as Medicaid eventually becomes less exploitable. Consider: PA is the epicenter of ‘filial responsibility’ legal decisions holding children responsible for parents’ healthcare costs. To qualify for Medicaid sans elder law assistance, assets generally can’t exceed $2,400 in PA for a single individual, with a $45 monthly needs (income) allowance.

Medicare does not cover LTC, Medicaid assistance is reserved for the indigent, and a plan to self-fund requires an ‘eyes wide open’ mentality rather than comprising a delusional cop out. Burdening loved ones to provide care is sub-optimal on many levels.

Transferring the risk to a commercial insurer can bring peace of mind at point of claim, as insurance quickly recoups money paid into the policy. Long term care insurance (LTCi) can be an effective alternative, but it can only be purchased while we are still young and healthy enough to qualify.

Tax benefits of group LTCi to business owners can be particularly attractive. Similar to group health insurance, LTCi can result in the ‘holy trinity’ of tax treatment: deductible to the business, no (net) imputed income to the insured employee, and no taxable income upon insured’s receipt of benefits. Employees’ spouses receive the same tax advantages. [Self-employed and 2% or greater owners of tax conduits offset imputed income with an above the (AGI) line deduction, but premium deductibility may be limited to age eligible premium limits]. Discounted group pricing and executive carve-out arrangement (facilitating legal discrimination) further enhance the economics.

As with group health insurance, the tax benefits to group LTC insurance to business owners can be particularly attractive.

Other insurance solutions beyond traditional LTCi are available in today’s marketplace. Briefly, these include insureds accessing life insurance death benefits to fund qualifying LTC needs (via an optional policy rider). Tax free access to a full life insurance death benefit without dying can alleviate ‘use it or lose it’ concerns inherent with insurance. Other avenues possibly helping on an ‘underwriting front’ include certain annuities which can provide a leveraged benefit to pay for qualifying care.

Death is no longer required to access a life policy’s full death benefit tax free.

The opening Don Corleone quote underscores the importance of vigilant and proactive thought. However, its sexist tenor is as ironically ignorant as it is outdated on several fronts, including that women are statistically more exposed to the LTC threat and more vulnerable to outliving their resources.

In summary, it pays to be cognizant of personal risks as well as business risks. Just because a LTC event isn’t on the immediate horizon does not diminish the peril. Even without considering the potential impact of demographics on demand for services, costs only increase with time. The odds of needing LTC assistance at some point are not remote, relying on Medicaid is ill-advised for most, and burdening loved ones may be the most costly solution of all. The plan for LTC is most effectively addressed well in advance, as President Kennedy’s risk management tenet resonates: “repair your roof while the sun is shining.”

A more comprehensive discussion can be accessed here:

Michael M. McDonough, RICP®, AIF®, CPA (inactive)
Michael M. McDonough, RICP®, AIF®, CPA (inactive)