Designing the best possible fit

Doug Horn

A topic that is almost avoided equally as much as estate planning is the discussion of how a family will care for an elderly parent when they can no longer care for themselves. I can almost hear the pages of the paper turning as many readers believe this is either unimportant or can be discussed later. Please read on.

Although it is most often considered an elderly issue, long term care needs can happen at any age. In my years of planning for clients, I have yet to meet someone whose strategy was to move to a nursing home as soon as they became unable to care for themselves. When asked, they prefer to stay in their home as long as possible. When this need for care arises, there is an immediate shift in the family dynamics, finances, and future health of the unaffected spouse.

The monthly cost of care varies depending upon the condition of the affected loved one and how much care is being provided by the healthy spouse or children. But cost of this care is generally an addition to the living expenses already in the budget. Thus, when care becomes required, there is an immediate strain upon the budget, whether it is an extra four to five thousand per year or in excess of sixty thousand per year. These costs can be paid from current income, savings, family members, insurance, or Medicaid. Determining the best solution is something that must be done for each circumstance. However, the best solution in my opinion is the purchase of insurance.

Yes, I am a licensed insurance agent, but that is not why I believe purchasing coverage is the best solution. I prefer my clients make the smallest financial mistakes when a mistake is made. Two mistakes can be made in the consideration of long term care coverage. Buy it and not need the coverage, or do not purchase coverage but need the benefits. From my research and the way we design solutions, one year of claims is generally far more costly than 20 or 30 years of premiums. Thus it is better to own coverage and have the protection of two or more years of claims than to be without coverage. However, not all coverages are appropriate and some may lead to more problems than solutions.

Just because a professional shows you an illustration with a cost within your budget, do not assume it is great coverage. Unfortunately, not every option presented as a solution should be considered. Here are some examples. A 90 day waiting period is less costly then a 30 day waiting period. However, in an example I recently discussed with a client, an illustration he was presented met his budget but included a 90 day waiting period. This reduced benefit provided a savings over 20 years of approximately $5,755 but exposed my client to 60 days of additional cost they would have to pay. While costs are roughly $5,000 per month now, in 20 years these costs could be around $10,000 per month due to inflation. Thus, while the premium dollars saved were over $5,000, to be exposed to $20,000 of additional costs in the future may not be the best solution.

Another area that may reduce the initial premiums but create significantly less benefits when claims are filed is inflation protection. Some companies offer Guaranteed Purchase Options (GPO) as a benefit when inflation protection is not purchased. While this may be presented as a viable option, I personally do not believe that to be the case. Not every company’s GPO plans are the same, but here are the weaknesses I see in a plan in which I am familiar. Purchasing the GPO instead of inflation protection is significantly less costly, which is why it is generally presented. However, for the GPO to stay in force, you must purchase additional coverage at least every other option year, because when two option years are declined back-to-back, the ability to purchase future increases is forfeited. Thus, for this feature to be beneficial, a retiree must be willing to automatically increase their cost of long term care protection during retirement, and I am not familiar with many retirees who like to have part of their annual budget automatically go up. Even exercising every other option year can still increase the annual premium by more than 50% during a twenty year period, and that is without considering normal policy increases. But the real trouble starts when claims are filed and a benefit that initially covered 90% of actual costs may now only provide 60% of the monthly expenses.

For a long term care plan to be designed properly, not only should it fit within the budget, but it should provide appropriate and expected benefits when claims may arise. In our learning center on our website, there is a ten minute seminar on long term care that may provide additional information and insight.

For assistance with insurance, estate planning and managing investments, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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