Once our clients start building their retirement plans, they realize that while they’re probably going to be okay for income, several risk factors could derail their retirement, including healthcare and long-term care.
To help explain how life insurance and long-term care are a vital part of any retirement plan, we have SHP’s J. Cawley on the podcast today.
In this episode, we dig into the changing state of long-term care and coverage, how to find long-term care that meets your specific needs, and how to have the important conversations with your team and loved ones to ensure you leave your legacy on your terms.
In this podcast discussion, you’ll learn:
- Why long-term care has historically been an afterthought for so many people and why that needs to change.
- How to choose hybrid long-term care vehicles to suit your potential needs.
- Why most people don’t want to rely on families for end-of-life care–and why this care can get very expensive very quickly.
- The main reason why many wealth advisors don’t talk about long-term care with their clients.
- Examples of how to structure your estate plan to reduce your risk and prevent long-term care costs from putting a huge dent in your portfolio.
- “Life insurance, particularly long-term care, are not like wine. They don’t get better with age. Just the opposite. So, the sooner you have the conversation, the sooner you can plan.” – J. Cawley
Keith Ellis, Jr.: Welcome back to the Retirement Road Map. My name is Keith Ellis, joined by J. Cawley, one of the people that works here at SHP, really dives in and helps quite a few of our clients with life insurance and long-term care. That’s kind of the focus that we’re going to spend on today’s podcast because we really want to take a deep dive into both of those aspects. As you know SHP, we believe that there is five steps to building a holistic retirement plan, income, investment, tax planning, health care planning, and legacy planning. And actually, what we’re going to talk about here today when it comes to life insurance long-term care really has to do with three of those areas – taxes, estate planning, as well as long-term care. So, thanks for joining us, J. Appreciate it.
J. Cawley: Glad to be here. Thanks.
Keith Ellis, Jr.: J., we hear quite a bit from our clients as we start to build their plan. So, we start with building their income plan first because we just want to make sure that they’re taken care of, that they’re able to do the things that they want to do in retirement, really focus on Mr. and Mrs. Jones first. And as we start to build from there and they realize, as we start to build their plan that they’re going to be okay, that they’re going to have some probably plenty of money throughout their lifetime, then we start to look at other strategies or things that could derail them in their retirement. And one of those is a health care issue or long-term care. I don’t know if you want to speak a little bit about, I guess, the maturation or the change of long-term care over the last, say, 7 to 10 years, I mean…
J. Cawley: Sure. Insurance in general is a pretty expansive topic. So, we could spend all day talking about the different aspects of insurance.
Keith Ellis, Jr.: But we want people to listen.
J. Cawley: Absolutely. We want them to stay tuned in. And we don’t want to overload them. So, we’ll focus in on this particular area. Long-term care in particular, unfortunately, has been historically an afterthought for a lot of folks. And with life expectancies being extended longer and longer, it’s kind of a mixed blessing. You have the benefit of having a long life, but at the same time, you’re also faced with the health challenges that come along with that.
And at SHP, we do a great job of helping folks plan for income, plan for everything. And like you had mentioned, a big threat to that, we can do all the planning that we want, but there’s some uncertainties, particularly when it comes to health, that are unanticipated and could complicate all the planning that we’ve done, and in some cases, really compromise all the planning that we’ve done. So, there’s ways to protect clients. It’s not always a popular topic, but when you’re being realistic, given your life expectancy, given the life, the health challenges, you have to do something.
Long-term care is that solution. Over the years, it has evolved. As you’ve mentioned, it used to be you paid for an insurance annually. It was expensive, it was very specific, and if you didn’t have a particular long-term care event, you didn’t get any benefit.
Keith Ellis, Jr.: Yeah, use it or lose it.
J. Cawley: Use it or lost it.
Keith Ellis, Jr.: You don’t want to use it.
J. Cawley: Well, ideally, you go peacefully in your sleep, but unfortunately, that’s not the case for everyone. And long-term care in and of itself, there’s varying levels of care. So, I think part of what complicates that conversation or makes people resistant to it is they always think that long-term care is going to a nursing home.
Keith Ellis, Jr.: Right, right. It’s the first thing that comes to mind.
J. Cawley: Exactly. And it’s not a popular topic. People would rather talk about their final expenses more so than talking about going into a nursing home.
Keith Ellis, Jr.: Correct.
J. Cawley: Long-term care, there’s varying degrees of care. You can receive care at home. You can move into an assisted living facility that has different degradations of care from people that just need medications every once in a while to people that have more intensive medical needs to people that live completely independently. Long-term care now covers those varying levels of care. And the type of products or vehicles that are used are no longer use it or lose it.
We as a firm don’t endorse those types of products anymore where you pay a premium and don’t necessarily have any benefit afterwards. We employ what are called hybrid long-term care vehicles that have two different components. There’s a long-term care component, and then there’s also a death benefit. So, in the event that you have a long-term care event, the carrier essentially gives you an advance on that death benefit to pay for those expenses. And if you don’t end up needing long-term care, if you simply pass away, there’s a death benefit that is paid to your beneficiaries or estate.
Keith Ellis, Jr.: So, as I said, so as I call it and talk about it, somebody getting something at some time.
J. Cawley: The money’s going to come out one way or another.
Keith Ellis, Jr.: Correct. And it’s going to come out tax-free. That’s the beauty of life insurances in general, like we’re going to talk a little bit later in regards to estate planning and some tactics around using life insurance and building, again, long-term care into that. But the beauty of life insurance is that it is tax-free. And that’s a very powerful component that most folks need to look at, especially if they realize they have enough income and assets to survive them over their lifetime. You can leverage those assets and pass money along tax-free to the next generation.
J. Cawley: That’s a benefit and a feature of long-term care. That’s almost too good to be true. The fact that you can grow the benefit on a tax-deferred basis and that as legislation has now received the benefits on a tax-free basis. And then, obviously, well, maybe it’s not so obvious, but that death benefit is also paid out tax-free as well.
Keith Ellis, Jr.: Yeah, I mean, to me, when we talk about these different areas of retirement, you’re right, long-term care is the one thing that can compromise. And while it isn’t popular, as you said, to talk about, I think people feel a lot more comfortable talking about it once they realize we’ve built them a plan, they see their income stream year over year. They see their income stream accounted for with inflation, so they’re seeing their income go up year over year. They know they’re going to have enough money to live throughout their life and then plenty of money, hopefully at the end, as we start to build their plan out, then it becomes a little bit more feasible. And folks want to understand and learn about the different ways to protect themselves from long-term care. It used to be that people buried their heads in the sand and it was called self-insurance. That’s a very, very expensive way to deal with something that happens to about 70% of us as we move forward through life.
J. Cawley: Yeah, the numbers are very much so skewed in the direction that you’re going to need some form of long-term care. And once again, it doesn’t necessarily mean that you’re going into a nursing home, but you’re going to need some assistance on some type of semi-regular basis and protecting the assets. SHP, as I mentioned in my past career, I used to be really proud of helping clients accumulate wealth and accumulate assets.
But the caveat to that was, well, it’s great that I did that, but then what did I do to protect those assets or what did I advise my clients to do to protect those assets? It’s kind of a shame to make so much progress and accumulate so much just in order to have to parlay that into paying for long-term care expenses. And I’m sure most people would rather see their assets or their wealth go to their family versus going to pay for those costs.
Keith Ellis, Jr.: And it’s so expensive. Even home care used to be “the cheap way” out, that is also very, very expensive now. So, it’s like, okay, you can pay for it dollar for dollar. Use your own assets to pay for long-term care. And some folks do have the means for that. Some folks, you look at their situation, you’re like, whether it’s a pension that’s coming in, dividend and interest income is going to carry it, whatever it is, they’re going to be fine to carry the load for long-term care. And they still might want to address the issue through different types of insurance or different types of strategies.
But then there’s those people that are right on the cusp where they have enough net worth or they have enough assets and they’ve done extremely well, but a long-term care situation might leave maybe their spouse in a bad situation if it’s extended, or not leave as much or anything to the children if they go into an extended care facility. And those are the folks that you really, really want to drive this home to. So, you build their income plan, you build their investment strategy. You’ve realized those two pieces are taken care of.
And like I said, where’s the vulnerability? Well, the vulnerability becomes a health care issue, raising taxes, which we all– so different tax strategies. So, health care is a big thing that, like you said, it’s not popular to talk about, but it is something that we do want to at least have the conversation on and look to address if folks want to address. And a lot of time, that comes around a time where they’re dealing it with their own family. I see folks come in the office and they’re like, “I just went through this with mom and dad. And we’ve talked about it with them in the past and they don’t want to do anything about it.” Then they go through it with a relative, and all of a sudden, now they’re raising their hand. And so, you go through it. It’s tough.
J. Cawley: Those are the biggest advocates for long-term care or those that have experienced it in their own lives or in their communities. And they see the effects, they see the financial effects, but they also see the stress that comes along with it. And there’s a couple of things to protect here. There’s protecting the assets, which is very important. Kind of an analogy that I might use is SHP will help you build the castle, accumulate the wealth and the legacy, and SHP will help build the moat or the barrier around it to protect it.
There is the asset aspect, and then there’s also the dignity aspect. So, a lot of folks would rather not have– well, some people think that they can rely on their family, and in an ideal world, you’d be able to. But modern times are such that most people’s families are dispersed. Your children go away to college. They’re not necessarily in the same state. They’ve got their own families. They’re not necessarily going to be available even if they wanted to help take care of you during your twilight years.
And when you really think about it, even if they were, you don’t necessarily want them helping you in the bathroom or helping you put on your clothes or helping you do some really intimate things. So, if you’re not as concerned about protecting assets, you might have more concerns about maintaining your dignity and just your privacy.
Keith Ellis, Jr.: And I couldn’t agree more. It’s one of those things that we talked to Mr. and Mrs. Jones, and I’m using them, obviously, as an example. And they’re like, “Oh, my kids are going to take care of me.” And it’s not bringing a plate of lasagna on a Monday night. It’s really getting in, like you said, to those intimate areas. And people can be uncomfortable with that, and that’s the other side.
J. Cawley: And they’re not necessarily qualified.
Keith Ellis, Jr.: Right, exactly. Exactly.
J. Cawley: So, even if something is as seemingly routine as changing a bandage or administering a particular type of medication, what have you, if your children aren’t necessarily medical, they might not be comfortable and they might not just be capable of rendering that type of care.
Keith Ellis, Jr.: Yeah, I completely agree. And so, we have seen evolution in the area of long-term care. Like you said, there used to be the traditional insurance policies and that’s what most people think of. When they think of long-term care, they think of, hey, look almost like car insurance or auto insurance or homeowner’s insurance. You pay a premium every month. If you don’t use it, it’s kind of gone and at least have had peace of mind that if something did happen to me, I had some type of coverage in place while I was alive.
And we started to see, like I said, that evolution. There’s also legal measures that can be taken by meeting with an attorney to start to protect assets, but that’s a different ballgame. Maybe you’re impoverishing yourself and maybe you lose lack of the ability to choose where you want to go. So, there’s pros and cons to every strategy. But SHP, one, we want to look at these strategies for the families that we work with. These are very important things because we build plans that cover, like I said, those five areas – income, investments, taxes, health care, legacy. And we’re also looking for things that could throw the train off the tracks, and health care certainly is one.
And we feel that this strategy, this hybrid strategy that has evolved, and more and more companies are starting to come into this space, still very limited, but a lot more options than there were three or four years ago is a great strategy to look at because you can cover tax planning in it, you can cover legacy planning with it, and you can cover and protect yourselves. You could pay for care at home, pay for care in a nursing home, pay for care in an assisted living facility. It’s kind of an all-encompassing way to be able to look at this.
J. Cawley: Right. And I was going to speak to some of the levels of benefit. And it really depends on the client situation that dictates and their preference. SHP isn’t “in the insurance business.”
Keith Ellis, Jr.: Correct. We’re looking for solutions.
Keith Ellis, Jr.: Yeah, we’re looking for solutions. We’re planning. We’re not slinging insurance. We’re offering options to help our clients protect the wealth that they’ve accumulated. And these hybrid or asset-based benefits solve several different objectives. Historically, those people that did have a mind towards planning for long-term care, they were keeping large deposits in the bank.
Keith Ellis, Jr.: Yes. Oh, yeah.
J. Cawley: They were keeping large CDs. I’ve had clients that would keep a quarter of a million dollars in CDs, “just in case.” Well, their houses have been paid off. They don’t have lavish lifestyles. They don’t have that many financial responsibilities, so that just in case or that what if was if I need help in my senior years.
Keith Ellis, Jr.: Correct.
J. Cawley: So, instead of leaving the money in a bank, which you’d have to pay dollar for dollar, what we’re suggesting are solutions that allow clients to leverage that money. So, let’s throw out some round numbers, someone that’s 70 years old, that’s still a great time to have this conversation and go to this process to see, well, I guess we should backtrack. Long-term care, you still have to qualify for it.
Keith Ellis, Jr.: Correct.
J. Cawley: All right. So, from an underwriting perspective, you still have to be insurable as far as long-term care goes. So, it’s not a guarantee that everyone can even get long-term care.
Keith Ellis, Jr.: And they’re looking at it differently because they’re looking at it more for hip issues, knee issues, those types, not necessarily heart issues. You got a separate life insurance and long-term care, right? Because a lot of folks will be like, “I’m on a high blood pressure medication, I would never qualify for that.” That’s incorrect. A lot of companies have no problem with that.
J. Cawley: The underwriting process is very different for long-term care and that’s something that we explain to our clients. They understand that they’re targeting a senior market and they’re well aware of the common health challenges and struggles that go along with that. But they do screen out those folks that theoretically could use long-term care presently.
Keith Ellis, Jr.: Yeah, relatively quickly.
J. Cawley: So, it sounds odd, but in some cases, it’s easier to get regular life insurance than it is long-term care. And there’s ways to plan around that, too. There’s some more sophisticated planning. If someone can’t necessarily get long-term care, we can talk to them about life insurance solutions that may help reimburse their estate for assets they’ve had to use. So, that’s a plan B, and we won’t go into too much detail on that on this discussion. But keep in mind that long-term care isn’t a guarantee that you do have to go through underwriting. It’s not that arduous of a process, and we don’t have anything to do with that. We arrange it all through the carrier and the client. They go through the process. They find out whether or not they’re eligible.
And then we kind of tweak in terms of levels of the extent of coverage that we think a client needs. And you’re speaking to some of the numbers and some of the costs a little earlier. I think it’s going to be a wake-up call for a lot of folks once they kind of do their own due diligence and do their own homework as to what these types of expenses are. On a monthly basis, you’re looking, and particularly in New England, it’s a pretty substantial expense. I would probably conservatively say you’re in the $10,000 a month range.
Keith Ellis, Jr.: Ten plus is what I would guess.
J. Cawley: Yeah, minimum. I was trying to be conservative. I don’t want to give too much sticker shock out there. You think about $10,000 a month expense for, well, in often times, we’re talking to couples. But let’s say even on an individual basis, $120,000 a year. Let’s say you have a couple of years where you need this type of care, that’s going to put something of a dent in your portfolio.
Keith Ellis, Jr.: There’s no question about it. And these are why we want to have these conversations. Again, not pleasant, but when it comes back to the underwriting, the early you have these conversations, one, it’s more cost efficient, and two, it’s easier to qualify, right? Because now, you’re not in your late 70s and you’ve amassed two or three different ailments over the past decade. You know what I mean?
J. Cawley: Life insurance, particularly long-term care, are not like wine. They don’t get better with age. Just the opposite. So, the sooner you have the conversation, the sooner you can plan. Let’s say, you can’t get long-term care, well, then that’s an indication that you need to make some other plans for your planning. But if you can get long-term care, it also affords you, doing it sooner gives you a peace of mind that you’re not going to have to worry about it.
Keith Ellis, Jr.: And it’s locking in the premium, so then you can build that into your cash flow plan so you can see how– so a lot of times what we’re doing is we’re saying, “Okay, Mr. and Mrs. Jones have now qualified for long-term care.” Now, we go to all the different carriers and say, “Okay, what is going to give us the best one bang for our buck?” And then structure that plan based upon need. What do they have for income coming in? What do we need to supplement with long-term care to give them the percentage of coverage that they are looking to achieve? Is it 100% coverage? Is it 80% coverage? Whatever it is that they’re looking to get to, then we have to build that into their cash flow, their plan, their overall monthly expenses, so we know that they can support that.
J. Cawley: That’s really what distinguishes SHP from other advisors that might recommend long-term care, number one, that’s rare. Most wealth advisors aren’t having long-term care conversations with their clients. They’re just not. I’ve been in the field long enough to know that wealth advisors love the gains, they love the returns. Long-term care isn’t a focus.
But SHP, obviously, we have the conversation, we offer the solution, and then we do the additional homework to make sure that it’s the best fit for the client in terms of, like you said, doing the cash flow analysis that’s necessary to account for the expense. So, we’re not just blindly making a recommendation and just leaving it up to the client to figure out how to pay for it.
Keith Ellis, Jr.: Well, it’s interesting. You and I were going back and forth over the weekend, actually, and a client that we had presented long-term care to in 2022 is now revisiting it in 2023, had an episode in their family over the last 12 months and really starting to raise their hand to say, “You know what? What you guys were talking about last year now makes sense to me. And I can see why this is important.” So, now, what we’ve done is we’ve submitted underwriting to an insurance company. The insurance company has come back, and now it’s about structure. And she’s younger, right?
And one of the recommendations that you had, which we love, this is kind of your bread and butter. Your specialty was lowering the actual benefit, but then increasing the inflation. So, then as it starts, because percentages say she’s not going to need it now. Obviously, we don’t know. No one has a crystal ball. But you go based on percentages, actuaries, whatever you want to call it.
Percentages say she’s not going to need it now. She’s 60 years old, right? She’s going to need it 15, 20, 25, maybe longer years from now. With that inflation increase over time, it’s going to surpass most likely what she would get based upon today. And what that does, it reduces her premium. So, it’s a win-win-win for the client all around, and that just takes time, that takes effort, and that takes a team to look at this.
J. Cawley: I was just going to add the team aspect. My role is to kind of come in. You’ve got the relationship with the client, and I’m fairly new to the firm. So, I’m still getting introduced to them. But you can share information with me about these clients that I don’t necessarily have, but it helps me tailor the recommendations that I make that much better. In this particular case, the husband found out that he couldn’t get long-term care. So, that meant we had to come up with another plan and really drill down on taking care of Mrs. in this particular case. But the relationship that the advisors have here, and then my background, my focus allows us to tailor the best plans available for our clients.
Keith Ellis, Jr.: Absolutely. And that’s just one example. But we do believe that long-term care is a conversation that you should have, and it’s something that should be at least looked at. And if the client doesn’t want to address it, like you said, it’s not popular, it’s not something we love to talk about either, but it is something that’s in the back of our mind for every family that we work with, every family that we represent because we’ve seen it time and time again. Sadly, it can throw the train off the track.
J. Cawley: Right. Well, if you wanted to leave a legacy and you only had so much in assets and then you had that long-term care expense, in some cases, you might not be leaving a legacy at all, and in some cases, it might be drastically reduced. You won’t be able to look out for your children and your grandchildren. Long-term care is a strategy that gives you a better opportunity to realize that goal.
Keith Ellis, Jr.: And like you said, provides dignity and care from qualified people while you’re alive. It’s not its care that is quality, you know what I mean? Not just relying on your kids, your neighbor, whoever. So, as we start to look at, and like you said, legacy, right? That’s obviously also a very important part of the planning that we do. It’s that final piece of the overall puzzle. It kind of aligns a lot with estate planning. We just call it legacy.
And we believe that if we did that same scenario, that same cash flow analysis, and we realize, again, not to sound repetitive, but Mr. and Mrs. Jones are going to be okay and their main goal is legacy, we think life insurance has a pretty good component to be part of that because you used the word earlier, leverage, right? There’s a couple of different hurdles that folks need to think about as they start to plan forward, both for themselves, the next generation, and maybe even the generation after that. And one of them is the Massachusetts estate tax, right?
J. Cawley: Absolutely.
Keith Ellis, Jr.: And do you want your kids to pay that? We did an analysis for a couple on the Cape. We realized, again, you got to go based on actuaries, life expectancies, things like that. Their estate tax bill was going to be anywhere from $550,000 to $625,000 when it was all said and done. Estate tax, IRA tax, kids were going to have to cut a check when the estate was settled for, let’s call it a round figure of $600,000. So, I asked, we simply said, “Do you want them to sell assets and write the check for $600,000? Or do we want to look at strategies that you can leverage some of your assets to take care of that $600,000, maybe at $150,000 or $200,000?” You know what I mean?
J. Cawley: Sure. Well, it completes the circuit or it completes the plan. The estate tax piece, it’s inevitable for those folks. You should be commended, you should be congratulated on having gotten to that threshold where it’s an actual concern. And we’re proud to help you get there. But at the same time, there’s that tremendous liability that’s due within the year of your passing. Uncle Sam is looking for their piece of the pie. And you can anticipate that, you can preempt it. And again, with leveraged dollars, you can make it so that there’s already an accounting for the taxes that are due so that if the portfolio has the potential to continue to grow or if your assets are just illiquid, or let’s say, you’ve got a lot in real estate and the markets aren’t ideal to sell those assets off, to account for the taxes that are due, you can use insurance as a strategy. You can use it as leverage to account for those taxes that are going to be due inevitably.
A really simple way of thinking about it is if you were buying, let’s say you were buying someone a gift card for a really expensive store and you see the prices of the items in the store and the gift card could get you that item, but then there’s also other expenses associated, like the taxes, what have you. Let’s say Lululemon, for instance, your gift could be the $100, but the item itself that might cover it, but it doesn’t necessarily cover the taxes that are due as well. So, if you wanted to give the whole gift, you would make the gift for the $100 and the taxes that are due. I don’t know about your household, but Lululemon is a big expense, in line.
Keith Ellis, Jr.: It’s expensive.
J. Cawley: So, if I’m giving a gift and I want to give the entire gift, I have to account for that additional layer that’s going to be due.
Keith Ellis, Jr.: Agreed. And that was the conversation I had with a couple that I just referenced down the Cape, that we just basically set aside $12,000 a year for the next 20 years. And that’s going to go, and now, God forbid, something happened to them earlier, we hope that doesn’t happen, that same $650,000 is paid to their children tax-free to cover their estate tax bill. And if it’s lower, they can keep the benefit. If it’s higher, they might owe a little bit more, but it’s at least a good chunk of that taken care of. And then, that to me is a great way to look at and plan for the inevitable. I mean, it’s there, you know you’re going to have to pay or your kids are going to have to pay it.
And like I said earlier, do you want them? And you said you had a great example, illiquid assets. Are we going to sell them at a bad time? We don’t know what the environment’s going to look like back then or in the future. What we want to do is plan and simply say, “Okay, you’re taken care of.” This is what we can do to help elevate the benefit to the next generation, which is why people are building an estate plan to begin with, which is why people are putting together everything. They want to make sure their kids, their grandkids, and their grandkids’ grandkids receive their wealth.
J. Cawley: Well, the term tax burden, that burden is going to have to be shouldered by you or by them. And if there is a more sophisticated way, if you can take advantage of the types of planning that are available, we’re not talking about some type of tax sheltering or offshore or anything. These are things that you’re able to do that the tax code allows us to do completely above board.
Keith Ellis, Jr.: And many people do it.
J. Cawley: Right. The benefits almost seem like you’re doing something unethical because you’re like, wow, all I have to do is plan ahead and I can use this. I can put in, for $100, I can get $500 out.
Keith Ellis, Jr.: Correct.
J. Cawley: Wow. Why wouldn’t I? Why wouldn’t I do that?
Keith Ellis, Jr.: And I think there’s more to the estate planning piece that I think the best thing would be, we did a great segment here on long-term care. Why don’t we have you come back in a month, month and a half, and we can dedicate a whole podcast just to the estate planning piece, life insurance, and how that fits in it?
J. Cawley: I’d be glad to. This is an area where I kind of get excited even though clients aren’t necessarily excited. I like to show that there are solutions and there’s strategies that you can use that make these things easier to deal with.
Keith Ellis, Jr.: And to be honest with you, I think they’re fantastic solutions and they’re the hybrid, not to revert back for that hybrid long-term care from what used to be to what is now, the animal is a lot better and it’s a lot more palatable for folks because like I said early, somebody is getting that benefit at some point and it’s tax-free. So, again, thanks, J., for joining us. You brought a lot of great knowledge and information to the show for folks wanting to maybe dive a little bit deeper into long-term care or look at it based upon their situation. Feel free to reach out to us here at SHP. And we look forward to seeing you next time right here on the Retirement Road Map podcast.Charlie podpostmedia2023-09-28T21:36:02-04:00