My rant on long-term care insurance last week generated quite a bit of feedback — mostly angry letters from the folks who sell long-term care insurance. I will share a selection of them with you because they present sound arguments and I think it’s only fair to include their perspectives. The issue is complicated and not one to be dismissed lightly. I’ll also include a few other letters that clarify or shed light on the issue.
I also heard from a few consumers who are on the fence about this insurance. If you’re not sure about whether it’s important for you, I urge you to consult an unbiased financial planner, and don’t give too much weight to the musings of a journalist. I don’t want to be responsible for your decisions — just my own!
Leslie Corcoran, a Certified Financial Planner of Family First Financial Planning in Stuart, Fla., considers herself a fan of long-term care insurance. She recommends the insurance to most of her clients, except for those in the “low or top level of assets.” She encouraged both of her parents to get policies. “My mom’s mom lived to be 103, and we watched a million-dollar estate evaporate — and she was healthy.”
Below is a selection of letters I received. Some are edited for length. Thanks for writing.
I have been through the Pension Protection Act several times and don’t see any language about taking money out of an annuity to purchase long-term care. I see some language about the LTC rider attached to an annuity will not be considered a part of gross income. I see some language about a special group of government workers being able to use up to $3,000 a year from their government pension to pay for long-term care insurance premiums. But, no wording about the individual taxpayer.
Is there some other area that explains this loophole that is opening in 2010? I would appreciate your direction to the section of the bill that spells this out.
Barclay G. SiskSenior Care Concepts Brokerage Inc.Greensboro, N.C.
You’re referring to the part of my column that as originally published said:
“The Pension Protection Act, signed into law last August, uses a carrot approach to entice consumers to buy long-term care insurance. Beginning in 2010, consumers can take money out of an annuity tax free if they use the cash to purchase a long-term care policy. For those in the 35 percent tax bracket, this represents considerable tax savings.”
It turns out that this is not entirely accurate and has since been corrected. Michael Kitces, director of financial planning at the Pinnacle Advisory Group in Columbia, Md., says, “Congress really dropped the ball on this provision, because the fine print actually makes it significantly less advantageous than has been covered in the general media.”
Kitces wrote an analysis on the new provisions for a financial book publisher. I invited him to put his findings into lay terms, and this is what he told me:
“As a minor technical statement, you don’t take the money out of the annuity; it’s deducted directly from the annuity as part of a hybrid annuity-LTC product. If you were to try to withdraw the money from the annuity to pay for long-term care, it would still be fully taxable. So it must be a single hybrid product, where expenses associated with the long-term care premiums are deducted directly from the annuity (or life insurance). This also means that, by definition, you will be required to purchase a new policy in or after 2010 to actually have an appropriate hybrid policy. To my knowledge, none currently exist that actually meet the specifications of the new law.
“Thus, everyone who wants to go down this road in 2010 will have to replace his or her current annuity or life insurance. Fortunately, the Pension Protection Act did provide that an exchange from an old insurance or annuity policy to a new hybrid policy is a nontaxable exchange under IRC Section 1035. But, a new policy will still be required — which also means forfeiting all the benefits of the old policy, paying any applicable surrender charges, and facing new underwriting requirements for life insurance policies. It remains to be seen whether or how insurance companies will come up with ways to make such a policy replacement easier.
“The primary issue, though, is that you don’t get to use the earnings to pay for the long-term care coverage. Technically, you’re using your cost basis to cover the premiums, and your gains are still waiting for you — except in the unusual case where your cost basis has been reduced to zero. Thus, you don’t really create any tax savings, because you’re never reducing your taxable gain (except in the zero basis case); instead, you’re saving money only to the extent that you’re able to “harvest” your cost basis for the long-term care premiums while continuing to defer the gain of the earnings. That’s still a tax benefit, but a significantly smaller one than actually being able to use the earnings tax-free.
“An example may help. Let’s assume that John Smith has a $100,000 annuity with a $75,000 cost basis. Thus, John has a taxable gain of $25,000. If John has $2,000 of long-term care premiums deducted from the annuity as a hybrid product, John’s cost basis is reduced by the $2,000 payment. Thus, his annuity value is now $98,000, his cost basis is now $73,000 (the original $75,000 less the $2,000 deduction), and thus his taxable gain is still $25,000 — which is $98,000 minus $73,000. Thus, John hasn’t done anything to reduce the taxes he’s eventually going to pay on his $25,000 plus future growth. All he’s done is manage to use $2,000 of his $75,000 cost basis without being forced to pay taxes on an annuity withdrawal, but the taxes are still coming in full force at some point down the road. And of course, John Smith would have had to exchange his old annuity for a new hybrid annuity in 2010 just to go down this road.”
Dear Boomer Bucks,
Call me biased or just call me a responsible 45-year-old adult, but I have purchased long-term care insurance. I work for a long-term care insurance company and witness firsthand the hardship that long-term care can bring to a family. I have a mother with dementia in a nursing home which costs $10,000 a month with no end in sight. But let’s put those facts aside. I also have plenty of money to “self-insure,” but ask why wouldn’t I want to transfer this potentially huge financial risk to an insurance company for a reasonable premium? Isn’t that the basic principle upon which insurance is based? I use insurance to protect my family from the loss of our home, our car, our health, and my income, so why wouldn’t I want to do the same for long-term care expenses?
In my case, I will spend approximately $27,000 over the next 10 years to fund a policy that will offer me hundreds of thousands of dollars in protection. And by the way, the benefits paid under my policy will be tax-free. That’s not the case if I have to start liquidating investments. My after-tax cost will actually be much less than $27,000 because New York state offers a 20-percent tax credit for long-term care premiums, and I will use pre-tax dollars from my HSA to pay my premiums. I will pay the premiums during my peak earning years when I can most afford them, and by age 55 I’ll be done. I will have no more premium payments, and the risk of needing long-term care will be one less thing that I and my family have to worry about as I approach retirement.
I have purchased a policy called Simplicity for MedAmerica Insurance Company that will pay me a monthly cash benefit without hassling me for copies of receipts, bills from providers or claim forms. It will give me and my family the flexibility to get care from whomever we want in whatever setting we want. I hope to stay in my home as long as possible, and this policy will give me the financial resources and the support network of my insurance company to do that without burdening my spouse and children. I don’t know about you, but the last thing I want is for my kids to have to take time away from their own families to baby-sit dad in his final days. I also don’t want my wife to have to make the sacrifices that I know are necessary to care for an ailing spouse. Instead, I want to be able to spend quality time with my family right up until the end without being a burden to them. In my opinion, long-term care insurance represents the best bet for meeting these wishes.
Long-term care is a very real risk for all of us and a potentially devastating problem for families that haven’t planned for it. If you want to protect yourself and your family, I believe long-term care insurance is an investment worth making.
MedAmerica Insurance Company
Dear Boomer Bucks,
As a certified specialist in long-term care insurance, I am compelled to take strong exception to your recent article “Is long-term care insurance necessary?”
For the sake of brevity, I will focus on only one statement, “Add to this the high probability that premiums will escalate over time, forcing some people to drop the coverage after years of paying into it, and long-term care insurance has all the allure of a soaked Serenity pad.”
Without question, there have been instances in which some carriers, mostly new to issuing this insurance, have used poor underwriting and management techniques in setting rates that resulted in the circumstances you describe. This was especially true during the initial introduction and evolution of long-term care policies.
What you fail to mention or recognize is that there are a number of companies that have spectacular records of premium stability. For instance, Genworth Financial and John Hancock with 30 and 20 years respectively of underwriting and issuing long-term care insurance, have never, yes never, had a single premium increase to their existing policyholders. These two companies are the fcDarkBlue fBg providers of long-term care insurance with a combined market share of around 30 percent to 40 percent.
This and other recommendations and observations in your article do your readers a huge disservice. It will scare many, especially younger, candidates from obtaining this vital coverage and, by doing so, will set them up for devastating financial, emotional and physical consequences.
Don Burkhead, CLTC
I honestly don’t think younger folks are great candidates for this type of insurance. They should be focused on saving for their home, their retirement, their children’s education and on meeting other short-term and long-term goals. Long-term care is something to think about beginning at age 50, in my opinion, unless an employer offers it. Nevertheless, your point that some insurance companies offer premium stability is well-taken. Thanks for sharing your views.
Dear Boomer Bucks,
Your article completely ignores the fact that long-term care insurance pays for home care and adult day care. Many policies today, including the Federal LTC Insurance Plan and the AARP LTCI Plan, pay for informal care, which means friends and family. Since less than 20 percent of care is in a facility (assisted living or nursing home), most people will certainly never be in a nursing home, but home care can cost as much or more, depending on how many hours a day you have. Even paying informal caregivers can cost more if you need upward of 16 hours a day, as many people do. The family simply can’t do it all and relationships are ruined from the pressure of caregiving every day.
Phyllis Shelton, Pres.
It’s true that I didn’t cover every single aspect about long-term care insurance in my column. You make some good points. Thanks for sharing them.
Regarding your column, “Is long-term care insurance necessary?,” let me take issue with this statement: “Medicaid is the fallback for the impoverished — those with less than $2,000 in liquid assets.” If that were true, people would buy long-term care insurance to prevent impoverishment. But, it isn’t true.
Even after the Deficit Reduction Act, people can have virtually unlimited income and get Medicaid. Even in the strictest states, anyone with too little income to pay privately for nursing home care qualifies for Medicaid benefits — not just for long-term care, but for all the supplemental medical benefits that Medicare doesn’t cover, such as foot care, eye care, dental care, etc. And assets? Only $2,000 in cash, but who’s too stupid to convert countable assets into exempt resources? You can keep home equity up to $500,000 in any state and up to $750,000 in some states. You can have a business, including the capital and cash flow of unlimited value. How about prepaid burials for the Medicaid recipient and everyone in his or her family? Keep one car of unlimited value, which doesn’t cause a transfer-of-assets penalty when you give it away because it’s exempt. Hence, the “two Mercedes” rule: Just keep buying and gifting expensive cars until you get down to $2,000. Or buy $1 million worth of term-life insurance. There’s no limit on how much you can buy; it’ll qualify you immediately for Medicaid by legally sheltering your assets; and it dodges the “estate recovery” requirement by permitting your wealth to pass unencumbered to your heirs. Over and above all this, if you still don’t qualify, hire a Medicaid planner. How do you find one? Do an Internet search for “Medicaid planning” for an overwhelming abundance of choices.
Medicaid and Medicare pay for the vast majority of all professional nursing home and home care in the United States and they have since 1965. The American public has been anesthetized to the risk and cost of long-term care. That’s why they don’t buy private long-term care insurance. That’s why Medicaid (pay-as-you go and bankrupting states and the federal government) and Medicare ($71 trillion unfunded liability) are insolvent. The best reason to buy private insurance for long-term care is not asset protection. A lawyer can get you that from Medicaid after the insurable event occurs. Instead, you should buy long-term care insurance to be able to access quality long-term care in the private market at the most appropriate level when you need it someday after the publicly financed long-term care programs have imploded.
Stephen A. Moses
Author of “Aging America’s Achilles’ Heel” policy analysis, Cato Institute
Longtime financial journalist Barbara Mlotek Whelehan earned a certificate of specialization in financial planning. If you have a comment or suggestion about this column, write to Boomer Bucks.