How to discuss long-term-care options with clients

70% of older Americans will require long-term care. Make sure your clients have a plan for it.
By Tracy Stewart, CPA/PFS/CFF

How to discuss long-term-care options with clients
Photo by bocero1977/iStock

If there is one topic that clients dislike talking about more than death and taxes, it is the possibility of a protracted illness or infirmity. The mere suggestion that they or their spouse may at some point need care in a nursing or assisted-living facility brings about resistance. After all, the commonly held view is that nursing and assisted-living facilities are dreadful places for seniors who have no family willing to take care of them. News stories of patients neglected and abused show up every now and again, strengthening that perception. As a result, many of your clients may subscribe to the belief that if they simply ignore this difficult subject, it will go away. Unfortunately, that is far from the truth.

According to the U.S. Department of Health and Human Services, 70% of people turning 65 will need some form of long-term care during their lives. That care can come in many forms. It can range from around-the-clock medical and personal assistance to independent living with a safety net.

And it can be extremely costly. Long-term-care insurance company Genworth's 2016 long-term-care survey shows that the median national cost of care at an assisted-living facility is $43,539 per year. The median cost for a semiprivate room at a nursing home is $82,125.

Therefore, it's crucial that older clients have a plan in place in the event of a serious illness or incapacity. Not having a plan can have disastrous consequences for your clients and their families, from homes lost to retirements sabotaged. CPAs can add significant value by helping their clients make the best possible decisions when it comes to planning for extended medical care. Here's a blueprint you can use for opening and structuring a discussion about long-term care with clients.

CLEAR UP CLIENTS' MISCONCEPTIONS ABOUT LONG-TERM CARE

Advisers can open a discussion about long-term care by assessing their clients' level of knowledge on the subject and by addressing some common misconceptions they may hold, such as the following:

Misconception: I don't need to worry about paying for long-term care. Medicare will cover all my medical expenses.

Reality: It is true that Medicare will cover certain costs of care in a hospital or a skilled nursing facility, as well as certain home care and hospice care costs. However, that coverage comes with a set of conditions.

To qualify for Medicare coverage, the care must follow a hospital stay of at least three days (admission for "observation" does not count) and must happen within 30 days of discharge. The level of care must be "skilled" as prescribed by a physician (meaning that it cannot be provided at home or on an outpatient basis). Care must be delivered on a daily basis and must be directly related to the condition that caused the hospitalization. And, even if an individual qualifies for coverage, Medicare will pay for only 100 days of skilled care, and in many cases, a daily co-pay is required in addition to the usual monthly Medicare premium.

Misconception: I'll never need long-term care. If I get sick, my family will take care of me.

Reality: Clients often make assumptions about who will care for them in old age without consulting with their family members first. Sometimes, they discover that family members have far different expectations on the subject than they do.

Clients also tend to underestimate the impact of providing extended care, which can be significant. According to a Senior Care Cost Index study, 33% of family caregivers report that they spend more than 30 hours a week on caregiving, which is a considerable investment of time—on par with a full-time job. The same study shows that 60% of caregivers report that taking care of family members has negatively affected their work. In other words, taking care of an ailing family member is a big responsibility and commitment. Clients should have a heart-to-heart conversation with their family about the realities and expectations of providing care before making care from family members a part of their plan.

Misconception: I will never end up in a nursing home.

Reality: The majority of people turning 65 will need some form of long-term care during their lives. What's more, even clients who don't end up living in a nursing home may still need in-home care or home modifications in the event of an illness (such as ramps, bed and bath rails, and other structural adjustments and equipment). Without a plan for covering the related costs, they could be exposing their families to a significant financial hit.

Misconception: Long-term-care insurance is my only option.

Reality: Long-term-care insurance can be one solution to the problem of paying for extended nursing care. However, it's not the right choice for everyone. For instance, premiums are significant and tend to rise as an insured individual ages. It is also critical to choose a policy from a reputable and financially stable insurance company. Long-term-care insurance products are relatively new (less than 40 years in the market), and some well-established companies such as John Hancock Financial (owned by the Canadian insurance company Manulife) have recently announced a move away from selling individual long-term-care policies.

In reality, the spectrum of options is much broader than "long-term-care insurance or nothing." For instance, clients could opt to self-insure or have an actual plan for family members to take care of them in the event of a prolonged illness. Annuity products can be a viable choice for some clients. The ultimate goal is to have a plan for getting medical and personal care in a way that makes sense financially and does not expose clients and their families to unreasonable financial and estate risk.

Misconception: Once I get a long-term-care policy, I don't have to worry about expenses.

Reality: Most long-term-care policies will cover a portion of the cost of care, usually up to a specified maximum amount per day. Also, the benefit payment is not automatic; certain conditions must be met to trigger a payment. Coverage of equipment costs also varies by policy.

EXPLAIN THE PROS AND CONS OF LONG-TERM-CARE INSURANCE

Make sure clients are aware of the pros and cons of this type of insurance. The right policy can be a financial lifeline in the event of a serious illness or accident. It can allow clients to preserve their assets and savings, maintain a level of independence, and choose where and how to receive care. There can also be potential tax benefits to buying long-term-care insurance.

However, long-term-care insurance is not a one-size-fits-all solution to the high cost of extended care. For one thing, premium costs can be significant. Your clients will have to weigh the potential cumulative effect of paying rising premiums for many years and assess the possibility that at some point those premiums may become unaffordable.

Then there is the financial stability of the long-term-care insurance company to consider. After all, your clients are investing in a product they may not need until a decade or more from now. Help them choose a reputable and financially strong insurance company by guiding them to public ratings from reliable sources such as A.M. Best, Moody's, and Standard & Poor's.

A BLUEPRINT FOR DECISION-MAKING

When a client is ready to discuss long-term care, here is a blueprint for how the conversation might go.

Step 1: Help your clients analyze their personal circumstances

No one can predict the future, and many factors will determine which path of planning for medical cost coverage is right for your clients. Encourage them to consider factors such as their overall health, family health history, financial status, and their spouse's age and health. Ask whether there are adult children or other family members living nearby who would be available and willing to assist.

Consider that long-term care comes in various forms, including skilled nursing facilities, senior communities, in-home care, continuing-care retirement communities, and many more. Choosing a facility or a care provider requires careful thought and planning, and is best done before a medical crisis happens. Encourage clients to talk with family members about their personal care preferences, and the financial consequences of various long-term-care options. The more insight family members have into your client's internal decision-making process, including their feelings on such matters as what is most important to them about the facility and the care they receive, the better equipped and informed everyone will be.

Your clients might also want to think about their emotional preferences: Some may be strongly opposed to leaving their home unless medical circumstances leave them no other choice. Depending on the degree and kind of help needed, this scenario may be workable for some (with a good deal of additional help from family and friends) but not for others.

Step 2: Identify options

As with all financial decisions, it helps to begin the long-term-care conversation by identifying the universe of relevant options. When deciding whether long-term-care insurance makes sense, CPAs can generate several hypothetical scenarios that project anticipated premiums into the future and compare them with the likely costs of care under various circumstances. Online cost-of-care surveys and calculators, like the one maintained and updated annually by Genworth (available at genworth.com, offer a wealth of data and inputs that are state-specific.

Given the financial circumstances of the family and the results of the projections, options vary. Wealthy families may opt for self-insurance. When paying long-term-care premiums would be an unmanageable financial stretch, families may choose to look into Medicaid-sponsored options. Keep in mind that Medicaid limits the choice of facilities.

Step 3: Research and read the policies

Before a client purchases a policy, encourage him or her to get multiple quotes and read the policies carefully. The fine print may well make a difference between a great-fit policy and a poor choice. Clients should think through the type of coverage they wish to buy, whether it is for adult day care, custodial care, skilled nursing home care, or something else. They must also be sure they understand details such as waiting periods, daily maximums, limitations, and exclusions for preexisting conditions. Also important are the rules concerning guaranteed renewals and waiver of premiums while receiving care.

With costs of medical and specialized care on the rise, your clients should give serious consideration to policies that have a cost-of-living adjustment (COLA) built into the policy at level premium rates. That provision means the insurance benefit will rise every year automatically. For most people, this option is preferable to buying stand-alone COLA inflation protection at a future date (which can result in a premium increase at a later age when it will be more expensive).

Clients considering the purchase of a long-term-care policy should think about premiums over a span of many years. They must be confident that they will be able to keep up with premium payments in the long run. If they decide to drop traditional long-term-care coverage after three or four years because of premium increases, the money they have paid into the policy will be lost.

Encourage your clients to explore the complete universe of options available to them. Does their employer offer voluntary coverage? Can they get a group long-term-care policy through an association? Would they be able to self-fund a portion of the expense and buy coverage with a higher deductible in exchange for a lower monthly premium?

Step 4: Look into hybrid products

Most traditional long-term-care policies are "use it or lose it": If your client ends up never needing care, his or her premiums will not generate any value beyond peace of mind. However, newer products on the market address this limitation.

Several types of so-called hybrid policies may be worth considering in addition to traditional policies. Clients can buy products that are combinations of long-term-care insurance and life insurance, long-term-care insurance and annuities, or even long-term-care coverage that can be shared by a couple. Any of those options can offer the combination of flexibility, asset accumulation, and access to care that is optimal for a specific client.

Step 5: Think through the tax aspects of the decision

Qualified long-term-care insurance contracts are given special tax treatment under the Internal Revenue Code, as long as the policy meets the requirements of Sec. 7702B. If the contract does qualify, then long-term-care premiums can be deducted as qualified medical expenses, to the extent they exceed 10% of adjusted gross income, and they are subject to a cap that increases with age (see Rev. Proc. 2016-55). Many states also offer a tax credit or a tax deduction for qualified long-term-care premium expenses, with certain tax credits amounting to as much as 25% of the annual premium (usually subject to a dollar cap). And amounts reimbursed under a long-term-care policy for actual costs incurred are excludable from income under Sec. 7702B, although amounts paid under a per-diem policy are included in income to the extent they exceed the greater of (1) actual costs incurred or (2) $360 per day (see Rev. Proc. 2016-55).

Favorable tax treatment may also be available to self-employed individuals, who can claim an above-the-line deduction for health insurance premiums, including eligible long-term-care insurance premiums, for an insurance plan established by their business. Each of these considerations could be important given your client's situation.

In looking at the strategic option analysis, it is important to take into account the after-tax outcomes of each scenario to be sure everyone is using the most realistic numbers for making the decision.

Step 6: Prepare your clients for the phone interview

Some clients can experience a degree of nervousness when it comes to the interview for a long-term-care insurance policy. Advisers can alleviate some of that discomfort by explaining what to expect and helping them anticipate interviewers' questions and requests. While specific interview questions vary, the interviewer will typically try to confirm the accuracy of the information on the policy application, as well as evaluate a client's memory and ability to perform activities of daily living (such as bathing, toileting, dressing, transferring, eating, and continence).

Encourage your clients to schedule or confirm the interview promptly. For their easy reference during the call, offer to help them compile a list of their current medications and dosages, the names of their doctors, and the dates of any recent hospital stays.

HAVE THE CONVERSATION AND REVISIT THE ANSWER

Even if clients choose to forgo long-term-care insurance when you speak with them, it's worth revisiting the issue periodically. Their circumstances can change, and new products may become available, which can result in a different best-outcome solution.


About the author

Tracy Stewart (tracybstewart@mac.com) is a Texas-based CPA financial planner who specializes in helping people make financial decisions in a variety of areas including retirement and aging.

To comment on this article or to suggest an idea for another article, contact Courtney Vien, associate editor, at Courtney.Vien@aicpa-cima.com or 919-402-4125.


AICPA resources

Articles

Publications

  • The CPA's Guide to Financing Retirement Healthcare (#PPF1604E, ebook; available to PFP section members or PFS credential holders at aicpa.org
  • Fundamentals of Insurance Planning, 6th edition (#PPF1506P, paperback)

For more information or to make a purchase, go to aicpastore.com or call the Institute at 888-777-7077.

Online resources

  • "Aging and Incapacity: CPAs Role in Advising Aging Clients," webcast, available to PFP Section members or PFS credential holders, aicpa.org
  • Elder Planning and Life Transitions After Retirement resources page, aicpa.org
  • Financial Decisions Guide—Elder Planning, aicpa.org
  • "Financial Planning for Clients With Chronic Disease" video, brightcove.hs.llnwd.net
  • Long-Term Care Insurance Resources, available to PFP Section members or PFS credential holders, aicpa.org
  • "Practical Planning for Social Security and Healthcare in Retirement" webcast, aicpa.org

PFP Member Section and PFS Credential

Membership in the Personal Financial Planning (PFP) Section provides access to specialized resources in the area of personal financial planning, including complimentary access to Forefield Advisor. Visit the PFP Center at aicpa.org/PFP. Members with a specialization in personal financial planning may be interested in applying for the Personal Financial Specialist (PFS) credential. Information about the PFS credential is also available at aicpa.org/PFS.

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