Ep # 50: Is Long-Term Care Right For Your Retirement Plan?

Benjamin Haas | Sep 23, 2021

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Benjamin Haas 00:02

Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!

Adam Werner 00:27

And welcome back to another wonderful edition of our podcast.

Benjamin Haas 00:32

I can't wait.

Adam Werner 00:37

I can hear the enthusiasm, just bleeding through my headset right now. Yeah, fun topic today.

Benjamin Haas 00:46

Wait until we announce it. It's like, it's right up there with talking politics, religion, masks in schools. I don't know. Can we get more fun than long term care?

Adam Werner 00:57

It's not that bad but yeah, at this point, people are already going to see the title. So

Benjamin Haas 01:03

Yeah, you're either going to choose to listen or you're not. So that's right. That's fair.

Adam Werner 01:09

Self-selecting group here listening to us.

Benjamin Haas 01:13

Well look, I think the reality is, as much as we like the fun part of planning, getting you to where you want to be. They are often tough conversations and I think, yeah, I cannot believe we're going to be 50 podcasts in before we talk about this topic, long-term care. But as we were skimming through, what are the things we haven't really hit on for our audience? Long-term care was one of them so we have to do it. Got to rip the band aid, right?

Adam Werner 01:44

And so that doesn't surprise me because it is one of those harder conversations to have because I think most people aren't in the right headspace even go down this road with us. I guess let's start from the beginning. Let's just define what the heck we're even talking about with long-term care and how do we view that? What box do we put that in?

Benjamin Haas 02:15

Really quickly, then let me just set the stage a little bit more. I think it's to acknowledge that we're not here to say that everybody needs insurance. We're certainly not insurance sales guys. Haas Financial Group is not a group that focuses on just selling insurance. At the same time, as financial planners, it's our job to recognize what are the things that could really get in the way of a comfortable and successful retirement? This has to be one of them and part of that is recognizing that we have to have this conversation. You cannot be as you I've heard you put it, you cannot be an ostrich and just put your head in the sand. That does not make it any less likely that this event could happen in your life. Statistics tell us that.

Adam Werner 03:00

Right.

Benjamin Haas 03:01

Let's have the conversation once. So hopefully, we never really have to have it again but the key is, have the conversation once. So take it away, Adam Werner.

Adam Werner 03:15

Let's start at the ground floor. What is long-term care even mean, at least in our context here? And it truly is, oh, man, I feel like I'm going to get so granular here, but let's go for it. So as far as insurance companies, or just that side of the world, they view a need for long-term care as needing help with two of the six activities of daily living. It's getting dressed, going to the bathroom, feeding yourself. There are others, the rest, like Gilligan's Island, and the rest. There are six things and once you can't do two of those six, you quote unquote, can qualify to have this long-term care covered. In the past, when we would think long-term care, everybody thought nursing home, right? In a home full, private nursing care and I think that certainly is the way things used to be. We've gotten to a point now where it's assisted living, and more people are opting for care in their home, which is absolutely part of the conversation that we've seen increase ourselves. Just finding a way most people want to be able to stay independent as much as possible and staying at home is probably more preferable than go out somewhere. I guess you can add on whatever you'd like there but as a baseline, when we say care, it can be that simple. You can still be at home and need essentially help to cover a few things that maybe you're not able to do on your own anymore.

Benjamin Haas 04:56

Right and in the world of planning, we talk about insurance premiums covering health care in retirement, then we had a podcast not too long ago, we were talking about and building in buffers for those extra expenses that might be prescription drugs, that might be covering deductibles on plans. We talked about Medicare. The point is you getting some sort of assistance, whether that's in a facility, assisted living, or paid professionals to come into your home to help you with the things that you cannot do. That all costs money and pop quiz: is Medicare going to cover that?

Adam Werner 05:36

Mostly no.

Benjamin Haas 05:38

Okay. So let's stay on that for like 30 seconds, what is the mostly no portion of that?

Adam Werner 05:49

Leave it to the government to be so specific. To be able to qualify for Medicare to cover part of long-term care, but it really is just a very short window of time. You have to have a qualifying hospital stay so many days and then that has to be immediately followed up with a stay in a long-term care facility and even then, I think that's only covered for up to 30 days. Beyond that Medicare is done at that point so it truly is extremely, extremely limited and you have to meet very specific parameters to have Medicare even kick in a dime.

Benjamin Haas 06:24

So therein lies the problem, right? We've gotten to retirement and as much as it is very fun and people come to us to talk about like the finances of recreating paychecks. There's the complete other side of that, where we do talk about maintaining purpose in life kind of redirecting in that way, maintaining relationships, but then there is this health side of it, that is a pillar here, that what sometimes gets completely missed is recognizing more so the end of life when the body or the mind completely wears down, we are now not so focused on the medical insurance, it is literally this type of long-term care help that is not cheap, in any way, shape, or form.

Adam Werner 07:09

Yeah, so I guess that's an important clarification. So it's not covered by Medicare for the most part but even just your traditional health insurance does not cover long-term care in or long-term care needs. They're extremely different things to just going to the doctor and having health care expenses and now needing long-term care type help.

Benjamin Haas 07:33

So then let's pivot because here's what we hear from our clients more often than not. First, there's typically a bias against insurance and I completely get that you are paying money out of pocket for something that you hope never happens, right? There's nothing about that that feels good.

Adam Werner 07:50

Correct.

Benjamin Haas 07:51

But on the other end, I think it's completely common for somebody to say, I worked so hard for this money, if it's not going to be for me, okay, but then I want to leave it to my heirs. I don't want this nursing home or the government taking all my money at the end of my life because I needed this care. So then I'll pitch it to you. We're financial planners here. The point in this podcast, the point in what we do is to talk about how do we approach the situation? How would we go about deciding is it appropriate to transfer the risk or not? Let's just maybe go through some of those. I've got five things on my cheat sheet. So I'm sure...

Adam Werner 08:29

Five?

Benjamin Haas 08:29

So I'm sure some of them are on yours.

Adam Werner 08:31

One.

Benjamin Haas 08:32

And then I'll take it from there. No, but let's now get into I think we set the stage. Let's get into planning how we think about it.

Adam Werner 08:42

Yeah, so I think as you kind of already said, the care itself is not inexpensive but then trying to decide how are we going to pay for this care, or at the very least, maybe we think about transferring some of that risk to an insurance company in the form of premiums that also is not inexpensive. But there's a couple different ways to kind of go about that. So insurance, I think, like you said, most people are not in love with the idea of buying more insurance and hoping they don't need it. But that's often the first thought is, if there's a potential here that I'm going to need to outlay significant dollars in the future, is there some way that I can mitigate some of that risk now? And the answer is yes, in the form of insurance. So even from that standpoint, the insurance component to this has changed wildly in the last 10 years, 15 years. I'll hopefully lay the groundwork here historically, traditional long-term care policies that paid for care were very singularly focused on long term care costs, right. The downside to those types of policies any insurance company can essentially petition the state Insurance Commission and raise the rates if they got their actuarial tables wrong on the front end. So we've certainly seen that with clients where the cost that they thought they were committing to can often get away from them as they get closer to actually needing care. Then they have a very tough decision to either accept less of a benefit for the same amount of premium or accept a much higher premium to be able to continue the same benefit. So that world...

Benjamin Haas 10:36

I just wanted to make the parallel. That's like how I think about car insurance or homeowners' insurance. It's either you use it or you lose it and yes, it's expensive, it can go up. There is a reason why some of those traditional long term care companies are no longer in the business because they got things wrong. The expenses went up too fast and we've seen a couple different people we run into, we got a long-term care policy 20 years ago, and we're like, yeah, holy crap, this is the most amazing coverage we've ever seen. Keep paying this bill because a lot of that has gone away and I'm sorry, I didn't mean to interrupt.

Adam Werner 11:11

No, no, I'm glad you did because that's where my mind was going next, the use it or lose it side of things, when again, to the traditional long-term care. You hope that you didn't ever need it but then you did outlay all these premium dollars and you didn't get anything in return. Those types of policies still exist, albeit with a much smaller handful of companies that now are actually in that space. What's becoming more and more popular is a type of hybrid policy that now combines life insurance with access to long-term care benefits. Essentially, from the insurance company standpoint, they know they're going to be on the hook for something and then you as the insured, know that either you're going to use it for long-term care and let's hope maybe that's not the case and you don't need it. There's a death benefit. There's a life insurance component that you can leave to your spouse you can leave to your heirs, that somebody is going to get something out of the premium dollars that you've put out.

Benjamin Haas 12:13

Yeah, and I think that's become more popular on both ends because I think there's a degree of certainty to the insurance company that's underwriting that. They know what they're going to be on the hook for. It's that death benefit or paying you out a little bit sooner but hey, to the consumer, to our clients, to you and me, there's a good degree of comfort too and knowing that it's not that use it or lose it. Somebody in my family is going to get it either because it's preserving the assets for my heirs by letting me tap into that death benefit or it's going to be something that's going to pay them after I pass away if I do spend down some assets.

Adam Werner 12:47

Yeah, and like everything in the insurance world, there are so many different variations and there's so many different flavors of these types of policies. Some that focus more on the life insurance, some that focus more on the long-term care. The point is they exist. It can help bridge that gap between completely self-funding, which maybe we'll talk about that next. Right, everything, you don't have any insurance coverage and if you God forbid you need care at some point, it's going to come out of your savings. Yes, lost my train of thought.

Benjamin Haas 13:21

Well, can I stay there because I think that's kind of the point when we look at maybe making a recommendation. Often it's just going to come for us as planners, we want to give the education on the front end and that is to say a lot of plans or financial plans, retirement plans are going to be built on what are my needs versus what are my wants and really, we use the word buffer all the time, discretionary, we really want a third bucket that is there to cover these uncertain events. If it's not going to be paying for long-term care, it's going to be trying to build in a little bit of that bucket that says over time if I have these extra health care costs, these long-term care costs, I'm still going to be okay. So we want to assess guaranteed income streams, Social Security, what are those gaps? And if we just illustrate, literally mockup you are needing long term care for, I don't know $80,000 at age 80. How are we going to pay for that? And if it's not through insurance, let's figure out how it's going to be covered with your own assets.

Adam Werner 14:24

Yes, so then I guess let's go down that road or maybe you just did right? If it's not insurance, then let's mentally account with my savings, this bucket or this pool of money or however you want to phrase it? This is earmarked for my future care if I need it and if I don't, great, it's still there. I can use it for other purposes but that would be like, in case of emergency break glass. That's there for that purpose.

Benjamin Haas 14:59

But here's the reality of that and I know we've seen this and this is why I hope we're going to give value to this podcast on not just what is long term care and what is insurance. Let's think as planners. The way that I think and you think is alright, if we mock that up and let's say it's $300,000, 20 years from now that you're going to spend on long-term care but all of that had to come out of a retirement account. Make up the number 25%, 24% of income taxes, you've paid $75,000 in income taxes to take that extra money out? Well, what if the premiums you were going to pay over the next 20 years was less than $75,000? Some of this is mental accounting. It's not about your disdain for insurance. It's not about the unknown of the future. It's what's the most economical way for me to deal with this potentially happening?

Adam Werner 15:49

Yes. Yeah, that's fair.

Benjamin Haas 15:53

So I think that's part of it. If you can afford to pay for the coverage, then let's really talk about that. If you can't afford to pay for it, then let's go through the mental accounting of that side.

Adam Werner 16:07

Yeah, so right off the bat, though, before you said that, the other thought that popped into my head, okay, so if not insurance and let's say I just I don't have the assets or I'm just unwilling to set aside a bucket for that. Ultimately, there is a safety net here in the form of Medicaid that will step in at a certain point and help pay for long-term care, however, huge, huge, huge however, you must essentially spend all your assets to qualify for Medicaid. We certainly have talked to people in the past that have taken the ostrich approach. So even if you haven't mentally accounted for a bucket that's going to cover long-term care. If you get to that point and you're going to need care, you're forced to start to spend your assets. To your point, if that's coming from a retirement account, we want to help do some of that math on the front end, to help them make an educated decision but absent all of that, eventually your money is going to have to go to care. It's just a matter of how much are you going to have to spend down before something else kicks in?

Benjamin Haas 17:25

Yeah, and I guess that's a really good point because there is and certainly are professionals out there that are kind of like long term care Medicaid specialists. Where you're trying to shift assets or the question we often get is should I put my house on my kids name and this when we're trying to be very proactive in this and really talk about what is best case scenario for you and the way that you go through planning. That is not surrendering all your assets either by gifting them away or spending them down or hiding them in some sort of Medicaid annuity or whatever those things are called?

Adam Werner 17:56

Yes.

Benjamin Haas 17:58

So on my list is as planners, oftentimes we'll get the, okay, I see the value in transferring that risk but like, how am I going to pay for that? And I think this goes back to our retirement planning conversation of, well, let's take a look at really what is available to you. We've run into clients before, I'll start with the 1035. Just so you know where I'm going. We've run into clients before who have had life insurance, which I think for most people is pretty common. Right? While they were working, they had life insurance, maybe they built some cash value but now they're entering a phase of life where the house is paid off, the kids are out of the house, is the life insurance need more important than the long-term care need? Maybe not? But if you have cash value, if you have ownership of asset inside that life insurance, we'll often try to do the math and say, well, what can we do to leverage that move that into a long-term care policy, where now you do have some protection on that end? We've seen that a couple times.

Adam Werner 18:58

Yeah, and those are often the cases that make the most sense, at least, you know, in the way that you laid it out, right? If the need for the life insurance component isn't as great now as the need for long term care or at least they'll want to cover that long term care expense. We've seen it, clients have accumulated many different insurance policies over time for whatever reason and you're able to essentially consolidate that cash value of multiple policies to now fill a need, or at least, cover a risk in the future. And you can do that with dollars that they've already paid in premium to limit the amount of new fresh dollars that need to come out of their pocket. That's a perfect thing for us.

Benjamin Haas 19:46

Yeah, so if that's not the case, I think this is where we want to get into like the mental accounting of things where I think you want to, you want to put yourself in a spot where you can think about leveraging yourself other assets, you know, you carve out from investment returns, we've had a really strong market these last couple years. Well to somebody that feels like they couldn't have afforded it three years ago, now some of those excess returns, maybe you do want to leverage that. Maybe you want to put aside a portion of your required minimum distributions or when they're projected to be in the future to cover that. Maybe, you want to work part time for a little bit. I know that doesn't sound awesome but again, against these alternatives, it's mental accounting. I can work an extra six months, and the income, that's going to pay long term care for the next 10-15 years, whatever.

Adam Werner 20:42

Yeah, that was the one that before you got there. That was what was popping into my head. I know we've had that conversation with many clients of just that trade off, per se. If this is a risk and you're open and willing to transfer some of that risk to an insurance company, here's what that means from a dollar standpoint. Yes, it can come out of savings, cash flow, whatever. But yeah, if you're willing to work an extra so many months and just mentally all that income is just going to fill this bucket or pay for this insurance moving forward. That's a much easier connection for, I think, people to make or at least rationalize, to help make that decision.

Benjamin Haas 21:25

But I guess that's kind of the summary of this. The whole point in having the conversations is to look and kind of isolate these variables to find the one that feels most doable and best for you. If we can talk about our number one role in retirement planning, it's to increase your confidence that no matter what happens, things are going to be okay for you. We want people to have that confidence. We want people to have greater confidence, to come up creatively with ways that they maybe can transfer that risk on the front end is really important to us.

Adam Werner 22:04

There was actually a CNBC article a few days ago that actually popped up on my phone and it essentially laid out that with long term care, none of the options are good. You're now presented with a whole bunch of lousy options. Let's choose the least lousy one for your situation.

Benjamin Haas 22:25

Yeah, so I don't know. Is there anything else you really wanted to hit on this or can I do some summarizing? How we want to go about it then is to give people the different objectives that can be hit and have you prioritize them. Is it long term care benefits? Is it a death benefit for your heirs? Is it limiting premiums that you're going to pay over time? Or is it having access to a pool of money that we really are mental accounting going to earmark for this? I think if we can talk people through making sure that they get those in the right order for what feels best for them, then we can do our planning work of saying, Here's option one, here's option two. Both things, we think get you into a better spot but then let's just do it.

Adam Werner 23:14

The worst thing that we often see is just the complete the ostrich head in the sand, right? I'm just going to completely ignore it. I hope it never happens to me and that's Plan A, which fingers crossed, that that actually happens for most of our clients. But the reality of the statistics is anywhere from 50 to 70% of people are going to need some sort of long-term care at some point in their lives.

Benjamin Haas 23:43

Yeah, which is a, that's a big number. We can probably make a fair assumption that as people are living longer through modern medicine, it also means that the body has a longer period of time to be breaking down. So again, this is so heavy

Adam Werner 24:05

On that positive note.

Benjamin Haas 24:07

It is not a fun conversation but we got to have it and I think anybody that's truly doing holistic financial planning, holistic retirement planning, we got to talk about it.

Adam Werner 24:18

Yep, agreed.

Benjamin Haas 24:22

So on that really happy and exciting and note.

Adam Werner 24:25

Can we say something positive the end of this?

Benjamin Haas 24:28

Yeah, the Eagles. Oh, no, they lost. Phillies are crashing and burning. Man, I don't know. What do you got? It's a Monday.

Adam Werner 24:43

Yes. These are all terrible things. Hey, the sun is shining. We're all breathing. Yes. Life moves on the right plan. Let's plan for some of these risks so that when things are not so rosy, you have a plan in place that we can fall back to and not feel panicked in the moment.

Benjamin Haas 25:09

Way to wrap it up. Thank you for all your insights and emotional competence, Adam. It's always, much appreciated.

Adam Werner 25:19

Likewise, thank you. Bye bye.

Benjamin Haas 25:29

Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

Ep # 50: Is Long-Term Care Right For Your Retirement Plan?