When we’re helping aspiring retirees plan their transition to retirement, I rarely hear someone ask, “What if we don’t need all of the income available to us in this plan? What if we die before it’s all used up?” The reason this sounds odd is because that’s precisely the objective in planning a successful retirement. If a person knows they’ll be able to live the lifestyle they are now without worry of running out of money, then all is well. But somehow the paradigm is different for long term care planning.
When we consider that half of us will need some level and duration of long term care assistance during our lives, it’s a wonder that more people don’t want to formally plan for the cost. Unlike income planning, where people are okay with leaving behind unused income after their death (meaning they didn’t run out), there’s a sense that people don’t want to leave behind money they set aside for long term care expenses that goes unused. Shouldn’t we view this as a good thing though? Shouldn’t we get excited to plan for a catastrophic long term care need and then pass away without needing to use that money? I suppose when we’re dead, we don’t worry much about money any longer (let’s hope!). Then how has long term care planning become so different from retirement income planning?
In a nutshell, setting aside money for long term care means we have less money available for other things that are undoubtedly more fun than a nursing home stay. And if we don’t think a long-term nursing need will affect us (that’s for other people), then why not just keep all the available money on the table for cool stuff?
Well, I think I finally feel comfortable with a solution to this dilemma. If you’ve read these articles for very long, you know that I’ve struggled with what to recommend to retirees regarding long term care insurance and its derivatives. After more study and contemplation (while rocking the baby to sleep) I’ve arrived at these core beliefs about planning for long term care.
- Allocating at least some money toward long term care has enormous psychological benefits. When people have earmarked resources for this possible need, they’re much more likely to sleep better at night and to get the necessary care sooner than someone who doesn’t make provisions for it. “I know, honey, but this is why we bought that insurance policy and/or funded a long term care investment account. Since we have the money, let’s get you where you’ll get the best care, okay?”
- Carving out otherwise low-yielding conservative investments (bonds, money market, CDs, cash, etc.) and placing them inside a specially-designed hybrid long term care / life insurance policy can generate huge returns if you need expensive care, and remains available for other uses while you’re alive if you don’t need care, and/or will pay a tax-free death benefit to your family should you pass away without using all of the money. It’s no longer a use-it-or-lose-it tradeoff!
- If you don’t use all of the money allocated for long term care during your life, that means you wouldn’t have used all of the money anyway had you left it in bonds, money market, CDs, or cash. So why not have that ‘leftover’ low-return money placed in a policy that would have paid a leveraged insurance benefit toward a nursing care need or a tax-free death benefit to your loved ones through the life insurance mechanism rather than just as cash? And if you want or need the money for other things during your life, you’re actually able to remove it from the policy when you choose (while forfeiting long term care and life insurance benefits of course).
For retirees who’ve set themselves up to likely have a bit more money than is needed to maintain their lifestyle, but who could suffer significant losses if they need long-term care, it’s getting very difficult for me to not strongly recommend a transfer of otherwise low-yielding assets into a hybrid long term care / life insurance policy while you’re still healthy enough to do so.
The objections to LTC Insurance planning generally consist of:
“It’s too expensive”
“I don’t think we’ll need nursing care”
“We prefer to self-insure rather than buy insurance.”
“We don’t believe in insurance.”
“Life insurance companies are only out to make a profit.”
“We just don’t feel like talking about this.”
And while all of these reasons have merit and are perfectly appropriate questions to raise, I’m experiencing a shift in mindset that hasn’t come without significant investment in time and study, and these objections are not as compelling as I once thought.
In the end, I’m not advocating that anyone ‘buy’ anything but rather shift some assets from one investment type to another in order to build leverage (insurance) into a comprehensive retirement plan. without sacrificing much or anything in the way of flexibility. If the cost of care is high and the need is increasingly likely, an embrace of these strategies is also very likely to yield benefits in financial and emotional ways for you and your family.
If I can change my mind on the subject, maybe you can too? Let’s agree to at least have the conversation. After all, our baby, Josie, is getting pretty tired of hearing about all of this while I’m rocking her to sleep, so she’s asked me to talk with you instead. And who can say no to a baby?
All the best,
Adam Cufr, RICP®