September 28, 2012 / 7:41 PM / 8 years ago

YOUR PRACTICE: Building health safety nets for older clients

Sept 28(Reuters) - When it comes to planning for long-term care, most of us have thought things out as far as “Oh, my kids will take care of me” or “I’ll just keep working.”

These flimsy strategies are a way of brushing past a question no one likes to ponder: Who will care for me when I can no longer care for myself?

Unfortunately the best safety net financial advisers can offer their clients - long-term care insurance - costs roughly a couple thousand dollars a year and is expected to get pricier.

These plans can be a lifeline when illness strikes, though, paying around $150 a day for three to five years worth of long-term care services either in the home or at a facility.

The insurance is unlikely to cover all the healthcare necessary. For example, a year-long stay in a nursing home costs $88,000 on average, according to the AARP. However, long-term care insurance can prevent your client from placing a financial strain on his family or ending up under government care.

Here are a few good rules of thumb for advisers to determine which clients should have a long-term care policy, when they should buy it and what it should cover.

WHO SHOULD BUY AND WHEN

Anyone who has tapped a long-term care insurance policy knows how valuable it can be. Just ask Mike Westling, owner of Assured LTC Planning in Eagan, Minnesota. When he started his company in 2003, his stepmother, Carol Westling, became his first customer. Six months later she was paralyzed in a car accident and had to move into a nursing home.

Even though Carol, then 70, had only made one premium payment of $2,000, her insurer, Genworth, paid out $150,000 to pay for her care until she passed away in 2008, Westling said.

If clients insist their child will care for them, make sure they’ve visualized it. “You spent your life changing your children’s diapers, do you want them to change yours?” is a question Pete D’Arruda, president of Capital Financial Advisory Group in Cary, North Carolina, poses.

Give them a reality check: About 70 percent of people over age 65 will require some type of long-term care service during their lifetime, according to a government estimate. Medicare and private insurance plans cover little, if any, of these costs.

Of course, not all of your clients will need a policy.

The typical policy holder has between $250,000 and $2 million in investable assets, Westling said.

People with more money can usually afford to cover long-term care costs on their own, but advisers should budget this out to be sure. The AARP has an online calculator that can help. Also research the costs of home healthcare and nursing homes in the client’s area.

Jimmy Lee, a managing partner at Phoenix-based Strategic Wealth Associates, said he typically forgoes policies for clients whose annual interest income can cover long-term care costs, meaning they won’t have to dip into their principal.

One of the toughest decisions will be determining at what age clients should buy a policy. Buy too young and clients feel they’re wasting thousands of dollars each year; wait too long and they may develop conditions that disqualify them from coverage or make a policy prohibitively expensive.

The average buyer’s age is 59, according to a 2010 study by America’s Health Insurance Plans. If your client has a family history of chronic diseases, they should buy a policy sooner, ideally around age 55, said long-term care specialists.

WHAT TO BUY

The majority of buyers pick a plan that gives them three years of coverage, which makes sense since the government estimates that people who need long-term care use it for about that time on average. Among the companies offering policies are Genworth Financial, John Hancock and Prudential Financial. Others have exited the business recently in part because the complexity of this insurance has made it hard for companies to set profitable prices.

A standard addition to a long-term care insurance plan is a rider that increases the benefit payout with inflation. Depending on the buyer’s age this can add as much as 50 percent to the cost of the plan, but with healthcare costs projected to rise, it’s worth it.

A popular alternative product is a hybrid policy that attaches long-term care insurance to a life-insurance policy. Buyers who need long-term care can dip into their life insurance payouts. Disadvantages are that such policies typically require a big upfront payment and can have more restrictions, like shorter benefit periods.

If you’re looking for guidance, ask estate planners for long-term care specialists in your area or get input from the insurance specialist inside your broker-dealer.

Westling, the insurance broker, recognizes that the insurance he sells is a big expense, but says it’s better safe than sorry.

“Every week I have someone who doesn’t qualify, and it’s because they waited too long,” he said.

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