Editor's Note: This article is part of the Financial Advisor series "How I Solved It." Advisors describe a client with a problem and what they did to help.
The fact that people are living longer means more will need long-term care in their later years, which means more people should be thinking about how to finance that care.
The first inclination of people who think ahead is to try to obtain long-term-care insurance. However, many people do not qualify because insurance companies are putting restrictions on writing policies, and the policies are becoming quite expensive. Rodger Parker, CEO of Parker Financial Group in Overland Park, Kan., has clients who have faced this dilemma and he has helped them solve the problem.
Parker has one client who became worried about long-term care when her older sister was suddenly confined to a nursing home and the client was hit with sticker shock for the cost of her sister’s care. Although nursing home care is somewhat cheaper in the Midwest than on the coasts, it can still cost $7,000 to $8,000 a month in the Kansas City area, Parker said.
“This client, who was 70 years old at the time and already retired, is relatively well-off,” Parker said. “Previously, she had said she was not interested in long-term-care insurance, but she changed her mind when she found out the true cost. As a consequence, she said she wanted to protect herself from this invasive cost. The problem was, after I asked her a few questions about her health I became convinced, because of a variety of health issues she had, that she would never get approved for a long-term care insurance policy.”
Parker said he began looking for alternatives for her.
“She did have a substantial amount of cash sitting in various bank accounts and she also was nervous about some of her mutual fund investments, which she no longer had confidence in,” he noted.
Parker’s proposed solution was a relatively new product known as an asset-based long-term-care plan based on an annuity. Parker is a former college professor, and his daughter, Maddie, is a former math teacher who is a certified financial planner in the family-owned firm. Parker’s wife, Jennifer, is the firm’s chief financial officer. So the firm takes a teaching approach to helping educate clients, Rodger Parker said.
The product he recommended for his client is a rider to a fixed-indexed annuity. The annuity allows the holder to participate in a portion of future market gains, but protects against market losses. The client found the basic fixed-income annuity attractive. But then Parker educated her on what he felt were the advantages of adding a lifetime income benefit rider with a “wellbeing benefit” as part of the rider.
The wellbeing benefit provided for a doubling of any guaranteed income payments for five years, should the owner of the annuity be unable to perform two of the six activities of daily living, or is cognitively impaired. Activities of daily living include such things as eating, bathing and mobility. The added payments can be used for nursing home care, in-home care or any other expenses.
The rider carries a fee of 1% of the annuity’s accumulation value. Parker’s client felt it was worth the extra money to have the added protection, which was provided without a health examination. In this case, the client paid $250,000 for the annuity.
“My client shifted most of her unneeded cash accounts and some of her risky mutual fund assets into this plan and could not be happier with the result,” Parker said. “It made me feel happy knowing that I had found a viable solution to her future concerns about long-term care.”
If the doubled benefits are used for the five years allowed, the benefit then reverts to the amount being paid before it was doubled. If the client dies before that time, the remaining annuity principal will go to her heirs. If she had been able to buy a long-term care insurance policy, there would be no benefits available for heirs at the time of her death.
Parker’s client, now 73, has been retired for nine years and holds another annuity, which she has been using for expenses. She plans to turn on the income rider with its wellbeing benefit in three years.
“Although my client has enough money to live on, and had a substantial amount to buy the annuity, this product could also be useful for people with fewer assets. The rider could at least pay for part of any long-term care expenses,” Parker said.