Another concern Zovistoski has is that clients don’t always understand the complexities of annuities. They are “sometimes difficult for clients to fully grasp and understand,” he says. If an advisor adds a long-term-care rider to the annuity, “due care must be given to ensure the client understands the cost and benefit, along with the positive and negative consequences of wrapping a [long-term-care] rider onto an annuity.”
Not One-Size-Fits-All
In general, LTC solutions are never one-size-fits-all. Savvy advisors will construct custom strategies for clients. “Innovation begins with knowing your clients and helping them identify their goals,” says Zovistoski. “All clients and their goals are unique, and therefore their plan to achieve the goals must be customized.”
Gordon at MAGA helped one client use a 1035 tax-free exchange to maximize LTC benefits. “A 72-year-old female had a $100,000 annuity with over half being a gain,” he says, meaning it was taxable. “Her original goal was to deplete the annuity first if she were to need care, [but] this would have triggered a taxable event and would not have given her the leverage.” So he helped her convert her taxable annuity into an annuity with an LTC rider, which gave her greater LTC spending potential.
Other Options
Another option for many clients is to use the equity in their homes. Besides home equity loans, some clients choose a reverse mortgage. Though Zovistoski calls this “a last resort”—only for those who have no surviving heirs or beneficiaries, have few remaining financial resources or have planned poorly—others consider reverse mortgages a viable option under certain circumstances.
“When done correctly, a reverse mortgage can be used as a line of credit to pay for LTC expenses,” says Kohlhepp. After all, for many retirees, the home is paid off, or nearly so. A reverse mortgage, he says, can “give them an opportunity to make [an LTC] purchase independent of their savings and investments. The credit line from the reverse mortgage can either be used to pay the premiums on the LTC policy or help fund the actual long-term care itself.”
Yet another option, for those who have a high deductible health plan, is to use a health savings account (HSA). HSAs are tax-advantaged savings vehicles that can be used for not only medical expenses but also LTC costs or LTC insurance premiums. “This might be good reason to open an HSA,” says Alford, at IFP Insurance, “since LTC is one of the things you can use HSA funds for, tax-free, down the road.”
Clearly, in all these scenarios nothing beats planning ahead. “Planning for long-term-care expenses is critical,” she stresses. “If there’s a gap and you have an unfunded long-term-care event, it can blow up your retirement plan pretty quickly.”
For those who haven’t planned ahead or otherwise lack sufficient resources, there’s always Medicaid. “Many attorneys are now starting to focus in the area of elder law to help people use trust strategies in order to qualify for Medicaid and [other] state-provided benefits,” says Alcantara. “If you own assets and don’t want to spend all of these assets on care, and [if you] are comfortable with state-provided benefits, this can be a way to pay for care if you either don’t qualify for or don’t own a long-term-care insurance strategy.”