Estate Planning with Long-Term Care for Wealthy Families

Monday, July 21, 2014

by Matthew Friedson

The long-term care market has significantly changed over the past several years. As the market evolved, many high net worth individuals have either purchased or expressed an interest in a new long-term care policy form called “Hybrid Long-Term Care” coverage. 

Advisors frequently ask us if it is prudent for their high new worth clients to acquire long-term care insurance when their net worth is sufficient to withstand the additional expenses attributed to long term care.  Every family’s goals, objectives and circumstances are different.  Yet many of the issues remain the same when considering the pros and cons of a Hybrid Long-Term Care policy.   

Hybrid Long-Term Care is a combination of cash value life insurance and long-term care coverage.  The program is funded with a single lump sum deposit with the insurance company.  The lump sum deposit guarantees the benefits in the contract and no further premiums will ever be required (this is not the case with traditional long term care policies where insurance companies have the right to raise the premiums).  In the event that the insured qualifies for long term care benefits, the policy pays the monthly benefit amount over the time period purchased.  However, unlike traditional long term care policy, if the insured dies, a death benefit is payable to the insured’s beneficiary.  Also, many Hybrid contracts have a return of premium provision or rider.  This rider will return the single premium to the insured at any time before a long-term care claim if the insured determines that the coverage is no longer needed.  In a low interest rate environment where cash earns very little, this makes a Hybrid Long-Term care contract a good cash alternative for the high net worth that maintain substantial cash reserves. 

Long-Term Care benefits paid from a qualified long-term care policy are income tax free.  If self-insuring and resources are needed to fund the expenses of long term care, selling assets may result in capital gains or ordinary income taxes.  Also, markets fluctuate and timing issues should be part of the consideration.  Lastly, assets with substantial built in gains my best be held until death because the step up in basis could be very valuable for the family.  

Lastly, long-term care events are an emotion time for families. Whether it is a healthy spouse or children that helping sort through finances and coordinate care, tension can run high. Some companies, in addition to providing the funds at the time of claim, also provide “Concierge Care Coordination” services to provide much needed support at the time it is needed most.   

In conclusion, there are several compelling reasons why long term care insurance, if structured properly, can play a role in the planning for high net worth individuals.

Contact Matthew Friedson to talk more about Hybrid Long-Term Care.