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Dec8, 2022

Should I Buy Long Term Care Insurance or Self Fund?

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In this episode of The Great Retirement Debate, Ed and Jeffrey discuss whether you should buy long-term care insurance or self fund.

Episode Transcript

[00:00:00] INTRO: Hi, I’m Ed Slott and I’m Jeff Levine. And we’re two guys who just love to talk about retirement and taxes. Look, our mission is simple to educate you the saver so that you can make better decisions because better decisions on the whole lead to better outcomes. And here’s how we’re going to do that each week. Jeff and I will debate the pros and the cons of a particular retirement strategy or topic with the goal of helping you keep more of your hard earned money. Yeah, but we won’t know which side of the debate we’re taking until we flip a. Winner of the coin flip gets to pick which side of the debate they want to argue and both of us will have to argue in favor of our respective positions, whether we agree with them or not. At the end of each debate, there’s going to be one clear winner. You a more informed saver who can hopefully apply the merits of each side of the debate to your own personal situation, to decide what’s best for you and your family. So here we go. Welcome to the great retirement debate.[00:01:00]

[00:01:02] Jeff Levine: Well, welcome back to the great retirement debate. Ed. It’s good to be with you again.

[00:01:07] Ed Slott: Great to be back here. I’m Ed Slott with Jeff Levine and you are listening to the great retirement debate.

[00:01:12] Jeff Levine: You know, I feel like every time you say the name, Ed, it just, the debate becomes greater. I mean, it just it’s good. It’s good, Ed. What’s our, what’s our topic today? What are we gonna be discussing? What are we gonna be arguing about? Debating

[00:01:24] Ed Slott: All right. Uh, a big, big topic, serious topic, long term care for those big expenses. Do you get a long term care policy or do you just try it on your own and self fund?

[00:01:38] Jeff Levine: All right. Well, let’s flip the coin. Here we go. All right. Winner, winner, chicken dinner, Ed. I get to pick. Alright. And I’ll, uh, I’ll take the side of let’s buy insurance and you can argue for self-funding.

[00:01:54] Ed Slott: Okay. I’ll argue self-funding go ahead.

[00:01:57] Jeff Levine: I’ll kick it off and just say like, Hey, when we think [00:02:00] about things that may happen in life long term care or the need for long term care, is really high up there. You know, when we think about, will you get into a car accident this year, Ed, thankfully for most people, the answer is no. Will you die this year? Thankfully for most people, the answer is no. Uh, will you become disabled? More likely than, uh, you know, more people end up needing disability insurance than they do life insurance, but still the answer for most people is that they won’t need it. But when we talk about long term care, long term care is one of those things where you are more likely to actually need it at some point. Then not need it, you know, thanks to our incredible medical advances and longevity getting pushed out. Uh, we now have situations where people are living a lot longer, but for many of those individuals, a lot more of those years require some additional form of care and that care can be all over, [00:03:00] right. It can be whether it’s just a little bit of home healthcare up to, and including, you know, skilled nursing facility, all of which would qualify, uh, as some form of long term care.

[00:03:10] Ed Slott: Yeah, it’s just about, uh, a certainty. It’s not if, but when, you know, if you’re gonna live a, a long time, uh, these things are so bad now I gotta tell you over the last, I’d say about 10 years. It’s not unusual to see tax returns that claim over a hundred thousand dollars of medical expenses, whether it’s nurses aides, or nursing homes, or, uh, modifications of homes, ramps, and railings and chairlifts and stair lifts and, uh, bathroom and kitchen modifications..

[00:03:45] Jeff Levine: As you know, I’m building a house as we record this. And in that house is going an elevator for my, an elevator for my nonagenarian grandparents so that they can get around.

[00:03:56] Ed Slott: And these are big ticket items. So there’s no question it has to [00:04:00] be planned for. So why would I take the side of self-funding?

[00:04:03] Jeff Levine: Well I was just gonna ask you that. I’m glad you brought it up.

[00:04:06] Ed Slott: Yeah, so I acknowledge the problem. And in fact, anybody that’s watched any of my programs or been at any of my seminars, I always, uh, talk about having funds funding. For long term care. I just don’t agree with the actual long term care policies. Not that I don’t agree. I don’t really understand a lot of the policies. It seems like the, the current current policies I’m not talking about the back ones. My mother had one from 20 years ago is the best thing we ever had. It paid like crazy in her last years. But the more recent versions where the insurance companies have tightened up and realized, oh, we can’t pay all of that amount out. So they’ve cut back. They’ve increased the costs. I don’t see the certainty there. So I believe in the need. I think it can be done a different way, even though I’m arguing on the side of self-funding, I’m not really calling it self-funding in other words, It can [00:05:00] be done through different means it has to be funded, but maybe where you are in more control, I’ll give you one example, uh, life insurance. I have this for myself and my family, these cash value policies. A lot of the new ones are these hybrid type of, uh, policies that have long-term care riders. And if it’s needed in its most simplest form. In essence, taking in advance on your life insurance. Yes. The children will get less, but they won’t have to dig into their pockets every month for your care. Nobody wants that. So I think that might be a better way if your insurable, not everyone is to fund it yourself.

[00:05:41] Jeff Levine: Oh, it’s a, it’s an interesting argument. I give you two counters to the, to the thought of maybe purchasing a, a life insurance with long-term care hybrid type of policy versus a, a traditional type of long-term care policy. The first is, uh, well, It’s never gonna be as good, [00:06:00] maybe three reasons, a never gonna be as good. And, and as cost effective, if you need long-term care as a, a true long-term care, kind of like a, the car insurance version of long-term care, right? Pay your premium. If you need long-term care, there’s a benefit. If you don’t you’ve paid.

[00:06:14] Ed Slott: Oh, don’t tell me, you’re gonna say, only pay for what you need.

[00:06:18] Jeff Levine: Oh, no, no, , I’m not, I’m not doing one of those car commercials. No, no, but what I am gonna say is that you and I are tax people, right? We’re tax nerds, uh, at, at heart. And there is no tax deduction for the premiums you pay for those life insurance with long term care policies. Whereas there is a federal deduction, uh, for, or at least the cost of a long term care policy, depending upon how old you are. There are different federal amounts that can be deducted each year as a qualified medical expense. So it may help you to increase your itemized deductions and thereby actually defer some of that cost if you’re able to itemize, and if you’re able to take those medical expense deductions, which admittedly, and I’ll, I’ll throw [00:07:00] out one for you here, Ed, I know you’ve gotta have more than seven and a half percent of your AGI. So some, some people may not get that, and even if they do, they may be limited by the overall standard deduction. Cause that’s higher. But for a lot of people that can help to increase their overall deductions and thereby minimize the cost. The other thing though, and I think my bigger issue with those type of policies is that it actually creates a disincentive to use the insurance that you actually bought. So Ed, if you were. Um, uh, well, let, let’s share some back history here. I said I was building a house. You’ve built a house before, but it’s the house you already had, right? You had to rebuild a house years ago when hurricane Sandy came in. Right. And destroyed. Unfortunately, uh, the house I remember going in and opening a draw with you and all of a sudden water came out, like one of those, uh, you know, one of those movies..

[00:07:49] Ed Slott: Water, water everywhere.

[00:07:50] Jeff Levine: Yeah. There was more than a drop to spare at that point, but you, you didn’t think about whether to call your insurance company, right? You just did, because [00:08:00] you paid for that insurance over the years. And if you didn’t call you, weren’t gonna get a benefit. Is that fair?

[00:08:05] Ed Slott: Yeah, that’s fair. But that’s a different kind of insurance there, right?

[00:08:08] Jeff Levine: Well, but if you buy the life insurance with long term care kind of hybrid, it almost creates a disincentive to use it. For instance, let’s say that, uh, Let’s say that you have an IRA that has a million dollars in it, and you also have a million dollar, uh, life insurance with long-term care product right associated with it, where you can use up to the million dollars over a period of time to cover the cost of your long-term care. Well, if I had a traditional long-term care policy, as soon as I needed care, I’d be calling the insurance company and saying, send me my money, because if I don’t use. I lose it. Right. But with the life insurance and long term care policy, if I don’t use it as long term care, it’s there for life insurance. And so I may be even more tempted to let’s say, use my IRA to take that out because that IRA may be, uh, you know, if I’m using, it’s say for a [00:09:00] nursing home and I’m paying a hundred thousand dollars a year, almost all of my distribution will end up being deductible and that could end up creating a situation where I burn down my, my livable assets during my lifetime or for a spouse, because I’m using my IRA because I wanna leave the tax free life insurance. If I don’t use it for long term care, it becomes tax free life insurance. Where if I leave my IRA, it’s taxable. So it almost creates this like we are disincentive to use the insurance that you just bought.

[00:09:30] Ed Slott: Oh good. You just made my argument for self-funding. Of course I would. If I had the IRA, I would definitely use that IRA. Uh, because that, I mean, you’re getting the money out at, at full deductions. Yes. If the money is big enough, you will get big tax deductions and that’s the best thing you can do. You’re getting rid of that otherwise taxable income on money that has to be spent anyway for medical bills. So why not get a big tax benefit out of it and bring [00:10:00] down the balance on those IRAs this way, the beneficiaries, if you’re so worried about the beneficiaries, they’ll get better money. If you don’t touch the life insurance policy. You’re right. There’s an incentive there. If you have both, if you have the traditional IRA and the life insurance policy with the long term care rider, you’re better off using the traditional IRA, getting the tax deductions and leaving your beneficiaries that windfall, they get from the full policy amount, the policy proceeds at death, which haven’t been hit for the long term care payment. So they’re gonna end up in a better shape, but if you are listening to this, which you are, if you hear me talking, uh, you should always do what’s best for you. People ask me that all the time. I said, don’t worry about your kids. They’re gonna be fine. You have to take care of yourself first. So if I was their advisor, I might say to take down that IRA first, anyway, for the tax benefits, they might like to hear that the kids will get more, but then they’ll keep building more of that cash value for [00:11:00] themselves. And if they need it for their own care and retirement, they can take it. Or for other reasons, they can tap into that cash value, which is just gonna grow the longer they don’t use it.

[00:11:11] Jeff Levine: Again, I think those are, are all fair arguments to make, but Ed let’s think about what happens when you actually need this cost of care. Right? We, we said it could be pretty expensive. Uh, one of the, one of the insurance companies out there Genworth each year runs, uh, kind of an annual cost of care service. And we can put the link to that, uh, that site in our show notes here for folks the, you know, the average, the average, the, the, the monthly median cost for 2021 for a semi-private room was about $8,000. Now that’s about $8,000, but that includes high cost of living areas, low cost of living areas. If I take an area, let’s say, uh, Where like close to your neck of the woods. And, and we put that in and we say, how much, you know, would that be in, in a particular [00:12:00] area, like a, in a, in a New York area comparatively, right? That becomes just astronomical. We’re talking about over $12,000 a month. That’s $150,000 a year. Even if you’ve accumulated a good amount over the course of your lifetime, that could very quickly erode your portfolio. If you’re married, uh, how do they have, does your spouse have enough income? Uh, and of course, once you need it, then it’s too late to get it right. And so, the idea that. You know, and here’s one other thought for you, Ed, you know, some people may be fortunate enough. Well, I don’t know. I guess you can look at that as two sides of the coin as well. They’re fortunate enough not to need long term care for a long time because they go in and, and they, you know, they either they pass or much less likely they end up not needing long-term care. Right? Most people, once you need long-term care, you need long-term care. And, and that’s gonna be that way forever. About 20%, according to recent government [00:13:00] research. And we can put the link to that study in our show notes as well, about 20% of people will need that care for more than five years. So there’s kind of this long tail risk where, you know, if you have, let’s say Alzheimer’s or some other cognitive decline where you know, your heart works great, your, you know, your, your, your bodily body, function’s fine. But maybe it’s just a situation where, you know, you need help because of cognitive decline or there’s just a serious physical injury that is not life threatening. It just means you require a lot of care. You could end up needing long term care services. A decade in some cases or more.

[00:13:36] Ed Slott: Yeah. Well, I agree it has to be planned for, but I’m not sure seeing the current types of long term care policies out there, whether, uh, you would get all of that without paying a fortune and every story I see recently, I’d say going back the last five years, when this comes up, they’re all, all the insurance companies are going to the state regulators to [00:14:00] raise their premiums. And then it comes to a point where people are starting to say, I can’t afford the long term care insurance anymore. I’ll just wait. And, uh, that’s why I would take the idea of self-funding. Uh, planning for it, not, not having it, but self-funding by planning in other ways, life insurance is one may way. May not be the only way building up a large IRA may be a way and if it happens, it happens, but you don’t have to come up with the money until it happens.

[00:14:29] Jeff Levine: Yeah, I’ll throw maybe one more out there. And that’s the idea that if you buy certain types of insurance, you may be able to protect, uh, additional assets. So of course, if you find yourself in this situation, right where you do need long-term care or spouse needs long-term care, uh, in most places in most states and medicaid is a very complex program. It’s a state and federal partnership. And so the rules vary dramatically sometimes between states and different locations. But you know, [00:15:00] in most places you have to spend most of your own assets. And the assets that belong to your spouse, right? Income is generally looked at individually, but assets are generally treated as though they belong to both of you and that can, you know, if you run out of money, if you get to the point where you are, are so low in assets, uh, and income that you now qualify for Medicaid, you know, in, in some places, the care you receive may not be as, as, as strong. That’s the, um, One of the best things about some insurance policies. In some states, they have these, what are are called partnership programs, where if you purchase a, a qualifying long term care policy, the state will actually allow you to keep more of your own assets. In other words, you can go on Medicaid sooner, uh, with a higher level of assets, and that will protect more for, let’s say, a surviving spouse than if you don’t buy these long term care policies, you may have to dwindle down your assets to, you know, pretty, pretty. [00:16:00] Slim pickings at some point,

[00:16:01] Ed Slott: Right, but you could be dwindling down your assets, just paying the premiums every month, over a long period of time when you didn’t need the money when you didn’t need the care.

[00:16:10] Jeff Levine: Well, that’s true. And, but, but you know, Ed, it’s a, it’s a, you make a great point there, but I, I will make the counterpoint. And I always, like, I talk about this with social security as well. People say, well, what if I die? Great. So you died and you didn’t run out of money, like here. All right. So you paid like, do you walk around every year going, ah, shucks, this year, I didn’t get into a car accident and I paid all that money for car insurance or, oh man, I I’m hoping for do, do you hope for another hurricane ed? So you have to rebuild your house again so you can call the insurance company.

[00:16:38] Ed Slott: Nobody wants that, but you have to look at how far your assets will go. And when to spend them down, I guess, is the real answer. Do I wanna spend them down right now, monthly payments while I can get the policies? Because if you don’t do it while you’re healthy, it’s almost impossible. Once the situation occurs where you need long term care, it’s going to be very difficult [00:17:00] to get it. Even the way I’m saying through a life insurance policy.

[00:17:03] Jeff Levine: Yeah. And I think maybe that’s one of the best points uh, we could make is that if you’re thinking about this, doing it while you’re younger, while you’re healthier, can be, uh, can be a pretty powerful thing. And, uh, you know, I, and I think while as we come to kind of the, the end of this debate for today, I would be remiss if we didn’t. Even though it’s to, to, to the point of maybe more self-funding, I’d be remiss if I didn’t really hit on the issue of, uh, that, and you, you touched on it before of people going back to the insurance regulators. So as many people know, you know, insurance is kind is a, is a regulated thing. You have to follow state guidelines. There are some federal laws as well that can apply in certain cases. Uh, but when we’re talking about long term care insurance, generally someone can’t say like, You were healthy years ago when you bought this policy, but now you’re not. And so now we’re going to increase your premium that’s general.

[00:17:58] Ed Slott: Oh, that’s not what I was talking [00:18:00] about.

[00:18:00] Jeff Levine: Correct. Right. I just wanna make sure that people understand that.

[00:18:02] Jeff Levine: Talking about regular cost increases because the costs are going up.

[00:18:06] Jeff Levine: And in most cases, insurers kind of, I don’t wanna say they promise, but they strongly hinted that their premiums may not rise, but costs are so much, so insurers have kind of been hit by a, a, almost like a trifecta, right? People are living longer. Uh, we we’ve got costs of care that have dramatically risen that have outpaced inflation. So people needing care for more years, that care is more expensive than ever. And the other thing that goes into this is that interest rates have been low. So the insurance companies, right years ago, when they bought these, you know, when they, when they took in these dollars and said, Hey, we’ve gotta save these dollars and grow them for the future amounts. We’ll have to pay out. They assumed that they were going to be actually generating some sort of real interest on them. And for a really long time, interest rates have been pretty low. And so insurance companies in, [00:19:00] in large respects, haven’t made near the returns that they were counting on for years and so we do see that a lot of times where they go back and will be able to increase for everyone in a certain class, like all 45 years..

[00:19:12] Ed Slott: If you don’t have stability in your monthly expenses, I guess that’s, what’s bothering me about paying it out monthly, but the bottom line with all of this, I think we both agree it has to be planned for and prepared for, because at some point it, it could be a likely thing in your life. So however you prepare, whether it’s the self funding through IRAs or life insurance, or actually going out and researching a long term care policy, something should be done while you’re healthy enough. Like hopefully right now to do it.

[00:19:41] Jeff Levine: Yeah. I, I agree. I, I think, uh, without a doubt, when you create your retirement plan, It’s understanding what the impact would be if there’s a long term care event or need and how that might impact look, if, if you I’ll make the extreme example, if you’ve got a hundred million dollars in the bank and you wanna, [00:20:00] self-insure like, okay, fine. Uh, that would be just fine. But if you have a scenario where, you know, you’ve got a million dollars or so, and. You know, having that long term care need could mean a spouse goes from living in a really nice apartment to living in a, not so nice apartment or from driving their nice car to never having another car again, you know, that’s something you wanna be aware of. And so just running the numbers, crunching the numbers. I, I, I think is probably the, the critical element here and just understand how that would impact you. And then from there, Whether you decide to insure, self-insure, whatever it is there it’s up to you agreed?

[00:20:39] Ed Slott: That’s right. That’s all.

[00:20:40] Jeff Levine: So we actually agree on something in this debate. That’s fantastic. Uh, and, and with that, Ed, this is obviously a huge topic because most people are likely to need long-term care at some point in their life, especially if they’re fortunate enough to live those long lifetimes. Right. If they, if they don’t pass away early, which certainly we would hope. Um, alright, [00:21:00] well, Ed, you know, there are two sides to every coin. Your life and retirement decisions are too important to leave up to a coin flip. And that’s why one thing that you and I always agree on is making sure that you’re talking through any big decision like this with a knowledgeable financial advisor or tax professional, so that you could weigh the pros and the cons of different options against your specific goals and objectives.

[00:21:23] Jeff Levine: If you’d like to continue the discussion with Ed and I we’d love to hear from you, you can reach out to Ed on Twitter using the handle @TheSlottReport, that’s at the Slott report with two T’s and slot, or you can reach out to me using the handle @CPAPlanner . Uh, if you think we missed something or you think a particular side of the issue is, is more important, or you just like to suggest a topic for a future debate, let us know, let us hear from you and until then, uh, Ed always fun, always educational. I know every time we chat, I learn something new in myself. So, uh, thanks and look forward to our next debate!

[00:21:57] Ed Slott: OK, Jeff, I’ll see you on the next great [00:22:00] retirement debate.

[00:22:01] OUTRO: Jeffrey levine is chief planning officer for Buckingham wealth partners. This podcast is for informational and educational purposes only, and should not be construed as specific investment accounting, legal or tax advice. Certain information mentioned may be based on third party information, which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but it’s. And completeness cannot be guaranteed. The topic discussed in corresponding arguments are those of the speakers and may not accurately reflect those of Buckingham wealth partners.