Legal Law

Long-term care and the liquidity trap

In 2011, the average cost of a room in a skilled nursing facility was more than $70,000 for a “shared” semi-private room, and a private room was more than $90,000. That was the cost for just one year of care and for just one person or spouse. Considering that many will need care for 3 or 4 years (or more) and it becomes painfully obvious why seniors are so concerned about the future cost of care.

With this kind of financial responsibility, middle-class families are most at risk, but even families with significant assets can find themselves in a long-term care liquidity trap. It is not a question of whether high net worth families can afford to pay for these expensive services, because they clearly can. It is about creating the necessary liquidity to pay for these services in a fiscally efficient manner.

Families with significant assets often hold diversified portfolios of securities, government and corporate bonds, annuities, real estate, or other assets. Unfortunately, these assets are illiquid or selling them at the wrong time could result in substantial investment losses. As a result, a long-term care event can cause a significant liquidity trap. Paying taxes on capital gains or withdrawals from qualified retirement accounts to pay for care only adds insult to injury. Because of this, long-term care insurance still makes a lot of sense, even for those who can pay for care out of pocket.

It’s for good reason that financial advisors sell life insurance to their clients to pay estate taxes; It is not because they cannot pay taxes, it is to give liquidity to their assets. LTC insurance provides a similar liquidity benefit and, like life insurance, provides a number of tax advantages.

For starters, insurance premiums may be deductible on individual tax returns. Second, qualified long-term health care expenses that would normally be paid for with other sources of income are financed tax-free. For high-income families, this can translate into thousands of dollars in savings. Furthermore, if government policy continues to favor future tax increases for the nation’s wealthiest families, these tax advantages may become even more valuable in the future.

Today, those with significant assets can purchase linked benefit policies that combine LTC insurance with life insurance. This unique plan design provides a long-term care benefit along with premium liquidity. Many of these hybrid policies can be canceled for a full refund at any time for any reason, and if the policyholder dies before using their policy benefits, the full premium is returned to their beneficiaries through a guaranteed death benefit. If you don’t use it, you don’t lose it.

For high net worth families, a linked benefit LTC plan provides the liquidity needed for future care and protects your principal investment at the same time.