Bob and Beth Pettison came to me with a unique problem.

“We’ve been reading your columns on this long-term care policy with the life insurance benefit you can access for long-term care needs – if necessary. Most of what you’ve talked about is people having money in CD’s who can increase their long-term care coverage. We don’t have a lump sum of money sitting in CD’s but we do have some money in qualified acounts– IRA’s and SEP’s – that we realize we won’t need when we reach age 70. What can we do to get protection when all we have is untaxed money sitting there?” Beth asked.

In this case, if Bob and Beth took out all of their money at one time for a lump sum deposit in order to acquire supplemental or primary long-term care, they would have a huge tax bill to deal with.

However, we were able to talk to a company that specializes in qualified funds and tax-deferred funds that have untaxed interest earnings.

Bob and Beth were able to transfer their IRA’s and SEP’s to the same type of qualified plan with this company. They then set up a twenty pay option on the IRA directly into the long-term care coverage – buying them nearly the same amount as if they had put in a lump sum – or about twice the amount of money they had in their qualified accounts.

The difference in coverage was because of this. If Bob or Beth needed care prior to the twenty years being paid in, or died for that matter, the company would still have the remainder of the IRA’s and SEP’s to use for long-term care as well as the death benefits under the long-term care policy. While the IRA account was going down, the cash value was filling up on the long-term care policy.

If they went on claim, Bob and Beth could draw from both their remainder accounts with the IRA’s and also use the benefits created by the policy.

If they died, their children would receive a portion of their money from the IRA’s and pay tax upon it while the death benefit paid under the long-term care policy came to them tax-free.

Because the withdrawals were set up over a twenty-year period, Bob and Beth only had to pay income taxes on the annual withdrawals each year rather than the lump sum. As they were actively farming, they were able to mitigate these taxable withdrawals by controlling their farm income.

In their case, they were able to create long-term care benefits to supplement their inadequate coverage (they were only insured for $175/day and minimum costs are now over $200/day). They had a lump sum death benefit they could access if they needed to fill in either holes in their coverage or care costs not met by their smaller long-term care policy.

They were also able to move their funds from a taxable event for their children to a by and large non-taxable death benefit – depending on whether the twenty years had expired and the IRA’s had been exhausted. If not, then the children received the death benefit – less any long-term care costs for either Bob or Beth from the same policy.

This same method would be used for annuities with growth in them that has not been taxed. Again, the company can do withdrawals from ten to twenty years and my client only pays income tax on the interest withdrawals. Because of the annuitizing of the contract, the interest would be spread out over the years chosen by the clients.

Bob and Beth were thrilled. “We can use this retirement money for a much better purpose – to protect our farm, and to give us peace of mind if our long-term care insurance is inadequate in the future. We also have access to all of the premiums paid after ten years, so if we truly need money, we can get at it. It seems like the right solution for us.”

“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone: 701-255-4079
Fax: 701-255-6106
Toll Free: 1-800-373-4078

Bill and Betty retired in the last two years. Over the years, their land values had increased dramatically to over three million dollars and they had managed to put money into CD’s of close to five hundred thousand. However, Bill suffered a stroke last year and Betty had been taking care of him for the first six months.

As anyone knows, it was not only Bill who lost his ability to enjoy life and do the things he wanted to do – it was even more so for Betty. Betty had to be at Bill’s beckoned call every minute of every day and couldn’t leave him alone except when one of the children could keep an eye on him. As they were not geographically close to their parents, the children could only help on a very limited basis. 

Finally, Betty decided that Bill needed to be in a facility for long-term care as she could no longer assist him in dressing, toileting, bathing, etc. The average cost of care per North Dakotan receiving care is now up to $239.00 per day. As with any average, this number is made up of people who pay less and people who pay more – sometimes a lot more. The average, however, is now eighty seven thousand dollars a year per person.

Bill and Betty always assumed the money they had set aside self-insured them for long-term care costs. After all, five hundred thousand was a kingly sum. When they evaluated Bill for care, his costs of care were $480.00 a day (some three hundred dollars less than the top costs in the state) or about $175,000 a year.

Betty assumed if she took care of Bill at home for as long as she physically could, Bill would not be in the home for very long – and she was right. Bill died after only thirteen months in the facility and it only cost $187,000 of the five hundred thousand dollars in savings.

The problem came shortly after Bill died. Betty, in her efforts to keep Bill at home and care for him herself ended up with many muscle and bone injuries due to the heavy lifting of Bill during his stay at home. At the age of seventy-four, these injuries didn’t heal and eventually turned arthritic for Betty.

Only four years after Bill’s death, Betty herself could no longer stay in her own home due to the care she provided for Bill. She couldn’t get in and out of the family tub for showers, she couldn’t go down steps without assistance and, unlike with Bill, there was not another body there to assist her in her difficulties.

Betty’s family found it was too difficult and dangerous for Betty to stay at home and they were unwilling to have a family member there full-time. After all, the children had families and jobs of their own.

Betty entered an assisted living facility and the costs were much less than Bill at only five thousand dollars per month. Betty than started using the remaining $313,000 in savings to meet her costs of care as well as the rents from the farm. Again, everyone assumed this was a huge amount of money, but Betty continued to live and continued to degenerate from her injuries over time.

With increasing costs for care due to her degeneration, Betty’s reserves of cash ran out in four and a half years. After this period of time, quarters started being sold to pay for her costs of care and the three million dollar estate started going down in value.

Solutions: This is one of those ‘should’a – could a -would a’ situations where hindsight is twenty-twenty. Had Bill and Betty prepared properly, the family farm would still be intact. As it is, if Betty continues to live year after year, more and more of the family farm goes each year.

Bill and Betty had options to prepare for their possible costs of care: Self-Insure, depend on welfare, buy long-term care insurance or re-position assets to cover care.
Because they chose to self-insure, Betty tried everything within her power to take care of Bill at home and preserve their assets. In doing so, as it is in about sixty percent of the cases, the spouse taking care of the care-needed spouse became a care-needed individual herself.

Had they used another option, they would have gotten better help for Bill while he was still alive because ‘they were insured for it’. By seeking better and quicker help for Bill, Betty possibly wouldn’t have become disabled herself.

There are policies designed today where you can get more than your initial money back if you die or if you need long-term care of two to three times the value of the CD (less any claims paid) or if you just merely want all of your money back because you have a better idea for the money.

If banks were to offer long-term care for depositing CD money with them with a guarantee of money back – if you’d like it back – or a death benefit higher than your deposit (plus interest) would ever amount to, in lieu of giving you .04% interest, people would line up around the block to get these CD’s.

Because Bill and Betty had CD’s and didn’t want to cash them in when they needed care, they will continue to shrink their estate for as long as Betty lives.

“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone: 701-255-4079
Fax: 701-255-6106
Toll Free: 1-800-373-4078

Dear Michael:

We had purchased long-term care insurance a few years back and, as expensive as it seems to be now, our agent told us getting new policies would be twice as costly for the same coverage. He also suggested we use an annuity with a long-term care rider on the policy to cover any extra expenses? Why does the current cost of our long-term care keep going up and how does an annuity with a long-term care rider work? – Underinsured on LTC

Dear Underinsured: People who purchased long-term care insurance during the late eighties and early nineties thought they were paying a lot for long-term care insurance back then. An average couple’s premium was fifteen hundred to two thousand dollars for up to one hundred dollars a day of coverage for a lifetime of coverage.

Like most things in health care – medical costs, long-term care costs, Medicare and all the insurances associated with these things – costs have gone up over time. Buying one hundred dollars a day for LTC insurance back in the eighties seemed foolish when costs were around eighty dollars per day. Now, the average cost of care – per day per North Dakotan receiving care – is about two hundred and fourteen dollars per day.

The reason the costs of your existing long-term care insurance rose over the years is quite simple. Back in the eighties, insurance companies used the then current mortality rates showing eighty percent of men and women would be dead by seventy-two and seventy-four, respectively.

What happened, by the two thousands, was eighty percent of their policyholders – who they thought would be dead and not on claims – are still alive and still producing more and more claims than ever expected. Insurance companies had four times as many policyholders alive than they anticipated back in the eighties and early nineties. Hence, many companies have had to raise their premiums to pay these claims.

Nowadays, to buy a decent long-term care policy – with two hundred dollar a day coverage – the costs for a good policy are twenty-five hundred dollars or more per person – if they are married. It’s four thousand or more if they are not married because single people have a higher risk rate of needing care as they have no significant other to care for them at home.

Insurance companies, recognizing these fears of their clients of being under or uninsured, have come out with a variety of plans to make it sound like they’re going to give you more long-term care coverage – if you need it – by placing money into annuities. However, you really have to look under the hood to see if these plans are what they say they are.

For example, a popular type today is a policy with an income rider/long-term care rider added on to the policy. The costs of this rider are about .75% to .85% of the amount you place into the annuity to begin with – and are subtracted each and every year.

These contracts will then show an income rider which states if you need to withdraw income from the contract at some point in time, we will give you income based on the following formula. We’ll compound your initial deposit by six or seven percent per year. When you decide to take income, you can take income of five to six percent a year of this compounded amount for the remainder of your life. If you have an LTC rider, they will pay double the amount of income for long-term care. Most are seven to ten year surrender charge contracts, as well, so liquidity is not great.

What you have to keep in mind is this. When you elect either the income rider or the long-term care benefit rider, the amounts paid out are deducted from the actual cash value of your initial deposit – under an annuity. In essence, the company is saying, we’ll give your own money back to you and if you outlive the time period of either the income amount or the long-term care amount, then you come out ahead. On the long-term care side, they only pay for five years – generally – and then they go back to just the income amount.

However, most people don’t elect these riders until they are in their late seventies or eighties or when they are in a nursing home. Longevity isn’t great if people buy these at seventy, wait until eighty to use them, and for most people, would only be on claim just long enough to use the money they originally deposited with the company. It’s a good bet for the insurance company that most of their clients the company will just be paying back the amount they initially collected plus any interest less rider costs.

There are also long-term care life insurance policies. These work a little different in that the initial deposit buys a death benefit (normally about ‘double’ the deposit).

They also provide three to four times of the initial deposit in a long-term care insurance pool of money – typically for a minimum of six years of coverage versus a maximum of five for annuities – and all claims are deducted from the death benefit.

If you want money to go to your heirs, all claims would be deducted from the ‘double death benefit’ versus your actual cash values of a long-term care annuity. These contracts do not, however, provide any sort of income stream but provide one hundred percent liquidity in three to seven years.

“Keeping the Family Farm in the Family”
Great Plains Diversified Services
Inc. 1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Telephone: 701-255-4079
Fax: 701-255-6106
Toll Free: 1-800-373-4078