Don’t risk burdening your loved ones with unexpected long term care costs

Couple a HECM with a Benefit Linked Long Term Care Policy

Most of us look to our parents to gauge if we’ll need protection against Long Term Care. The fact is that through food, travel, technology, and avocation most of us experience life in a much more active and fluid style than our ancestors did.

This lifestyle creates a greater risk of needing medical care along the way. I’m not talking solely about a permanent need either. A Long Term Care (LTC) need can arise in the form of an unexpected and protracted rehab from surgery. Or, perhaps your spouse undergoes medical treatment of his or her own, requiring temporary care during recovery. Sometimes a need for temporary medical care comes about from something associated with a chronic condition like diabetes.

A full 70% of people over age 65 will require some type of long term medical care at some point , and even though a lot of us think we could self-insure, that doesn’t mean we should. One financially creative approach involves coupling a HECM with a Benefit Linked LTC product.

What is a Benefit Linked LTC Product?  

A Benefit Linked LTC product is a policy that provides leveraged LTC dollars (often $3 – $4 for each of your $1 of cash today) in the case of a triggering event. A triggering condition occurs when a person cannot perform 2 out of 6 Activities of Daily Living (ADL) by him- or herself. A decline in cognitive ability can also trigger the need for LTC.

In exchange for a lump sum, or in some cases a series of 5 – 10 structured payments, an insurance carrier will guarantee a certain pool of funds remain available in case the policy holder(s) require LTC. If an LTC need never arises, this policy pays out a death benefit in excess of the initial premium.

In most cases, the premium itself is fully guaranteed, meaning you could change your mind in the future and walk away. The fact that both benefits and premiums are fully guaranteed from the start marks an important distinction from a traditional LTC policy. Traditional LTC policies are “Use it Or Lose it”, so if the holder never needs long term medical care, that money is lost. A Benefit Linked LTC product eliminates this concern.

CASE STUDY – Don and Peggy Leverage HECM to Cover Potential LTC Needs

Don and Peggy are both 65 years old and in very good health. They have a $2 million net worth that includes a home valued at $625,000 with no mortgage. Don and Peggy have each had a parent who required long term medical care for a period longer than two years.They have concerns about the negative financial impact a long term medical need would have on their future. They would be ill advised to self-insure for a potential future long term illness. If Don or Peggy required a long term medical need, paying out of pocket could put their retirement goals in significant jeopardy.

Don and Peggy qualify for an initial line of credit of $343,400, via a Home Equity Conversion Mortgage (HECM), based upon the value of their home, current interest rate, and age. Don and Peggy accessed their HECM line of credit for $200,000 in the first year. They each purchase a life insurance LTC Benefit Linked policy for $100,000 for a one time deposit. The policy guarantees LTC and death benefits, significantly increasing available funds to cover potential future care for both of them.

Since Don and Peggy are in good health they could each qualify for LTC benefits of over $400,000, but this varies depending on the insurance company and medical underwriting. The design of the specific policy depends on their medical history and the ability to qualify for the insurance. If they never use the LTC benefits before they die, their beneficiaries would receive a tax free death benefit in the $130,000 range.

The HECM now has a balance of $200,000. The mortgage balance is growing at a 3.75% rate over the one LIBOR (footnote) plus 1.25% for a total of 5%. Don and Peggy have the flexibility to make payments, or make no payments and allow the loan balance to accrue.

Year Credit Line Available Loan Balance Long Term Care Benefit for Don & Peggy* Home Value at 4% Growth Total Liquidity for LTC Rate**
1 $152,714 $212,991 $800,000 $780,000 $952,714
5 $196,430 $273,962 $800,000 $912,490 $996,430
10 $269,073 $375,277 $800,000 $1,110,183 $1,069,073
15 $368,579 $514,059 $800,000 $1,350,708 $1,168,579
20 $504,884 $704,164 $800,000 $1,643,342 $1,304,884

* The combine LTC pool of funds for both Don and Peggy

** The combined LTC poll of funds plus the remaining credit line

At some point, if one of them fails to perform 2 of the 6 Activities of Daily Living, the policy begins to pay a monthly benefit for LTC expenses. If the insurance benefit payments are insufficient to meet the actual expenses, Don and Peggy could opt to access their HECM credit line or other estate assets.

If they never have a LTC claim, when the first of them passes away, the survivor receives a significant tax free death benefit. The survivor has the option of paying down the HECM loan or keeping the cash for other uses.

Even though Don and Peggy access a portion of the credit line at inception that which they did not use continues to grow.  In our example the remaining credit available at the HECM’s inception of $143,400 ($343,400 – $200,000 = $143,400) continues to expand at 5% over the one year LIBOR. At year 15, the remaining line of credit of over $350,000 will be available for Don and Peggy on a tax free basis.

Imagine Don and Peggy allow their loan balance to accrue by making no payments. In the 15th year, the balance would reach slightly over $500,000. If they drew on the remaining credit of $350,000, causing the total loan balance to reach $850,000 what would happen, since their home’s fair market value (FMV) is only $750,000? This means their loan balance has reached a full $100,000 above the FMV of their home. When they left their home, either by death, disability, or sale; they would not owe the difference of $100,000. This represents another impressive advantage of a HECM over the traditional HELOC product.

Make sure you are not leaving retirement planning to chance

Planning for long term care medical expenses can be very complicated with many moving parts.  At Coyle Financial Counsel, we utilize a team of experienced advisors to develop a comprehensive financial plan. A comprehensive plan accounts for all assets, liabilities, cash flow projections, and income tax planning to determine the best course of action.  Coyle Financial Counsel is fee only and collaborates with insurance professionals to design insurance policies that directly meet our client’s needs.

A HECM might be appropriate for a variety of different planning needs. Learn more about HECM and how they can be used to prepare for the cost of long term medical care. The HECM is a proactive financial planning tool, it’s highly advisable that anyone approaching age 62 seek objective financial counsel. An experienced advisor like Rob O’Dell, will assess your overall financial landscape, consider all available assets, and develop a personalized financial plan. Discover a better way to manage your finances.

Our proprietary approach, TransformingWealth™, is designed to get your arms around the big picture so you can make informed financial decisions with conviction. Ask Rob about Coyle’s TransformingWealth Preview Meeting, and schedule a complimentary consultation and start living the Good Life Managed Well™.

ro200Rob O’Dell, CFP®, serves clients in our Naples, FL office. With more than 20 years of personal financial planning experience, Rob knows that successful financial planning involves a distinct process, not a one-time event.

Rob has been featured in the Wall Street Journal, Financial Planning Magazine, The Daily Herald and Money Magazine. He was a contributing author on the Third Edition of the Florida Domicile Handbook. Learn more about Rob O’Dell.
800-480-7913 |

We value your comments and opinions, but due to regulatory restrictions, we cannot accept comments directly onto our blog.  We welcome your comments via e-mail and look forward to hearing from you.


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