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When is the Right Time to Purchase Long-Term Care Insurance?

By Harry S. Margolis

The other day, I met with a long-term care insurance broker who bemoaned the quicker timetable of estate planning attorneys as compared to the underwriting process for long-term care insurance (LTCI). He reported that in his experience most estate planners try to complete the process from first meeting to executing the ultimate documents in about five weeks. It takes longer than that for an application for LTCI to be approved or rejected by insurance companies who will only sell policies to healthy applicants.

He explained that this discrepancy in timing can be a problem for clients who are trying to decide whether to purchase LTCI or to protect assets by transferring them to an irrevocable trust. How can anyone make the choice without knowing all of the options — whether they can get LTCI or should take other planning steps?

I explained that the reason that estate planners work on such a tight schedule is for the sake of efficiency. When the process drags on it becomes much more time-consuming for the attorney. If she is charging by the hour, this can become inordinately expensive for the client. If she is charging a flat fee, the matter will become unprofitable for the law firm.

But more importantly, it seems to me that for the most part candidates for LTCI and for transferring assets into an irrevocable trust are not the same, so few clients face a choice between the two options. The difference has to do with age and financial resources. We are very unlikely to recommend that a couple or a single client in their 60s to transfer assets into an irrevocable trust since this would mean that they could never access the principal in the trust even if they lived another 20 or 30 years. Not only is it hard to predict their needs going out that far, it’s impossible to know what the MassHealth rules or the long-term care market will look like that far out. They are better candidates for LTCI.

On the other hand, clients in their 70s and 80s are less likely to qualify for LTCI due to

pre-existing conditions and the premiums for them will be substantially higher. They are much more likely to be candidates for asset protection through irrevocable trusts.

As mentioned above, financial resources can also play a role in choosing the right planning approach. We are more likely to recommend LTCI for clients who can better afford the premiums. Those clients who would need to scrimp to cover the annual premiums would be better candidates for planning to qualify for MassHealth should they need long-term care.

This chart may help demonstrate the different options for different clients:

  Younger          Older
Higher Assets            LTCI Self-Insure
Lower Assets Wait Irrevocable Trust

While this chart looks definitive, each criteria — age and financial status — is a continuum with no clear dividing line. In addition, while the younger the client, the more likely he will be a candidate for LTCI, this only goes so far. Very few people buy LTCI before their mid-50s. In addition, while most people don’t have the resources to purchase LTCI, those with a really low level of savings are also not good candidates for tying up assets in an irrevocable trust since they may not be able to support themselves during the resulting five-year penalty period during which the transfer would make them ineligible for MassHealth benefits.However, with those caveats understood, this chart can provide guidance to clients and advisors trying to decide whether to purchase LTCI or shelter assets in an irrevocable trust.

Finally, it’s also possible to bifurcate the planning, to start with the basic planning of wills, durable powers of attorney, health care proxies and revocable trusts, and then to take the further step of establishing an irrevocable trust if LTCI turns out to be unavailable. That way the estate planning and the LTCI timetables do not need to conflict. In effect, the estate planning attorney and the clients will do the estate planning first and the long-term care planning second. The long-term care planning could take the form of purchasing LTCI or sheltering assets in an irrevocable trust, depending on the availability of LTCI and other factors such as age and financial resources.

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