In my former life as a lawyer and an accountant, I scoffed at the need for long-term care insurance—for myself or my clients.
I readily understood that medical insurance wouldn’t cover the cost of a nursing home, assisted living or in-home health care, and that these costs could be very expensive. But I was already shelling out thousands for medical, disability and life insurance. I’d reached my personal-insurance saturation point. How could I or my clients ever get ahead, in business or personally, if we spent all our money hedging against risk?
Well, now I’m in a new line of work: advising family companies about succession planning. And guess what I’m finding?
• One in five men and one in three women over 30 will suffer a long-term disability before retirement.
• The most common causes of long-term disability are heart disease and back problems.
• Regardless of age, 50% of people who suffer disabilities lasting longer than six months will remain disabled after five years.
• About 14 million people between 16 and 64 years old are currently work-disabled.
• About one in 14 join the ranks of the disabled each year.
In other words, the potential need for long-term care is a greater risk than many other situations that most of us insure against without a second thought.
Then there are the costs to be considered:
• The average monthly rate for a private room in a U.S. nursing home is $5,100. (The cost drops to $4,350 per month for a semi-private room.)
• The average monthly base price for assisted living in the U.S. is $2,159. But additional fees can increase the cost to as much as $6,800.
• Home health aides average $18 per hour.
• Licensed practical nurses average $37 per hour.
• Round-the-clock care at home can cost $13,000 per month or more.
How would I pay my mortgage and also pay for long-term care if my wife or I became disabled? I found myself quickly gaining a new appreciation for long-term care insurance.
But what really got me excited was the fit between LTC and family businesses.
Family companies may vary as to what they expect from succession planning. But virtually all of them share two universal goals: (1) financial security for the retiring generation and (2) ensuring a sufficient financial incentive for the incoming generation or key employees after the current generation retires.
“Financial security” usually means freedom from financial worries. The retiring generation is often driven by a fear of catastrophic illness or injury (and the accompanying catastrophic expense) rather than by the desire to vacation in the south of France. Usually they look to their children or their company as the cushion of last resort. That can be scary for the successors, who need positive incentives to justify sustaining the business or buying out their parents.
Long-term care insurance can provide this assurance for both generations. If, for example, the retiring generation receives long-term care coverage as part of a retirement or buy-out package, their fear of the unknown is reduced. Thus they may demand less money upon transferring the business. This in turn may make the successors more enthusiastic about taking charge of the company.
Of course, long-term care may be an appropriate benefit at any time, not just in the context of succession planning. It assures managers that the value they create after taking over the company won’t be eroded by long-term care costs if they or their spouses get hit with Alzheimer’s disease or the like. It’s especially appropriate in family businesses, where executives and employees are often related and have a real vested interest in caring for each other’s health.
OK, OK, you’re saying. But what about the cost? Surprise: It can be quite reasonable. For example, if a 52-year-old husband and a 46-year-old wife without health problems purchase long-term care policies for each, offering $5,000 per month in benefits for five to six years, the annual premium runs between $2,600 and $4,000.
And most insurance companies offer a variety of payment options. For example, many companies allow you to pay all of your premiums within the first ten years (a “ten-pay”), or to make payments until age 65 only. After the specified time, your long-term care policy is fully paid. With a “ten-pay” policy, my hypothetical couple could purchase an aggregate of $600,000 in long-term care coverage (with a 5% per year inflation adjustment) for between $70,000 and $100,000. What’s more, most insurers offer significant price discounts if policies are purchased through groups, such as employers or families.
Another attractive aspect of long-term care insurance is the income tax treatment. The premiums are 100% deductible by businesses (except for individuals like sole proprietors, partners and S corporation shareholders, who can deduct between $250 and $3,130 per person, depending on their age). The premiums paid by the business don’t count toward the employee’s taxable income, and the benefits are usually not taxable when they’re paid out.
You can call me a “long-term care convert,” if you will. But as I see it, I’m not just getting older—I’m getting smarter.
Matthew K. Donovan, J.D., CPA, is a succession planning consultant for CFG Business Solutions in Phoenix, Ariz. (www.cfgllc.com).