Cash Flow Planning and Long Term Care

John Boardman

One of the most challenging planning areas for us as practitioners is Long Term Care.  In principle, it should be easy to universally recommend everyone go out and buy a Long Term Care policy that pays for skilled nursing needs at the end of their life.  However, we have found planning in this area to be much more nuanced.  While most people think about how much they have saved as way to cover future Long Term Care, we believe planning around future cash flow to be most effective.  By understanding your future cash flow, we can steer a client towards the proper type of coverage, if any.

As we look at the current market for long term care, we see significant issues.  Insurance companies, anecdotally, seem to be far less interested in approving people for coverage.  Even more problematic, most carriers with existing policies in place have been increasing the premiums on in-force policies.  Sure, they may not be able to cancel your coverage but they can passively force you down the path to cancellation by driving up your annual cost.  We have had clients bring premium increase letters to us from policies they purchased many years ago, often times from very reputable, financially strong insurance companies.  In certain cases, some of these premiums have increased 30 to 40%!  If a policy holder receives many of the notices, there is propensity to cancel or lower coverage as they age.  Effectively, much or all of the previous premiums paid becomes a sunk cost.

It is understandable why the Long Term Care insurance industry is behaving this way.  As I stated above, planning for a person’s individual need is a guessing game.  According to, an information site sponsored by the US Department of Health and Human Services, 31% of people will never use any form of long term care.  This statistic also uses a very generous definition including home health care, skilled nursing, and assisted living.  As well, only 37% of people will ever take residence in a nursing home, with average stay of around one year.  On the opposite end of the spectrum, 10% of people who enter a nursing home will stay for long than five years, according to Morningstar.  When you think about what this data means, it is no wonder people are perplexed by the best method to plan around their POSSIBLE need.  We believe insurance carriers have tightened underwriting standards and increased premiums because of the above detailed uncertainty, as well as the rising cost of care and expanding life expectancies.

In our firm, across our client base, we control what we can control and anticipate and place safe harbors around what we cannot.  No honest advisor can sit in front of a client and accurately assess what that client will precisely need for their POSSIBLE future Long Term Care.  Unfortunately, as described above, Long Term Care policies are often sold as a be-all-end-all solution for everyone.  One of the more troubling trends we are beginning to see is clients, having paid into policies for decades, now cancelling because the current premium is cost prohibitive.  As a response, we have been consistent in our approach to cover your future need via self-insurance or a modern form of insurance coverage where the costs are capped.

Self-insurance sounds like a more complicated strategy than it is.  Essentially, it means you have the resources to no longer need insurance coverage.  If we have the time and opportunity to effectively plan and the client has been diligent in saving adequate resources, we would much rather prefer that an individual self-insure.  If we can build a client’s portfolio plan with a safe withdrawal rate and cash flow we feel will last their lifetime, we believe this is much more powerful approach.  Adequate and lifetime-lasting cash flow is by far the most effective way to minimize insurance costs while simultaneously covering future Long Term Care need.  Most of our clients want to live a comfortable retirement which is often defined by steady, predictable, and long term cash flow.  This cash flow often allows them to enjoy life by travelling, spending time with family and friends, and any other activities that bring them joy.  When someone is able to self-insure, we explain they are in a position where they can redirect their retirement cash flow if the POSSIBLE need for Long Term Care becomes a reality.  If we can put a client in a position to fund their own Long Term Care need, we are likely saving them considerable insurance premiums over their lifetime.

Although the traditional Long Term Care industry has presented problems to potential and current policy holders, there have been some recent innovations in the life insurance space to help clients who are unable or unwilling to self-insure.  There are countless versions of this type of policy but, generally, many carriers offer Long Term Care riders on new life policies.  Essentially, a policy holder can receive some advance of the death benefit during their lifetime (over a pre-determined schedule specific to each policy).  This avoids one of the biggest issues we see- clients or their heirs never seeing any financial benefit from the policies they owned.  The cost of the rider is typically capped at a certain price over the life of the policy and the premium for the policy itself is fixed.  From a cash flow perspective, a retiree or client planning for retirement will know exactly what cash flow he or she has to dedicate to the policy.  Most importantly, if no care is ever needed, the death benefit will be paid to the policy owners heirs.  We believe we will see a trend of more people moving in this direction when they desire coverage and we also anticipate further innovation in this space, making these policies even more attractive.

We have been speaking about Long Term Care above in generalities.  To effectively plan for your own situation, we believe revisiting your cash flow plan is the best first step.  We do not want the idea of funding Long Term Care to be overwhelming, so we implore you to reach out to us to review this with you.  If you have existing Long Term Care policies, we would ask that you let us review for you.  We have had clients maintain, adjust, or even cancel coverage based on their specific circumstances.  The worst decision you can make is to not review or address the issue because you could be missing an opportunity to put a plan in place to make sure your future POSSIBLE needs are met.