Client Case Study
We had a dear client who loved to travel -- especially overseas. Her passion for travel was such that we had to coordinate our meetings around her trips. When she suddenly, and unexpectedly, died at the age of 67, it was in Europe. We had first met with our client when she was 65 and still working part-time, but her mind was definitely focused on getting to the places on her bucket list.
She had two goals: (1) ensure that her savings would be enough to pay for all the bucket list items she intended to achieve, and (2) ensure she had enough money set aside for long-term care, if necessary.
She was in good health, but hesitant to spend her savings freely on what she considered a “luxury” item like travel when she was concerned she may have a major health decline.
Because of that, her retirement funds were, in a sense, held hostage by her fear of “what if”. She had good reason for this concern as she had lost her husband aged 66 to progressive dementia 11 months earlier and knew firsthand the high cost of long-term care.
When we met, this client had a traditional long-term care insurance plan through her employer that only paid out for a maximum of 3 years. What if she needed long term care for more than 3 years? After all her mother was still living and in her 90s. She could have opted for more traditional long-term care insurance; however, traditional long-term care insurance is only for limited benefit periods, has ever increasing premiums, and requires a substantial annual investment that would be lost if she never needed to use it (lose-it-if-you-don’t-use-it plan). That was not a solution we could recommend.
In reviewing her overall financial situation, we identified that she had several accounts with qualified investments which are dollars saved for retirement purposes that benefit from certain tax-advantages. Qualified funds may consist of pre-tax dollars like a traditional IRA or a 401(k) plan or may consist of after-tax dollars like a ROTH IRA. Thus when distributions are made with qualified funds these may be taxable as income and must be made under certain conditions to avoid penalties. We recommended that one of these accounts with a value of approximately $200,000 be re-positioned into a life insurance/annuity hybrid that provided long-term care benefits. The exchange is tax-free. In addition, there was an optional rider that would extend long term care benefits for our client for the rest of her life by paying a fixed annual premium, guaranteed never to increase.
Our recommendation provided: (1) lifetime long-term care benefits if our client became disabled and (2) retained a death benefit as long as it was not exhausted by the payment of long-term care benefits thereby (3) converting a taxable investment into a partially tax free investment upon death.
Almost a year after implementing our recommendation, our client was diagnosed with an auto-immune disease not severe enough to prevent her from traveling but enough to give her pause. We met with her more than once because of these medical changes. Her questions became focused on whether she should travel, and spend the money, based on her new health issues. Was she spending too much money? Should she save more now that the threat of long-term care was looming?
My answer: Go where you want to go, see what you want to see, check off your bucket list!! Do this NOW before you physically can’t do it any more. Financing the long-term care, if necessary was covered. Go! Have Fun! Take lots of pictures!
That was the last conversation I had with her. She did not end up needing or using any of the long-term care benefits that would have paid $9,000 a month for the rest of her life. Instead, from an initial investment of $200,000, her adult children received an inheritance of $315,000! In less than two years! Moreover, of the $200,000 investment that was originally 100% taxable at death, because of the repositioning, $115,000 was able to pass tax-free!
While we can never replace loved ones with money, our client would be happy to know her children inherited over $100,000 more – tax free – for them to invest in ways that will minimize their own taxes, leverage for growth over time, and provide for their own long-term care needs. With proper planning, generations can benefit.
If you have at least $50,000 you can leverage for long-term care or a guaranteed income stream, please contact us to see how we can help you and those you care about.
Created with images by Frank_DiLorenzo - "bird red cardinal" • STIL - "packing list"