Long-term care is a subject many would rather not think about, but not doing so could be costly. Phil Sirolli, CPA, a wealth transfer adviser with Valley Forge Financial Group, clarifies some common misconceptions about long-term-care planning, outlines
insurance options, and explains why CPAs need to have this conversation with clients.
By: Jim DeLuccia, PICPA Communications
According to a recent study by Georgetown University Medical Center, nursing home costs are now topping $70,000 a year, which exceeds the cost of medical care in many states. But nursing homes are just one component of long-term care insurance, which is our topic for today. And joining me to discuss how CPAs can provide much needed value to their clients in this area, is Phil Sirolli, CPA, wealth transfer advisor with Valley Forge Financial Group.
Phil, thanks so much for coming into PICPA headquarters in Philadelphia here today to talk to me about this topic.
[Sirolli] Yeah, absolutely. Thanks for having me.
I want to begin by defining what long-term care actually means. I know that when you and I spoke about this topic offline, you had mentioned that there are some misconceptions out there. Can you kind of explain that to us a little bit?
[Sirolli] Sure. Absolutely. Long-term care is when you need assistance, when a serious illness or disability renders you unable to physically or cognitively perform one or more activities of daily living. Activities of daily living
is a term that you typically hear with long-term care costs. And an activity of daily living is bathing, eating, dressing, or essentially transferring from one place to another, your bed to your normal daily active activities in life. The other side
of activities of daily living is cognitive impairment. Memory loss, Alzheimer's, dementia, those are the types of things that trigger long-term care.
Okay, that makes sense. It really encompasses a lot of different areas.
[Sirolli] Correct. Long-term care also is not medical care. There's a difference. And it's also not limited to nursing homes. Typically, a misconception out there is long-term care equals nursing home or assisted-living facility. And it's
not only those costs that are long-term care costs.
And I guess that's what makes that $70,000 figure that I found that I mentioned in the introduction, I guess, a little bit scary when you consider that, that nursing home costs, that's only one component.
[Sirolli] Correct. Normally when you do get to the point of being in a nursing home, a lot of those costs are inclusive within that cost. But as we look at long-term care estimates for individuals as we're looking at planning for what they
should expect in a cost, we look at nursing homes being that last year of their lives and having to essentially be in a nursing home for a year or two years. And then we sort of look back from that and say assisted-living facility would be the year
before that. And then prior to that would be possibly in-home care or skilled nursing that would come to your home and assist you in that way.
That's when, as you start looking at these costs, the cost of long-term care gets pretty large
because it isn't just that one year of a nursing home that you might need. It could be as soon as you can't do two of the six activities of daily living. You need a skilled nurse to come in your home. You need someone to come help prepare meals, to
clean your home, etc, etc.
Now that we have that defined, should a CPA's client be concerned with long-term care costs? I mean, it seems like the answer is yes, but can you kind of get into a little bit as to the “why” there?
[Sirolli] One of the other common misconceptions is that, I won't need long-term care. If I need any of those aspects of care, whether it be a skilled nurse, someone to come in to cook or clean for me, one of my family members can perform
those activities. And in theory, that's a great idea and that would be a great plan. But once it comes into practice and that individual, that family member needs to come to your home for 20 hours a week to perform these different functions for you,
you realize that it's no longer a good plan because not only is your life impacted, but their life's impacted as well.
Again, when you look out there for any type of resource that you look into, whether it be www.longtermcare.gov or an insurance company's website for a cost calculator, normally they're going to show you statistics on who ultimately needs long-term care. Those statistics range pretty widely, but typically
you're going to see greater than 50% of individuals are going to need some form of long-term care, which is why planning for it and at least coming up with a plan, whether it be filling that need with an insurance product or self-funding is so important.
To really answer your question, yes, it's absolutely important for a CPA to assist their client in planning for long-term care costs.
Yeah. It seems like a slam dunk. And I should mention that Phil is a member of our personal financial planning committee and this is kind of right in your wheelhouse, right?
[Sirolli] Absolutely, yes. This is something that I look at daily, weekly, I help assist clients with this type of thing. I'm constantly looking at, how should we plan for this? How should we address this variable that's out there possibly
20 years from now, 30 years from now. Something I'm looking at all the time.
As we were talking about planning there, I think it's actually a nice little segue, as they say in the business, to talk about what are some of the long-term care insurance options that are out there and how should CPAs be adding value to clients as they think about these options?
[Sirolli] A few things to clarify in regards to policies and what types of costs are covered by different types of policies. Health insurance won't pay for long-term care insurance, long-term care expenses. Medicaid will not kick in
until most of an individual's assets are depleted. And Medicare only comes into play in certain situations, but for the most part won't take care of long-term care expenses.
In regards to long-term care insurance policies, long-term care
insurance started out with the use or lose it type of policy, which is mostly what people think of when they think of long-term care. That type of policy is that you pay a premium, you get a defined benefit. That premium is based on age, risk factors,
things of that nature. If you don't end up needing long-term care, you essentially paid a premium that you don't get back, hence use it or lose it.
Then there's sort of a middle ground where there is a hybrid product where basically it's
a life insurance-based policies that have minimal life benefits, but they're focused on providing long-term care benefits. With these types of policies, it's a combination of the two aspects, the life insurance as well as the long-term care insurance.
And you can design these in various ways to have return of premium, higher life insurance or better long-term care benefits. And then the last one is life insurance with a long-term care accelerated rider. So what that is, would it be more of a life
insurance policy that has a rider that allows you to access that life insurance benefit early once you actually meet the requirements of triggering the long-term care, which is the two activities of daily living or a cognitive impairment.
You've laid out the different types of plans here. So now the question is, if a client already has life insurance or long-term care insurance in place, how often should these plans be reviewed?
[Sirolli] Typically we meet
with our clients annually to review their entire insurance portfolio, so whether they have long-term care insurance or just life insurance, we're meeting with them annually to understand how the policy is performing and if it makes sense for them
to still have that policy. The reason why we meet with them annually is one, individual's circumstances change all the time. When you purchase a long-term care insurance policy, it might fit your need today, but as time goes on, those circumstances
The other aspect of it is, the long-term care policies, depending on how they’re designed, will be performance-based based on possibly market factors, interest crediting rates, things of that nature. Those are aspects that
you need to review to make sure that the policy is on track and it will be in force when the person actually needs those benefits.
There are a variety of different types. There are policies that could potentially lapse. There are policies
that, if you pay the premium, it will always be in force and there are policies that have premiums that could go up or down based on the insurance company’s reassessment of a given group of insured persons. It's important for you to meet with
your CPA, or your CPA and your insurance adviser in combination, to understand if the plan that you have in place still makes sense.
Where can CPAs turn for more information on this subject? It's clear that it's something that CPAs who are in public practice or who are working with clients here, it's something that they really should have in mind. What are a few resources you would recommend that they should consult?
[Sirolli] For informational purposes, I would say that there are a lot of resources out there. Longtermcarecosts.gov is a resource. Insurance companies, your major insurance carriers typically will have sections with a plethora of information
that you can access and use. Understand that every source of information that you use is going to have a bias.
If you go to an insurance company's website, they're going to have a bias and make you think that you absolutely need the insurance.
But ironically enough, even when you go to some of the government websites, they have partnered with insurance companies and when you click on certain links, you'll be redirected to an insurance company's website, so it almost makes you think, oh,
they must be working in conjunction with the government, must be safe. But understand that it is a third-party insurance company. I would say for informational purposes alone, just to kind of get your bearings on more of the aspects of long-term care
and long-term care insurance, there are a variety of resources.
I would also strongly encourage CPAs to really try to establish a relationship with someone who does have access to long-term care insurance and essentially provides that service.
Reason being is that the combination of a CPA and an insurance adviser is significantly greater than a CPA alone. Because, as a CPA, we all understand that we have so much information to be concerned about whether it be for corporate taxation or personal
income tax planning, things of that nature, to pair up with an insurance adviser is significantly greater benefit to the client because you're going to get the expertise of the insurance adviser while the CPA can question and vet any suggestions that
the insurance adviser might propose.
I would say that the number one is, do your homework and kind of look at some of these sources, but also find someone that you can trust, talk to, get educated from and work together to assist your client.