When it comes to estate planning, the focus usually rests on methods to avoid probate court and minimize tax assessments against your estate. Other priorities are the issues of ensuring that your assets are given out in accordance to your wishes, as well as determining who will make medical decisions if you are incapacitated.
However, there are additional estate planning components that, if overlooked, could damage otherwise well-laid plans to such an extent that a once-substantial estate could be entirely exhausted.
Key Estate Planning Tools
1. Disability Insurance Policy
If you are wealthy enough to replace your monthly income with savings and investments for extended periods of time, you might not need a disability policy, as you would be considered self-insured. But most people don’t have such funds, and would have no income if afflicted by severe illness or an accident.
Disability policies replace 70% to 80% of your monthly income if you become disabled and cannot work. Depending on the policy, they can cover short- or long-term time periods.
It’s important to recognize that estate planning begins before you’ve built your estate, while you are still working. And you cannot build an estate if you do not have income, nor can you build an estate if you have to exhaust savings and investments to pay bills while you are disabled. This is why a disability insurance policy is a key estate planning tool.
2. Critical Care Insurance Policy
A critical care policy is an insurance tool that pays a lump sum of money if you have a critical medical problem, such as a heart attack or cancer, or a debilitating disease like muscular dystrophy. These policies are very popular in England and Australia, but still relatively unknown in the U.S. In fact, only a few companies in the country sell them, including Combined Insurance, American General, and Assurity Life Insurance.
How a Critical Care Policy Works
Due to the fact that modern medicine can help people survive major medical emergencies and conditions, you need to plan to pay for the care involved in recovering from these events. This is where a critical care policy or other policies with critical care components are extremely beneficial. Consider the following example:
- A man is diagnosed with cancer, but the doctors catch it early. He has surgery and begins chemotherapy.
- His health insurance covers most of the cost of the surgery and some of the chemotherapy. It does not cover co-pays or co-insurance, so that sum must be taken out of investments. If he has disability income insurance, he can activate that and may get up to 80% of his monthly income for a specified period of time.
- The problem is that his family needs more than 80% of his prior income to pay all the bills. So the difference will come from investments and savings.
- However, if he had a critical care policy, he would be paid a lump sum that could be used to fill the gaps between his health and disability plans, and thereby allow him to keep the bulk of his savings intact.
Critical Care as a Life Insurance Rider
A rider for catastrophic illness on a life insurance policy will also allow you to take a lump sum for such an event – however, it will typically do so at the expense of the life coverage. Plus, you often have to be close to death to activate the rider. For example, a doctor may need to confirm that you have only 6 or 12 months left to live in order to activate the rider. Though such a rider may be a decent option for someone who can’t otherwise afford a standalone critical care policy, it is not ideal.
3. Long-Term Care Coverage
Long-term care costs represent the biggest financial danger to those over 50 years of age. In addition, 40% of all long-term care cases are for people under the age of 50. The average cost of a nursing home stay is $70,000 a year, and the average cost for home health care is $30,000 a year. Considering that most people stay in a long-term care facility for more than one year, these costs quickly add up and can drive families into debt.
For example, an Alzheimer’s patient can live for 10 years or more after diagnosis. $70,000 a year for 10 years is $700,000, which would leave a gaping hole in your nest egg. Simply put, few things will eat away at a retirement fund faster than a nursing home stay.
What Long-Term Care Covers
Most long-term care policies will cover the costs of nursing homes, home health care, and adult day care facilities. You get to choose the daily coverage amount, how many years you’ll be covered for, and an amount of time that you must pay for your own care before coverage activates. All these factors allow you to customize a policy according to your needs and budget.
Long-Term Care as a Life Insurance Rider
As with critical care, you can purchase a long-term care rider on some life insurance policies – or a rider that covers both long-term care and critical care events. Depending on the circumstances, which may vary by insurer, you can get a certain percentage of your life insurance coverage as a lump sum to pay for long-term care. However, doing this usually voids your policy.
If you have life insurance to cover income to your surviving spouse, pay estate taxes, or leave a college fund for your grandchildren, combining it with a long-term care policy is probably not a good idea. In fact, in most cases, it is better to buy a separate policy, as this typically provides more extensive coverage.
When to Buy Long-Term Care
It is better to get a long-term care policy when you are younger. It will cost you less, and you are much more likely to qualify. For example, if you seek long-term care coverage once you’ve already had the early signs of a terminal illness diagnosed, you can bet no insurer will be inclined to cover you for any amount of money. Seek coverage while you’re still healthy.
Lastly, steer away from complicated Medicaid planning strategies. These usually entail using trusts, gifting, and other financial tools to lower the value of your estate so that you can get your state’s Medicaid plan to pay for your nursing home costs. Not only are these complex, and potentially unethical, but you’ll limit your options when it comes to receiving care and you may have to choose from facilities that do not provide the level of care or amenities you desire.
Think of your estate in four phases: accumulating it, protecting it, accessing it for income during retirement, and transferring it to your heirs – all the while minimizing taxes and probate costs. While financial planners and lawyers have most of this process down, they tend to neglect the second step: protection. But this is crucial, as leaving your estate to your heirs only happens if you have something left to leave. A well-built house on sand will wash away one day, and an estate plan is no different. However, the estate tools mentioned here will prevent holes in your plan, and provide a solid foundation.
What other tools do you use for estate planning?