401K to Fund Long-Term Care

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This is the Truth Network. Welcome to Finishing Well, brought to you by CardinalGuide.com, with certified financial planner, Hans Scheil, best-selling author and financial planner, helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in Finishing Well, including discussions on managing social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes.

Now, let's get started with Finishing Well. Finishing Well is a general discussion and education of the issues facing retirees. CardinalGuide.com, Cardinal Advisors, and Hans Scheil CFP sell insurance. This show does not offer investment products or investment advice.

So, welcome to Finishing Well, a certified financial planner, Hans Scheil. Today's show, I'm really excited about it, is Creative Ways to Pay for Long-Term Care, which I think you're going to be excited about some ways. We talked about this on last week's show, is long-term care and how, you know, really Jesus said, you know, deny yourself and follow me, right, and take up your cross and follow me. Well, you got to deny yourself in order to take up your cross.

What happens with long-term care? A lot of us are in denial. We're denying that at that point of our life, we're not going to be able to take care of ourselves. Like, we're not going to be able to take care of our own salvation. But as we've processed this and we said, okay, long-term care is something that looks like I'm going to need. Now, we got to figure out how to pay for it, Hans.

And I love this strategy that you've got today to talk about. Yeah, and we've had this, in fact, this particular policy, which is using IRA money or 401k money through an asset transfer to purchase long-term care insurance that's paid up for life was patented. So it was designed back in the late 90s and the patent just ran out a few years ago.

And I don't know if it was necessary, but it's so, I've never seen another insurance product or a common, because there's really two products put together having a patent on it. And so what it's designed to do is to use, just like it says, to use IRA or 401k money in a tax efficient way to purchase long-term care insurance, which is attractive to people when once they understand it fundamentally is because this hybrid long-term care is very attractive to people. The whole idea of just paying for it once and being done with it is very attractive to people planning for retirement or in retirement. They're going to be scared of these long-term care premiums where you've got a three or four or $500 a month premium going on that could go up and they just, how long am I going to be able to pay for this? So once people are bought into the idea of having long-term care, of purchasing it, then they start looking at traditional long-term care and they say, you know what, I just, I don't like this.

I don't like taking on a $400 a month premium. I'm just pulling that out of my head, but you know, a significant amount that could go up and then having that just spinning into retirement so that when I'm finally going to use this at 90 or something, I either can't pay for it or it's gone up so much that, or my kids drop it or whatever. So all of a sudden, hybrid long-term care starts to look pretty good to people where they're going to, you know, we're going to just pay one big payment or deposit or asset transfer, whatever, and we're done with it and it can never go up.

It's all guaranteed. So the whole idea of hybrid long-term care becomes attractive to people in the process that we put them through. Then the next step, then we go find the money that we're going to transfer and I just tell you about this example. This guy is very well off. He's got over, he's got 2.7 million in his 401k.

I mean, that's pretty awesome. This guy also happens to be a CPA himself. He's not a practicing CPA because he runs this very large law firm that he's the run in the, he's like the chief financial officer of this in the thousands of lawyers, okay? And he's been very diligent about saving and investing and his IRA is almost like he's rubbing his hands together. He's so excited about all these taxes he's avoided until he met me, okay? And so I just kind of throw that afterthought in there, meaning that I still want to stay excited about it. I mean, somebody comes to me for advice on how to retire and they start with the fact that they got 2.7 million bucks.

I don't care whether they've paid taxes on it or not. I got something to work with here, okay? I mean, I can line up your retirement and these people don't have a high lifestyle and as I got to know them, I really kind of learned I'm gonna throw a couple other wrinkles in there. They have a special needs son and who's 28 and lives with them and they very much care about, love him, and they're very joyous about having him in their life. I mean, which is really, really cool and I started thinking about that. I mean, a lot of people could be down on this and here we are approaching retirement and we got this and with that and I'm sure with the special needs, there's all kinds of problems, but these people aren't looking at it that way and they really got me looking at it that way. That's kind of cool.

They're about my age. I'm more than blessed and I get to work with those folks every week as I've been teaching that group for over 20 years and the special needs folks I teach are older and so their families are older, but I can assure you that these students or whatever you want to call my friends that I work with every week bring joy to your life because they have a certain joy that they see the world in a way that we can't see it. And so as they bring that into your life, it adds a dimension like any relationship with, but now you got a dimension. Now you got a friend who sees things completely different than you do and they've got different filters than culture is going to put on them and so I can see completely.

In fact, I've never forgotten as long as I live, Hans. This is before I ever taught special needs. I remember one day I was having lunch at a Burger King right over by Baptist Hospital and there were two families sitting there. One family had a special needs, actually some of them had Down syndrome and they were older family and the Down syndrome gentleman was older too and I was watching them eat lunch and then over here to the right was what you would call a normal family.

Yeah, there is such a thing. Right. And I was just observing. I was a casual observer and oh my goodness, these people over here on the right, the so-called normal fit, they were screaming, yelling. There was not a lot of fun going on over there.

It just wasn't. They were getting food eaten, but man, I didn't want to be over there. But if you could see the joy that was over there, the family B that was so-called abnormal. So man, I get it. That's what I'm picking up from these people. And then as the financial planner, I mean, I'm looking at all this and I'm thinking, okay, we, now we're going to add that to the list and it just, we got to take care of him when you're gone.

But I'm also thinking how cool is this? Because I think often about how much I miss when my boys were younger and, you know, in just those times and my kids are growing up and having grandkids and, you know, and these people have this son's more than likely going to be with them through all their old age. And now we're talking about what happens to him.

They, they were smart enough. They took care of, they got a special needs trust because you really need one of those, because if he inherits all this money, which he will do at some point, if he inherits it directly, he's going to lose all his government benefits and all the things that those people really need, you know, Medicaid. And I don't know if he moves to a group home, which I don't know whether he'll do or not, but so, so anyhow, that's kind of off on a different subject. These folks are also very concerned, worried, interested in long-term care, especially after they met me and we're talking through this. Her mother just finished, she just passed away after 11 years of a combination of home health care, but mostly facility care.

And actually this young, the special needs son and the lady of the house, they visited grandma and mom almost every day, you know, for years. And, but they're, they're looking at their own situation. You want to blow up this 2.7 million bucks. You have one or both of them go through a big long-term care event. It's going to blow up their retirement and they're real well aware of that. So anyhow, so we started doing all the planning and then hybrid long-term care was very attractive, just like I opened the show there, you know, but the only place, these people have 2.7 million bucks in a 401k. They've got like 14,000 of money, not in a 401k.

That's it. They have very little savings. They've really done a great job of diligently creating this big after-tax problem or before tax problem account, whatever you want to call it, but it's a tax bomb because it, you know, if they all of a sudden were to die or one of them dies or somehow or another, they've got to get that money out of that. And before the second one of them dies, because you can't leave IRA or 401k money to a special needs sign, you can't get it into the trust, he'll lose all his benefits. He as a CPA could see all that real clearly.

He just never had put all these pieces together, you know, as you had talked about. We're just kind of going along and what it really amounted to is if we're going to get a hybrid long-term care policy, the only place to get the money is out of the IRA or the 401k. And because he's old enough, he can do an in-service distribution. I can figure out that he doesn't pay taxes. And it was around a quarter of a million bucks, a little more than that too, because they bought a huge policy that covers both of them.

So I don't know everybody listening. You don't need a quarter of a million bucks to cover two people that are about 65 on one of these types of policies, unless you want to buy a super duper blown up long-term care policy, which they did. And so this policy is just a blessing. I mean, it's just that the people that thought of it and the insurance company behind it and it, so we make this asset transfer and we got this policy, you know, just issuing right now.

They're all approved. And then you made the transfer into some type of an annuity from what I understand where there wasn't actually taxes coming out in spite of the fact that you transferred it. Yeah. So it's an IRA annuity.

I mean, specifically designed. So there's two policies that this company has is that the receptacle for the big chunk of money is an IRA annuity. And then the annuity specifically drains itself down over 10 years to transfer money into the life insurance or the hybrid life long-term care policy that sits beside it. And it just, all those inner workings of that, they don't need to worry about that. The listeners don't need to understand that. It's just all this stuff is pre-set up.

It's all fixed. So you can see as we are moving forward that, oh my goodness, you know, that it's really helpful to have somebody that can help you finish well, right? Somebody who can help you with the long-term planning with details, because there's always potential. And when we come back, we're going to talk a lot more about that potential. But in the meantime, we just want to tell you, you got potential of getting Hans' book, The Complete Cardinal Guide to Planning, Foreign Living, and Retirement. It's right there at cardinalguide.com, as well as his email address if you ever want to ask Hans anything.

We'll be right back with a lot more finishing well. ... Hans and I would love to take our show on the road to your church, Sunday School, Christian or civic group. Contact Hans at cardinalguide.com.

That's cardinalguide.com. Welcome back to Finishing Well with certified financial planner, Hans Schall. Today's show, we're talking about creative ways to pay for long-term care. I'm sure that if you've listened to the beginning of the show, you're intrigued. And I'm intrigued. Part of the reason I'm so intrigued is because what God taught me this morning, and I give him complete credit because at first I wasn't paying any attention. He told me to look at Romans 8.28, and I kind of argued with him in spite of the fact that I know better that when I hear something from God, I need to believe it came from God and take him at what he says and go study it. So as I began to study Romans 8.28, which you might recall, is all things work together for good for those who love God and are called according to his purpose, that that word all there at the beginning, I got a chance to study because God asked me to. And it means potential.

It has to do with all the days of your life. And when you think about it, every moment that you have has all kinds of potential for good if God's in there. And so the idea of potential, if you could think of it in Hebrew letters, is just think, I want you to think of the palm of God's hand. God is reaching 2.6 million or whatever. There's potential that's absolutely phenomenal because he owns way more than $2.6 million.

And he's got way more that he's working together for good for you right this very second. But in order to unlock the potential, Hans, what do we have to do? Hans Steiner What we had to do with these folks is first, they needed to get to a point where they really are accepting the serious problems that they have in front of them that they just discovered, which is they need some serious long-term care insurance to protect their lifestyle at the end of their life. And we can add with the special needs son, he's not going to be able to do for them when they're needing long-term care like they did for her mother and the CPA.

His parents were both in there for a couple of years, separately at different times, and he provided for them. So there's all kinds of things going on with these people. And we first thing we need to do is we just always got to visit that is they needed to get to a point where they really accepted they had a problem and they wanted to do something about it before I'm going to go to all the trouble of creating this strategy.

I don't really like to get myself in selling situations. So they needed to get to the right place. And then as they, when they got there, we just discovered that most of the money that they have available to them is in a pre-tax situation. So that immediately tells us we can't take a big hunk of this out at once, but we can solve the long-term care problem by doing an in-service rollover or an in-service distribution where we roll the money into this product with this company that is an, you know, is an annuity IRA that's specifically designed to fund the life insurance long-term care benefit over 10 years. Everything in it's guaranteed.

So there's no ifs in anything. If this happens, if that happens, it's got 3% interest inherent in the thing. And we're doing all this to get over to this third situation, which is the life hybrid life long-term care policy, which in their case was about $300,000 of life long-term care insurance. And then it has an extension rider on it that when they blow through all the long-term care benefits, then they're going to get just as much as they've blown through, they'll get again in an extension rider. So these people are really protecting themselves against long-term care with one premium and they're doing it with a premium out of their 401k. So then the 2.7 million becomes about two and a half million, still a lot of money.

And, you know, we can talk on another show how I help them prepare to get retired and have an income. But what you need to understand about these people is at the end of their lives, at the end of the second one of their lives, they still got the sun there and we got this special need trust, which right now has no money in it. It's just a piece of paper. Maybe they put a hundred bucks in there or something and they got it.

I think they did now that I'm correcting myself. I think they put a hundred bucks in there. But, you know, so this thing is waiting till they die. And so I don't think they understood before the importance of getting everything right before they die or long before they die so that when they die, we don't have a bunch of pre-tax money going into the special needs trust, which doesn't work. It has to go to the sun first.

It's a disaster. And so life insurance is the answer to that because life insurance payments are tax-free to beneficiaries and the trust can receive that directly. So now this guy is all over buying life insurance. And so that's another show where we'll talk about he just bought some with this life long-term care hybrid policy with his IRA.

Darrell Bock Which is another part of the equation when you think about it, that, okay, you know, let's say you don't need any long-term care or you need very little for the next two years. The good news is you didn't really lose any of your investment. I mean, it's just sitting there to be used either towards long-term care or to go to your beneficiary. You know, it's like having your cake and eating it too.

Jay Smith Well, it is. And again, that's if you don't use it up for long-term care. And they're buying the policy under the assumption they're probably going to blow through that and more. But if it happens, they're both killed in a car accident three years from now or something, they're, you know, if the sun survives, the beneficiary on this, the primary beneficiary on this policy is the Mrs., okay? And the contingent beneficiary is that special needs trust. So, if she's gone before he dies, because he's the 401k owner, the money will just go straight tax-free of the death benefit right into the special needs trust. Once he understood that, he's like, now we're going to just figure out a way to systematically move a bunch of that money into a whole life policy, a bunch of the 2.5 million remaining into a whole life policy over 10 years, which has a cash value. So, if he needs that money, if he lives to 90 or something, then we'll start tapping that money tax-free, the cash value for them to live. But if he doesn't need it, then the beneficiary on that will be the Mrs. Darrell Bock So, as I'm listening, and I know a lot of our listeners, you know, it's pretty hard for me to relate to somebody's got $2.7 million.

However, when we look at potential, right, God's got potential for whatever resources that we do have, let's give an example of a more typical person, I could use the same numbers, I just remove a zero. I can't tell you how many people I run into that have 270,000 in their 401k. And they've got $1,400 in their savings account. I mean, basically almost nothing, their cash flow.

And that's the situation. You can buy a policy on one person with this thing for $50,000 asset transfer. I mean, for starters, those kind of people could still look at this policy.

And then if you're covering a husband and a wife, or you're covering a couple, you're going to probably need 100,000. However, we can do a combo kind of policy where we're going to take some of your 401k money and pre-fund a single premium hybrid long-term care. And then maybe we buy a separate traditional policy to supplement it. I mean, there's all kinds of things you can do, we can do in planning to deal with income and that sort of thing, buy a smaller policy. So we have something for everybody. And I'm just using them as an example.

Right. And then there's a lot of us that fall into another category, really. But we're talking about creative ways, right, to pay for long-term care insurance. And so there's a lot of us that, health-wise, don't qualify for certain times of these policies, right? Well, there are. And we've got short-term care and recovery care.

And we've got... But there's annuities, right? Am I right that somebody that possibly had, again, a large sum of money or even, to me, a large sum of money is $240,000.

That's a large sum of money to me. So if they had that and they didn't qualify health-wise for the hybrid, there's other options. There's a definite, we do a lot of those, or people that have... We have a lady that had cancer like nine months ago. She had a mastectomy and chemo and all that kind of stuff. And it's been as little as six months after that, where she's cancer-free, she's able to get this annuity hybrid long-term care.

It's actually with the same company that does this. And then she can purchase the extension rider. Once you qualify for one, you qualify for the other. And that's exactly what we sold them. And I appreciate you bringing that up. So now there's some health conditions you can't get that, but then we got something else for those folks. So if long-term care is of a concern, I don't care whether your money's in an IRA or it's just income that you could pay a premium or it's in something else, it's in a CD at the bank, we can figure out a way to get you protected or to enhance that money for the use of long-term care.

Darrell Bock Right. Because it's interesting to me, or I think it's really helpful, that one of the real callings that you feel like you have on your life, because I know you will, is to help people come out of denial of this situation coming into their life. And then finding ways to help them protect themselves and their assets. And from my standpoint, even more importantly, protecting your family from a crisis of guilt and shame that they're going to feel because they weren't able to care for you the way that they really would have liked to. Darrell Bock Listen, when people are in these crises, because I'm in them weekly, okay, I mean, just in there with the whole family, the adult kids that are about my age or a little younger, and then mom or dad who's in their 80s in a crisis, I'm telling you, if they don't have insurance, even if they have a lot of money or they have middle money or they have no money, they're all complaining about money and they're arguing about money and they're worried about money.

Wouldn't it be great to just take money out of the equation? I mean, I guess that's why they're coming to me. But I'm thinking, how about we just worry about dad and how are you doing? Daughter that's bearing all the burden and you got your two kind of sorry brothers that just came into town for this meeting that wouldn't be much good to your mother anyhow. But your shoulder and the whole burden and you got kids, how are you doing? How's your mom doing? And what's your care like?

And how much choice did you have and all that? I mean, we really need to shift this discussion in a crisis away from the money, but they're all talking about money because money's the issue. And so even if we get a small amount of long-term care that covers for a short period of time, we can move money out of the issue in the crisis by using the insurance and then we can plan out the rest of the assets if the insurance runs out. Right. So I'm afraid I can't even believe it.

We've run out of time again before we ran the show. So again, I hope you can see this is clearly one of the areas that Hans really, really has a heart for and wants to help you be creative whatever your situation is. And he's always going to take all your different pieces of the puzzle and help you put that together in order to come up with a plan that fits you and your family, your health needs and all that's going on with that. And that's why he wrote the book, The Complete Cardinal Guide to Planning for and Living in Retirement, which is available at Cardinal Guide.

You can find all this information at cardinalguide.com. Thank you, Hans, once again. Awesome. Thank you. Finishing Well is a general discussion and education of the issues facing retirees. cardinalguide.com, Cardinal Advisors and Hans Shile, CFP, sell insurance.

This show does not offer investment products or investment advice. We hope you enjoyed Finishing Well, brought to you by cardinalguide.com. Visit cardinalguide.com for free downloads of this show or previous shows on topics such as Social Security, Medicare, IRAs, long-term care, life insurance, investments and taxes, as well as Hans' bestselling book, The Complete Cardinal Guide to Planning for and Living in Retirement and the Workbook. Once again, for dozens of free resources, past shows, or to get Hans' book, go to cardinalguide.com. If you have a question, comment, or suggestion for future shows, click on The Finishing Well radio show on the website and send us a word. Once again, that's cardinalguide.com, cardinalguide.com. This is the Truth Network.