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Life Plan Community Contracts: Evaluating The Money-Back Guarantee

Life Plan Community Contracts: Evaluating the Money-Back Guarantee

If you or an elderly loved one has made the emotional and financial decision to transition into a Life Plan Community (LPC)—what was formerly called a Continuing Care Retirement Community, or CCRC—leave yourself plenty of time to evaluate the facility’s contract options.

Yes, you’ve probably already spent a great deal of time choosing the facility itself, based on their reputation, quality of care, amenities and more. However, taking time to review your contract options is just as important as choosing the community. The contract you end up choosing can have a big impact on your financial goals and future resources.

All contracts aren’t created equal

Some life plan communities make it easy on you, offering only one type of contract that applies to all residents. However, other communities offer a broad range of options.

One choice may be a traditional contract. Under this agreement, the entry fee you pay for joining the community may be completely non-refundable. Other traditional contracts include a “declining balance” clause, which means your entry fee is refundable, but on a sliding scale. The amount you or your estate would receive if you left the community or died would reduce slightly (perhaps 2%) every month you stay.

Still other contracts offer refunds ranging from 50-90% of the entry fee after a resident passes on or leaves the community.

Also, the requirements for receiving refunds can vary significant from community to community. For instance, some facilities will only refund your entry fee after they’ve been able to fill your apartment or home with another resident.

Because there are so many variables in contracts, prospective residents need to evaluate their options quite carefully.

Here are some of most commonly asked questions regarding traditional versus refundable contracts:

Which is better: A traditional or refundable contract?

This is an individual decision that comes down to two factors: Price and goals. Keep in mind that a contract that provides a future refund will command a higher entry price than one that does not.

Example: One-bedroom apartment at a high-end New Jersey life plan community
Traditional Contract: $328,250 entry fee.
Refundable Contract: $505,000 entry fee for a 90% refund.
Difference: $176,500 higher entry fee for a contractually guaranteed $454,500 refund (90% of $505,000) down the road.

Considerations: If a prospective resident has an estate goal of leaving assets to children, the refundable contract may be an attractive option. However, if the resident can’t afford the higher entry price—either through the sale of their primary home or via their investments, the traditional contract might be the logical choice. So this is where price and goals come into play: You must often decide which factor is more important or more easily attainable.

If I can afford either the traditional contract or the refundable contract, how do I choose?

Using the example above, you could look at the “opportunity cost” of the money saved and apply certain assumptions over specific time periods.

For instance, suppose you are 75 years old and opt for the traditional contract on the one-bedroom apartment. We will assume you have $176,500 (the difference in values between the two entry fees) that you could theoretically invest over time—if you didn’t spend it on the more expensive, refundable contract.

Turning $176,500 into $454,500

Next, let’s look at what compounded rate of return you would need to see that $176,500 grow to $454,500 (the 90% refund amount) over 10 or 20 years. Over 10 years, your initial money would need to grow at a rate of approximately 10% per year. If we stretch out the time period to 20 years (or your age 95), the money would only need to grow at a rate of about 4.85% per year to hit the $454,500 target.

Of course, you also have to consider how comfortable you are investing your money in investments that would garner 4.85%. Or 10%. You would also want to take into consideration the market risk of your portfolio compared to the credit risk of investing in the life plan community.

If you’re not comfortable running these numbers and comparing various investment options, an experienced wealth advisor can help you with this evaluation.

Do traditional and refundable contracts carry different monthly fees?

This one has a simple answer: Typically, no. The biggest financial difference is in the one-time entry fee. Monthly fees will vary based on the size and layout of the independent living unit, or the location of the unit within the community. Monthly fees will also be higher if a couple lives in the unit instead of a single person.

Do the different contracts have tax considerations?

Yes. The Internal Revenue Service (IRS) allows you to take a medical-expense deduction on a portion of your entry fees (and monthly fees). However, your qualifying fees must include a medical-expense component and must be non-refundable.

Including essentially a “prepayment” of medical fees within your entry fee and/or monthly fees is common in most “life care” contracts. Why? It allows you to pay the same ongoing monthly fees even if you move from independent living to higher levels of assisted and skilled care.

The medical tax deduction on your fees may be a substantial one. Depending on the community, it could account for up to 40% of the entry fee and the ongoing monthly fees. Each community should be able to give you and your accountant details about whether or not your contract includes a pre-payment of medical expenses and if so, what percentage of those fees the IRS would consider a medical deduction.

By contract, the IRS typically will not allow you to deduct any amount of your entry fee that would ultimately be refunded to your or your heirs

It is very important to understand which tax benefits might be applicable to your situation. There are some income-planning strategies that might be very appropriate during the year in which you move into a life plan community. Your tax professional or wealth advisor should be able to give you more information.

I’ve heard that my life plan community living unit must be filled with a new resident before I (or my estate) would receive an entry-fee refund. Is this true?

Yes, this is true at many life plan communities. However, it all depends on your agreement. This is another reason you and your financial advisor should carefully read and understand the community’s contract.

Some contracts are very restrictive. For instance, they may require not only that your same unit be reoccupied, they may also require that you or your estate continue paying fees during the months the unit is empty. More liberal contracts may allow you to be added to an overall refund waiting list. As other units in the community are reoccupied, refunds are paid out according to your order on the list.

This means that not just you—but your executors and estate beneficiaries—should be aware of how refunds will be paid. Depending on your contract’s refund rules, you may also want to check on your community’s occupancy rates and waiting lists.

If you have more questions about a life plan community contract, please feel free to get in touch with me. The decision to enter into a life plan community is important and it can be confusing. However, with the proper advice, you’ll be in a strong position to make an informed decision.

 

Important Disclosure Information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable. Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This presentation is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

The returns shown above are not reflective of the return of any RegentAtlantic client nor are they intended to show the potential returns of any RegentAtlantic client. They are shown solely to illustrate the portfolio return that is needed to grow the amount saved in the entry fee of the LPC without a refundable contract to the 90% refundable amount in ten years.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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