How you prepare for the possibility of long-term care may impact the security of your entire portfolio.
Even if you’re still saving for retirement, you should consider your future long-term care needs. The cost for long-term care continues to rise. In 2006, the average national cost of nursing home care was $171 per day or $62,415 per year for a semi-private room, $194 per day or $70,810 per year for a private room. Long-term care costs can be a key challenge to your retirement income security.
When a long-term care need arises, the first thing most people do is tap into their cash reserves. But even assuming a cash reserve of $150,000, it’s easy to see how quickly that asset could be depleted when one considers the costs of long-term care today. And if the long-term care need arises, one’s entire portfolio can be at risk if additional money is needed. Illiquid or other highly appreciated assets may have to be used and these assets may have substantial liquidation costs and market losses in a down market. These losses could be prevented, in part, by adequate long-term care insurance.
So what are your options?
Until now, there were only two ways to prepare for long-term care needs:
Traditional long-term care insurance – though this may be the appropriate solution for many, premium payments are made for many years, and in the event you never need care, the money you’ve paid into the policy is typically lost forever.
Self-insuring– requires you to set aside significant liquid assets and risk depleting your “emergency fund” assets before your need for such care is over. Self-insuring also ties up assets that would be available for personal and/or business use. Furthermore, many individuals consciously or not, elect to do nothing about preparing for the risk of long-term care. If one is not prepared, they are self-insuring by default.
For many, especially affluent individuals, who believe self-insuring a potential liability that can be handled with a personal reserve fund, the solution may be long-term care linked with life insurance. This type of linked-benefit policy provides income tax-free long-term care coverage, yet if it’s never needed, it provides a life insurance benefit. Some even provide a money-back guarantee should you change your mind (if exercised, this benefit may have tax consequences).
A linked benefit policy not only provides benefits you can tap into to reimburse qualified long-term care costs, but also offers an income tax-free death benefit greater than your premium costs so that if you never need long-term care, your family receives an income tax-free death benefit upon your death. It also may include a lifetime return of premium feature that allows individuals to retain control of the asset by having the ability to reclaim their full premium at any point. This creates a reallocation of their personal reserve, not a straight premium-based approach as with a traditional long-term care policy.
It is important to make sure that the contract says that benefits are guaranteed and, even more importantly, make sure that the insurance company you are working with is a financially sound and a top-rated insurance carrier.
Linked-benefit policies are typically funded with a one-time payment, a single premium. The source of the single premium is normally an existing cash reserve asset, which is repositioned into an LTC-Linked Insurance policy. By repositioning assets you are creating instant leverage. For example: Martha, age 63 a healthy female nonsmoker has $300,000 reserved for long-term care. She decides to transition a $100,000 of her $300,000 cash reserve into a linked-benefit policy. She has just created for herself, a total pool for the reimbursement of long-term care expenses of over $526,000 payable at a tax-free maximum monthly benefit of $7,313 for six years. If she never uses the long-term care benefits, it has a guaranteed minimum death benefit of over $175,000. Martha’s financial position has not changed since she still has control of the $100,000 she used as the premium for the policy.
The positive impact to Martha’s financial plan during her retirement years is that she has instantly created an income tax-free pool of money of over $526,000. This is the amount of money now available for qualified long-term care expenses. She has also freed up the remaining $200,000 in her “emergency fund” to be used as she pleases.
Regardless of your financial position in life, a linked-benefit insurance policy can protect your assets from the risk of long-term care without losing control of your money. You are simply moving money from your left pocket and putting it in your right pocket and by doing so, you have created a long-term care benefit plan linked with life insurance.
Tim L. Johnson, CLU, ChFC • Life Insurance
Specialist • 485-7166 • tljclu@aol.com
