|by Thomas McGlone|
|An Alternative to Traditional Long Term Care Insurance
Very few people relish the thought of needing assisted living or nursing care as we get older. As our lives are increasingly busy, our finances are often the first item that gets neglected. It is no surprise that most of us never really analyze or think about how Long-Term care insurance fits into our overall financial strategy. Most of our friends and relatives do not have any kind of financial roadmap let alone LTC insurance.
As medical costs soar, and life expectancy increases, many of us are left to wonder; how would we pay for assisted living or nursing care if we were forced into this tragic situation?
Traditional Long-Term Care insurance is a bit like automobile insurance, you know that you need it, but if you never use the insurance, you feel as though you have thrown your money away. Unlike auto insurance, LTC insurance is not mandatory. Many people avoid this type of insurance because they view insurance and insurance companies as evil. Imagine needing Care: A person goes into an assisted living facility at age 68, incurs costs of $150/day for 8 years and then dies. During this 8 year period, this person pays $54,000/year or $432,000 during the entire 8 yr period. These expenses are paid directly out of this persons assets, thus reducing the assets that can be passed to his or her beneficiaries. If this person did not have $432,000 in his or her estate, assets would be sold to pay for care until these assets were drawn down to $0. At that point, the state would kick in to pay for care at some established level. The level of care would depend on state rules at the time that assets were depleted. The big unknowns at this point are the level of care (will it be nice?) and how much would be left to the beneficiaries (perhaps $0).
Imagine not needing Care: The Average 50 year old client buying traditional Long-Term Care insurance today could incur expenses of $3000 to $5000 per year. The average age for a person drawing on LTC insurance benefits is 78 years old. Therefore, this person may pay for LTC insurance over the next 30 years before potentially needing to draw on the benefits. 30 years worth of payments could potentially cost between $90,000 to $150,000. These expenses ignore the opportunity cost of having invested this money over a 30 year period.
So how should a person plan for a potential LTC need? A "Linked" Policy might be the answer!
Imagine the Best of Both Worlds! In our hypothetical example the same 50 year old client could buy a life insurance policy with a LTC rider. This one time premium provides a lifetime of LTC benefits with inflation protection for the future as well as a life insurance death benefit. No further payments are required. Should he die without ever using the LTC benefits, his beneficiaries could receive the full death benefit. Should he need to use the LTC benefits of the policy, the LTC benefits paid reduce the death benefit until the death benefit is reduced to $0. At that point, the LTC policy continues to pay expenses until the person dies. A residual death benefit is paid upon death. If LTC is no longer needed, the policy can be surrendered to receive back at least the original premium.
Following are the pros and cons of a "Linked" asset policy:
One time payment only. Could provide a lifetime of benefits and inflation protection if selected at policy inception. Assets are preserved for beneficiaries if LTC benefits are never needed. Alternative to assets paying little interest due to low interest rates. Estate protected if LTC benefits are needed in the future. Policy can be surrendered at anytime to receive back original premium. May receive interest depending on situation.
Cost may range from $50,000 to $120,000 depending on age and health. May not be affordable to average investor. Physical required. Lost opportunity costs on investing $50,000 to $120,000 over extended periods of time. Value of Life Insurance would come back into estate for estate tax calculations.
Thomas McGlone is the First Vice PresidentInvestments at the McGlone/Lusco Financial Advisory Group of Wachovia Securities. He can be reached at Thomas.email@example.com or at 302-227-7342. Wachovia Securities, LLC, member NYSE and SIPC does not render legal or tax advice.
LETTERS From CAMP Rehoboth, Vol. 15, No. 6 June 3, 2005