2005-09-29 / Business & Finance

Long-Term Care Insurance

Will I outlive my money?” This is one of the crucial questions asked financial planners along with, “What happens to my loved ones if I die?” and, “What will happen if I become disabled?” While the first question is not necessarily based on a catastrophe, the last two questions are. One can run out of money, albeit slowly, in several ways. One way is to have planned poorly or not have planned at all.

Another is by investing in assets that perform poorly over long periods, and a third is by being a spendthrift.

However, one can outlive their money, very quickly, based on an ever increasing catastrophe - landing in a long-term care facility. As health aware-ness increases and medical care im-proves, we can expect to live longer than any generation before us. The longer we live, the greater the need for care in our latter years. Illness and injury can be prevented and cured, but the odds are we’ll still need assistance with the activities of daily living.

Well, we insure against death and disability through life and disability in-surance, so why not insure against the hazard of requiring home care or go-ing to a long-term care facility through long-term care insurance. What follows is information on benefits available within long-term care insurance policies (LTCi).

Let’s first look at cost versus benefit. LTCi can provide benefits for pennies on the dollar. A 65-year-old could pay $2,000 per year for a $3,000 monthly benefit. One year of care $36,000 (12 months x $3,000/month) would be worth 18 years of premiums $36,000 (18 years x $2,000/year)!

Next, let’s look at time horizons. One of the challenges of planning for long-term care is that it generally doesn’t happen in our 60’s or 70’s, it most often occurs when we get into our 80’s.

How does someone in their 50’s (a good time to purchase a policy) deal with a risk that is 20-30 years in the future?

The answer is, you buy a policy with a benefit that’s adequate today, perhaps a $200 daily benefit, and you purchase an inflation rider that will automatically increase your benefits, as you get older. Although the benefits increase, the premium remains fixed.

What about taxes? LTCi offers several tax advantages. Premiums are in-cludable as a medical expense on individual income tax returns. Company- paid LTCi can be deductible to the company and not taxable to the employee. When you collect an LTCi benefit from a quality company it is tax-free.

Where is care provided? Good policies provide for care in the home, in alternative facilities such as assisted living and, of course, in a long-term care facility. The next question is “who” provides the care? Better policies don’t restrict you to certain government-approved facilities. In fact, some policies even allow a trained friend or family member to provide care.

What about premiums? If you purchase a policy that is “noncancellable and guaranteed renewable” the insurance company cannot raise the premium on “your” policy because they’ve discovered you have had an illness or accident. They can only raise premiums on the entire “book” of business that they have in which you are a policyholder. Additionally, they have to get permission from the state of issue before they can raise premiums.

There are policies available that offer guarantees not to raise premiums for up to ten years. You can also purchase a policy with a fixed premium payment period. Some companies offer polices that have a 10-year payment period so that after paying premiums for 10 years, you do not have to pay any further premiums. Obviously, these premiums are much higher than lifetime premiums, however they can be paid by a company as a deductible expense and the employee does not recognize the premiums as taxable in-come. Nice.

LTCi is available within certain life insurance and annuity products so, if you never need care, you can use the money you’ve invested or pass it to heirs. In other words, you don’t have to choose the “Use it or lose it scenario.”

LTCi can provide a benefit for life so you won’t run out of coverage. LTCi protects against catastrophic risk. 10% of us will need more than 5 years of care ($250,000 in today’s dollars). Care for life could cost millions.

What asset(s) you own, for other purposes, will you liquidate to pay for coverage?

We have home insurance even though only 1 in 1,200 houses will catch fire. If you have a 1-in-10 risk of losing $250,000 or more, wouldn’t you want to protect yourself and what you’ve worked so hard for against such a catastrophe? Keep in mind long-term care insurance policies and companies are different. A thorough analysis of your objectives and needs is necessary to recommend a particular solution.

Find someone who knows.

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