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Why Self-Insure Long Term Care?


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From dissolving the barriers between accumulation and decumulation, the liability of longer lives and a raft of investment choices; retirees will find themselves on a very different pension’s pathway than anyone before them.

In my experience, over half the people who shun long term care insurance do so because they feel they will never need it. It is difficult to visualize going to a nursing home. Statistically, half of these people will be right.  However, there are a number of scenarios where the person may need some kind of assistance but never see the front door of a nursing home. In fact, most people who need long term care can receive care without ever leaving their home.

When you stop and think about it, the decision not to buy long term care insurance is a decision to self insure. This can be costly and possibly devastating.  The average cost of a nursing home today is $80,000 per year and rising. At that rate, it doesn’t take but a few years to grind through a modest estate. If both the husband and wife need nursing home care, the time to dissipate an estate is cut in half.

A person can spend 40 years in a career building a retirement nest egg. They spend another 40+ years conservatively managing their money while trying to keep up with inflation. If they need to go into a nursing home during the last five years of their life, it all could be gone quickly.  Long term care is used for a person who becomes unable to care for themselves and needs assistance. This assistance might in their home, daycare, or nursing home care.

Most people react to a problem only when the problem surfaces. If a person waits to apply for long term care insurance until they are experiencing health problems, any long term care insurance plan may be prohibitively expensive or altogether unavailable.

One reason for the popularity of long-term care insurance policies is Medicaid; this government-sponsored program can pick up the cost of nursing home expenses, but only after patients have already depleted their assets and life savings.

On June 30 of 2009, the government has mandated rules and regulations on restricting the transfer of assets of the elderly. There is now a five year look-back provision if you apply to Medicaid to qualify for the nursing home – the Medicaid nursing home. These restrictive laws are intended to impoverish the healthy spouse.

Before you can qualify to receive, or to enter a nursing home, you must spend down your assets, which means that, if you are of the age where the nursing home may become an issue, in order to protect your wife, or the healthy spouse (i.e. you or your wife, whoever is not sick) you must do Medicaid planning 5 years earlier than the date that you went in to the nursing home.

The Solution: The Long Term Care Insurance That is Not a Policy

The underlying base of an “LTC annuity” is an annuity. Nothing new here; annuities have been around for a hundred years. They are safe, the funds accrue at a competitive interest rate, and the account grows tax-deferred. To form an LTC annuity, the insurance company has built in a “long term care option.” It is not a rider. There is no premium. It is simply an option you elect if long term care is ever needed. Sweet.

To qualify for benefits, a person only needs to lose two of six ADLs (activities of daily living). ADLs are insurance companies’ method of determining the qualification for levels of care. They are eating, bathing, dressing, toileting, transferring (walking) and continence. The person doesn’t have to be in a nursing home. They simply need to have demonstrated the inability to perform two of the six ADLs to qualify to put the long term care option in their annuity in action.

An Example:

If a male, age 60, places $200,000 into an LTC annuity, assuming a conservative interest rate, the policy would grow to $300,000 in ten years. If the $300,000 were converted into a life income, the person would receive $2,200 per month for the balance of their life. An 8.8% return. Not too bad, considering it is guaranteed no matter what. If this person needs long term care at age 70 by virtue of losing two of six ADLs and elected the long term care option, the life income would jump to $4,500 a month.

Long term care annuities, provide the option to receive long term care benefits only if they are needed. There is no separate long term care insurance policy, no premiums and generally little underwriting. Many buy an annuity to secure a stable retirement income. This new kind of annuity adds on coverage for long term care.

The coverage is paid for by the investment return from the annuity. This product also functions exactly like a fixed annuity, but has a long term care multiplier built into the policy. There is no premium rider attached to this medically underwritten annuity policy. Instead, a portion of the internal return in the contract is used to pay for the long term care benefit.

Long term care coverage is calculated based on the amount of coverage selected when the policy is purchased. The insurance company offers a payout of 200% or 300% of the aggregate policy value over two or three years after the annuity account value is depleted.

For example, a policyholder with a $100,000 annuity who had selected an aggregate benefit limit of 300% and a two year benefit factor would have an additional $200,000 available for long term care expenses after the initial $100,000 policy value was depleted.

The policy owner would spend down the $100,000 annuity value over a two year period and then receive the additional $200,000 over a four year period or longer. In this example the contract pays $50,000 a year for a minimum of six years, but care will last longer if less benefit is needed.

Again, if long term care is never needed the annuity value would be paid out lump sum to any named beneficiary. Consumers who utilize hybrid policies can avoid self-insuring against catastrophic long term care related expenses and have the peace of mind associated with a comprehensive plan.

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Wednesday, December 3rd, 2014 Wealth Preservation

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