While it is important to have a well thought out health strategy for health’s sake, it is also vitally important for protecting assets that maintain your retirement lifestyle and the lifestyle of your spouse that depends on those assets as well.
Many already know that Federal Medicare doesn’t cover everything and that some form of supplement will be required. Although this may change down the road, the current outlay for supplements and related out of pocket costs won’t break your budget. The larger misstep comes when we address potential long term care.
Very often the same person who in one regard wants to spend their assets quicker because
’t think they will live that long, now turns into superman when it comes to possible Long Term Care. We men are the worst offenders. We never think anything will happen to us. As financial planners we hear it all! “I feel great”. , “People in our family simply drop dead”. “If anything happens to me, I’ll make my wife shoot me.” “50 is too young to purchase Long Term Care, I’ll wait until I’m older”. All of these brilliant lines and many more have graced my ears! Let’s face it, who wants to buy more insurance? I know I don’t. There is nothing worse than spending money for something you may never use! The reality is proper planning is about having a response for all of life’s what ifs and longer life spans have made this topic crucial to protecting your way of life.
I tell everyone that of all the insurances you possess, Long Term Care is the one you will most likely use. If you’re going to bypass this one, why bother with any of them? Let’s look at the raw numbers. 2 out of 3 people over the age of 65 will require Long Term Care¹. The average length of the majority of Long Term Care claims is 3.8 years². The average life expectancy after an Alzheimer’s diagnosis after age 70 is 4 to 7 years³. 40% of Americans will need Long Term Care between the ages of 18 and 64⁴. Average annual costs are running from $37,572 for assisted living to $79,935 for a private room⁵.
Staggering numbers to say the least and to add insult to injury, many Americans falsely believe that these costs will be covered from other sources. 54% believe that Medicare covers Long Term Care…..it does not! 46% believe that Medicaid will pay……..only if you have exhausted most of your assets( I say most because new partnership Long Term Care plans in Georgia help protect a certain amount of assets from Medicaid)and I promise you, the facility will not be your favorite! 44% believe that their traditional health insurance policy will cover it…..again, no⁶.
The good news is, today there are numerous ways to address this vital need based on your personal situation. If assets are limited, you may want to consider traditional Long Term Care insurance. You can structure a policy in many different ways to fit your budget and if money is tight, having some coverage is better than none at all. There are also many asset based products that combine insurance or investments with Long Term Care riders. These solutions may be best if you have assets that you won’t be using right away and provide other benefits that you will use at some point. This is ideal for those who may not want to pay annual premiums for something they may never use. Everyone’s situation will be different and I encourage you to call me or your financial advisor for more specific solutions and strategies. In closing, a health care strategy is paramount to retirement success. Avoid the cardinal retirement mistake of rationalizing scenarios that you can’t control!
¹ US Dept. of Health and Human Services National Clearinghouse for Long Term Care information website, May 2010
² Genworth Financial claims data, 2009
³ National Institute on Aging, National Institute on Health, 2/09
⁴ Life and Health Insurance Foundation for Education
⁵ US Dept. of Health and Human Services National Clearinghouse for Long Term Care information website, 2010
⁶ Strategy One National Survey, 2007
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment (s) may be appropriate for you, consult your financial advisor prior to investing.
Roy Larsen, CFP®, AAMS® is a CERTIFIED FINANCIAL PLANNER™ practitioner, financial advisor and wealth manager. Roy is President and CCO of Larsen Wealth Management, LLC, a Fee-Only Registered Investment Advisory firm in Cumming, Georgia. Roy is an expert in successful retirement living and specializes in holistically managing the multiple planning and investing issues surrounding the receipt of a large lump sum. Roy Larsen, CFP®, AAMS® is available in all 50 States. He can be reached for comment at 678-456-8138,email@example.com or www.investinretirement.net
The appeal of this combination policy lies in the fact that either you'll use the policy to pay for long-term care expenses or your beneficiaries will receive the insurance proceeds at your death.
Here's a tip:If you need long-term care insurance, you may be able to get it by exchanging an existing life insurance policy with accumulated cash value for a new policy with a long-term care rider. You can do this through a tax-free exchange, but you must also qualify for the new insurance policy as well. You might not get as much death benefit as you had under the original policy, but you'll pick up the option of being able to use it for long-term care expenses.
Life insurance has many uses, including income replacement, business continuation, and estate preservation. Long-term care insurance provides financial protection against the potentially high cost of long-term care. If you find yourself in need of both types of insurance, a life insurance policy that combines a death benefit with a long-term care benefit may appeal to you.
Here's how it worksSome life insurance issuers offer life insurance with a long-term care rider available for an additional charge. If you buy this type of policy, you can pay the premium in a single lump sum or by making periodic payments. In any case, the policy provides you with a death benefit that you can also use to pay for long-term care related expenses, should you incur them.
The amount of death benefit and long-term care allowance is based on your age, gender, and health at the time you buy the policy. The appeal of this combination policy lies in the fact that either you'll use the policy to pay for long-term care expenses or your beneficiaries will receive the insurance proceeds at your death. In either case, someone will benefit from the premiums you pay.
Long-term care ridersThe long-term care benefit is added to the life insurance policy by either an accelerated benefits rider or an extension of benefits rider.
Accelerated benefits rider --An accelerated benefits rider makes it possible for you to access your death benefit to pay for expenses related to long-term care. The death benefit is reduced by the amount you use for long-term care expenses, plus a service charge. If you need long-term care for a lengthy period of time, the death benefit will eventually be depleted. This same rider also can be used if you have a terminal illness that may require payment of large medical bills. Because accelerating the death benefit can have unfavorable tax consequences, you may want to consult your tax professional before exercising this option.
Example: You pay a single premium of $50,000 for a universal life insurance policy with a long-term care accelerated benefits rider. The policy immediately provides approximately $87,000 in long-term care benefits or $87,000 as a death benefit. If you incur long-term care expenses, the accelerated benefits rider allows you to access a portion, such as 3% ($2,610), of the death benefit amount ($87,000) each month to reimburse you for some or all of your long-term care expenses. Long-term care payments are available until the total death benefit amount ($87,000) is exhausted (about 33.3 months). Whatever you don't use for long-term care will be left to your heirs as a death benefit.
(The hypothetical example is for illustration purposes only and does not reflect actual insurance products or performance. Guarantees are subject to the claims-paying ability of the issuer.)
Extension of benefits rider --An extension of benefits rider increases your long-term care coverage beyond your death benefit. This rider differs from company to company as to its specific application.
Depending on the issuer, the extension of benefits rider either increases the total amount available for long-term care (the death benefit remains the same) or extends the number of months over which long-term care benefits can be paid. In either case, long-term care payments will reduce the available death benefit of the policy. However, some companies still pay a minimum death benefit even if the total of all long-term care payments exceeds the policy's death benefit amount.
Continuing from the previous example, if the policy's extension of benefits rider increases the long-term care benefit (the death benefit--$87,000--remains the same) to three times the death benefit ($261,000), the monthly amount available for long-term care increases to $7,830. On the other hand, if the extension of benefits rider extends the length of time the monthly long-term care benefit is available, then the monthly payments ($2,610) are extended for an additional 24 to 36 months beyond the initial number of months (33.3) available.
Other provisionsTypically, qualifying for payments under a long-term care rider is similar to the requirements for most stand-alone long-term care policies. You must be unable to perform some of the activities of daily living (bathing, dressing, eating, getting in or out of a bed or chair, toilet use, or maintaining continence) or suffer from a severe cognitive impairment.
An elimination period may also apply: you pay for the initial cost of long-term care out-of-pocket for a specific number of days (usually 30 to 90) before you can apply for payments under the policy. As with all life and long-term care insurance, the insurance company will require you to answer some health-related questions and submit to a physical examination before issuing a combination policy to you.
Is a combination policy right for you?Deciding whether a combination policy is right for you depends on a number of factors. Do you need life insurance and long-term care insurance? How much life and long-term care insurance will you need? How long will you need it? Will the long-term care part of a combination policy provide sufficient coverage?
A long-term care rider may not provide as many features as a stand-alone long-term care policy. For example, the combination policy may not cover assisted living or home health aides. It also may not provide an inflation adjustment, an important feature considering the rising cost of long-term care. The tax benefits offered by a qualified long-term care policy may not apply to the long-term care portion of combination policies, which could result in taxation of long-term care benefits received from the policy.
What if your life insurance needs change as you get older and you find that you no longer want life insurance protection? It's not uncommon for people to drop their life insurance in their later years if there's no compelling need for it, but if you surrender the combination policy, you're also forfeiting the long-term care benefit it provides, usually at a time when you are most likely to need it.
And keep in mind that as you use your long-term care benefits, you're depleting the death benefit--a death benefit you presumably wanted to pass on to your heirs or perhaps use to pay for estate taxes.
Finally, compare costs of combination policies to other forms of life insurance, such as term insurance, and stand-alone long-term care policies. Depending on your age and health, the cost for the combination life policy may actually be higher than the total premiums paid for separate life insurance and long-term care policies, especially if your life insurance need is temporary (such as income replacement during your working years) rather than permanent.
Roy Larsen is a Certified Financial Planner™ practitioner and Fee Only Wealth Manager who resides outside of Atlanta, Georgia.
Roy's Financial Blog contains articles on multiple financial life events as well as his favorite questions from he receives from around the country as a an expert panel member for Investopedia's Advisor Insights.