Article by Louis Hammer
An important question I often hear from many of my clients is “do I really need to buy long term care insurance?” This type of insurance policy is set up to pay for Long Term Care. Other forms of medical insurance most likely will deny claims associated with the bills from a long term care treatment. Medicare will only pay 90 days if it is the most extreme level of care. The levels of care that are paid for with a Long Term Care Insurance, LTCi, policy are broken down into three levels: skilled, intermediate and custodial. There are also 3 main locations where care is administered: skilled nursing homes, assisted living or hospice care centers and a family’s home.
Most financial advisors have recommended similarly as to who should purchase LTCi. They adhere to an industry formula that is as follows. Anyone with less than seventy-five thousand dollars in their savings and investments (excluding a car and house) and would project to have less than twenty-five thousand dollars per year available to pay living expenses when retired then one should not have to purchase an insurance policy. Medicaid has helped many people in this category indicating it should be available in the future.
The twenty-five thousand dollars per year available to pay living expenses is not always what would be called income. This figure is money available to retire on taking in to account Social Security income, plus interest, bonds and dividend earnings plus spend down of retirement accounts, savings accounts plus investment plans. If someone’s assets are greater than million then most of the time there will be enough resources to pay for living and medical expenses and they would not have to buy a standard LTC insurance policy.
Who are they taking about that should buy a long term care insurance policy? Individuals found in-between the numbers just talked about above.
There are a number of variables in the design of a LTCi policy. One of them is the term limit of the policy. You choose the limit at the onset of the policy to fit the need of the individual enrolling in the plan. The term limit could be anywhere from 2 or 3 years and some choose 6 or 8, or even the unlimited time benefit. This is the amount of time benefits are available starting some time in the future when benefits are triggered due to an accident or illness. The greater the benefit period is the more the policy will cost. With the individuals in the top half of the group being recommended to get insurance, those between 0,000 and million of assets, the term limits could be lower to jointly cover expenses with their personal investment plans. A few of these people question if they need coverage as they say they can pay for the care from their own money. This would be true for some in a perfect financial world. What about in times of financial upheaval or recession.
What would happen if the stock market dropped 1000 or even 4000 points over a short time period? The same question applies if the housing market collapsed. An individual would have to sell assets to get the money for nursing home or home health care and there might be a big loss because of the timing of when they needed to sell their assets. If they had a two year insurance plan time would be available to safely divest their portfolio with a more profitable outcome because of the timing. At the end of 2 years they would be able to use their own funds. Many times the cost of a 2 year policy will be more than paid for with the potential additional gains in the investments because they are not being forced to sell at “liquidation sale” levels. Best case scenario could be if an insured never makes a claim with their LTCi policy. The higher rate of return on such a portfolio would have paid the premiums. This happens when the investment mix of such a retirement plan includes a higher percentage of longer term investments many times with a better rate of return. Investments in this type of portfolio will generate more money and could be used to pay the insurance premium. It’s a no loose design.
We will be covering more LTCi issues in the next few blog updates. The topics to follow will be issues such as when is the best time buy a Long Term Care policy. What are the many benefits that can be included in the policy? Plan designs are different with the top companies like Genworth , John Hancock and Transamerica. What would indicate which benefit mix fits your needs will be addressed. The new Hybrid policies will be explained. These plans add Long Term Care riders to annuity and life insurance policies. You can find more information in our web site. Find subjects like life insurance 101 and LTC 101 as well as the ability to request free quotes and comparisons for LTCi, life, and health insurance policies.
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