Financial Abundance

In 2011, the leading edge of the “Baby Boomer” generation reaches age 65, while the average American life span continues to rise.  The confluence of these two phenomena will dramatically increase the number of Americans who will ultimately require long term care.  With the national average annual cost of nursing home care exceeding $78,000, many are considering how to fund long term care (LTC).  Let’s look at some strategies for funding potential LTC requirements.

Long Term Care insurance typically pays a maximum daily amount for either in home care or nursing home care, after an elimination (waiting) period of either 90 or 180 days.  LTC insurance policies are a popular method of protecting against catastrophic long term care expenses.  However, depending upon the age at which you initiate the LTC insurance, policies will often have premium costs between $2,000 – $6,000 annually.  Like any insurance policy, these payments could be very worthwhile if LTC is required, but are lost if LTC is never needed.

Beginning in 2010, the 2006 Pension Protection Act provides new methods in which LTC insurance can be funded.  Some “hybrid” whole life insurance policies are combined with LTC coverage.  With these policies, a portion of the death benefit can be paid out before death, to cover the insured’s LTC expenses.  “Hybrid” deferred fixed annuities can also be packaged with LTC benefits.  Starting this year, any LTC benefits that are received from either of these “hybrid” products are tax free, providing considerably higher after tax benefits for most recipients.

A current whole life insurance policy or deferred annuity may also be utilized when purchasing a new “hybrid” policy, through a nontaxable exchange under IRC Section 1035.  If the “hybrid” product insurer provides for a 1035 exchange, you may “convert” a current life insurance or annuity policy to a “hybrid” policy.  The “hybrid” policy will allow for  insurance proceeds, used to pay for long term care, to be received on a tax free basis.

Another way to pay for long term care is to “self insure.”  Insurance products are best when used to protect against financially catastrophic events.  If you have adequate financial resources, you may wish “self insure” for long term care requirements.  Let’s see how self insurance works.

Jane is a single 85 year old, with $300K in retirement funds and other investments.  She also owns a mortgage free home valued at $300K.  To meet her current annual expenses of $45K, she withdraws $25K per year from her investment portfolio.

At the end of 2010, Jane, no longer able to care for herself, enters a nursing home, at a cost of $80K/year. Upon entering nursing home care, Jane’s other annual expenses decrease to $5K.  In 2011, Jane’s annual expenses will be $85K, requiring her to withdraw $65K per year from her investment funds.

Assuming no investment growth, Jane’s funds would be depleted in 2015, when Jane is age 90.  However, Jane (or possibly her children) can use a reverse mortgage or an outright sale of her home to provide more funding for her Long Term Care.  In this scenario, Jane will likely never outlive her financial resources.

When considering “self insurance”, remember that the cost of nursing home care is offset by a significant reduction in current expenses.  It is also important to consider the value of a home and other non-liquid, but salable assets in determining if self insurance is right for you.

Long Term Care requirements will affect many baby boomers.  If you are a member of this generation, now is the time to determine what financial strategies meet your LTC requirements.