Insurance | FJG/FYI
Why does long-term care insurance make real sense for people with high net worth?
by Tim Cope
Consider the following:
You’re standing outside your home watching the fire department try to contain a blaze that will eventually burn your house to the ground. Now think about having to write a check from your investment account to rebuild your house because you didn’t think you’d ever need homeowner’s insurance. Ouch.
Here’s my point. Over a lifetime, an average 5 in 1,100 people will have a house fire (a). 600 in 1,000 people who reach age 65 will need long-term care (b). And the annual cost of that long-term care ranges from a not-immodest $50,000 to a very substantial $200,000. Most of us choose not to put our home on the line by purchasing homeowner’s insurance. But many of us are not as prudent about planning how to maintain our quality of life in our later years.
How about these scenarios?
Scenario I: With your entire portfolio invested in stocks, the bottom drops out of the market and almost overnight your portfolio is down 25%. Will the market - and you - recover that loss? Right about then you might be thinking that diversifying your portfolio with some bonds and guaranteed investments would have been a better choice.
The same applies to making the choice for long-term care insurance. Thoughtful planning now offers a lot better chance of no regrets later. And, unlike an investment loss that with the grace of the market you might recover, once that potential $500,000 or more is spent on long-term care, it’s gone.
Scenario II: During your later years, your life changes and you’re in need of immediate funds to cover long-term care expenses. Your financial planner tells you that you’ll have to sell a highly appreciated asset on which you’ll have to pay a highly expensive capital gains tax. Long-term care insurance can protect you from having to sell that asset (and paying that big tax bill) by providing you with $50,000 to $200,000 annually in "after tax" dollars for your long-term care. It also may allow you to preserve the step up in capital gains basis on your investments.
Scenario III: You and your spouse have a pre-nup preserving the rights of each of you to your own assets. The time comes when one of you needs long-term care. That spouse must liquidate and pay out all his or her assets for long-term care expenses. That’s bad, but what can happen next is worse. Despite that carefully planned pre-nup, the other spouse’s assets are the next to go. This will happen because Medicaid requires both spouses’ assets be spent before coverage can begin for either spouse’s care. While you may have think you have enough assets to cover long-term care for both spouses without Medicaid, it’s wise to keep in mind that medical costs continue to rise at alarming rates. Long-term care insurance offers you more flexibility to choose how you use your assets.
What I’ve found is that while high net worth people may not need long-term care insurance, they may want it because for them, it makes them feel safer or more secure. As an added bonus, if you own a C corporation or are a non-owner of any business, the check you write in payment of your long-term care insurance is fully tax-deductible.
How do I know if long-term care insurance is right for me?
It’s not unusual to pay over $230 a day, $6,900 a month or $83,000 a year for nursing home care and double or triple that if you need 24-hour care in your home. If that’s the cost today, imagine what it will be in the future. Without a doubt, long-term care insurance is valuable to consider. In some instances, it’s vital.
It’s important to understand there are two groups of people who purchase long-term care insurance. One group of people needs this type of insurance and the other group wants it. Those in the first group need to purchase long-term care insurance to be protected in their later years from depleting funds saved for one spouse's retirement income. The people in the second group want to purchase long-term care insurance to protect their assets. There are a number of good reasons to do this; I will explain later.
You need this insurance if your spending $6,900 monthly would drain your retirement nest egg, a nest egg that someone else is dependent upon for living expenses after you die. Most commonly the “someone else” is your spouse, who will need continued income after your death. “Someone else” could also be your child with disabilities, who is not able to support him or her self. Or “someone else” may be your children, whose financial or physical care for their aging parents would limit their earning ability.
You may want this insurance if you choose to leave your savings to your children or to charities. While you may be able to afford to pay your long-term care expenses from your savings, it would substantially reduce the amount of money or assets you have to pass on.
You may want this insurance if you still have homeowners insurance. The loss of your house due to fire is much less likely to occur than the need you will have for long-term care (c) and the cost of that care may well exceed the value of your house. If insuring against the loss of your home makes sense, it also makes sense to insure against the much larger risk of long-term care expenses.
You may want this insurance if you have investments worth more today than when you purchased them that you plan to sell to pay for long-term care. You run the risk that the right time to sell may or may not coincide with your need for funds and you will owe taxes on the gain in your investment. Choosing long-term care insurance to cover your later life care expenses allows your investments to be passed on to your heirs with a step up in cost basis (no income tax on the growth).
You may want this insurance if you want to be certain that there will be money available to provide the later life care you desire, regardless of how your investments perform. As long as the insurance premiums are paid, long-term care insurance will provide money to pay for your care.
You may want this insurance if you want to make it possible for your heirs to receive all premiums you paid into the policy, if you do not require care in later life. It’s nice to know money you paid is not lost if care is not needed by you.
You may want this insurance if you want another tax-deductible expense for your business.
Remember that we want not need many of the things on which we spend money. A reliable car is something most of us need. Many of us want the optional all-wheel drive and anti-lock brakes that give us added protection and security.
Tim Cope, an over 27-year veteran of the insurance and investment business, is an Advisor at Fleischer Jacobs Group. If you have any questions about the information in this article, please feel free to call Tim at 802.865.5000 x104 or click this link to email him. Need the Link
(a) Source: Insurance Information Institute of Americans in 2002
(b) Source: The Looming Crisis, American Health Care Association, 2000
(c) Source: Insurance Information Institute of Americans in 2002