If you consider the statistics that more than 60% of healthy 65 year olds will need some form of long term care during their lifetime, you’ll agree we need a plan to cover these potential costs.
The current cost for skilled nursing care exceeds $80,000 per year in my home state of California. That will scramble a nest egg in no time.
Most people fall into two camps when they consider the issue of covering long term care costs.
The first camp does not want to think about the possibility. They hope that if they ignore it, it may go away. Or, they plan to deal with it later…when they are closer to actually needing it.
The second camp has proactively sought out more information about long term care insurance but decided that they don’t want to pay that premium cost for something they may or not need.
It is discouraging to deal with the potential costs of long term care insurance. Actual claims are increasing at a rate higher than many insurance companies predicted. This has led to price increases. As a result, some drop their coverage whereas those who are actually sick retain their policies. The result? The pool of those who are insured gets worse…more claims…higher prices…and the spiral continues. Many long term care insurance companies have now stopped taking new long term care insurance business and are leaving the state.
What can we do?
Fortunately, there is an alternative that for those whose financial circumstances fits that is win/win/win.
What if I need future long term care insurance? With this alternative, you’ve got it. Win.
What if I never need long term care insurance? I don’t want to lose all those premiums that I put in over the years. With this alternative, you don’t lose them. Win.
What if my circumstances change or I change my mind? I would want to get my money back. With this alternative you can. Win.
Asset Based Long Term Care Insurance
Let’s look “under the hood” and see what this actually is.
In layman’s terms, it is a life insurance policy that has two riders. One rider is to access the death benefit for long term care. The second is a return of premium rider.
Asset based long term care policies can have flexibility in how they can be funded:
- They can be funded as a one time lump sum deposit.
- They can be funded over a short time window (5-10 years).
- They can be funded with after-tax dollars.
- There is even a company that allows funding from IRA assets.
There is no such thing as a perfect “investment” though, so let’s look at the tradeoffs.
First, an individual who is in poor health would not be able to qualify for this type of policy.
Having said that, the underwriting criteria for the policy is based on mortality (issued leading to death) and not morbidity (disabling issues), which make qualifying easier.
Second, with the exception of one company, the policy is funded with after-tax (non-IRA) funds. If most or all of your retirement funds are in IRA or 401k accounts, this will present a challenge.
There are certainly ways to use after tax dollars creatively to fund it.
If you still have a number of working years left, you can use these remaining years with higher work income to fully fund it before retirement.
You may have a chunk of after-tax dollars at your disposal, or you may receive an inheritance.
With some companies you can initially fund it with a smaller amount just to get it set up and add to it at a later date. You could add the additional dollars at any point, such as when you start receiving required minimum distributions that you don’t plan to spend.
If you would like to learn more about anything discussed in this article, please contact me.