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Posted: March 22, 2012

Insurance for the future?

A look at LTC coverage and its alternatives

Wayne Farlow

The cost of long term medical care is a primary risk management concern, especially as people age. In Colorado, the median cost of a private room in a nursing home was $81,030 in 2011. Unfortunately, the cost of a long term care (LTC) insurance policy continues to rise. Let’s look at some options that may help minimize the risk of long term medical care expenses depleting your retirement savings.

LTC insurance plans are well suited for people seeking peace of mind. If you are considering LTC insurance, be sure to look at all of your options and riders available. Some of these options include:

1) Elimination Period Type – An elimination period is the time between when a person qualifies for long term care and when the insurance begins making payments. Only buy a policy with a “lifetime” elimination period. The elimination period can either be calendar days or “service days.” With in- home care, requiring a twice a week visit from a provider, the service day elimination period count is only two days per week. Typically it is better to have a calendar day approach to elimination periods.

2) Elimination Periods length – Lifetime elimination periods range from 0 days to 365 days. The longer the elimination period, the lower the policy cost. By approaching LTC insurance as “catastrophic coverage,” an elimination period of 180 or 365 days may be very cost effective. If retirement funds will likely be available to cover the long elimination period, the lower priced LTC insurance will protect you against the unlikely event of long term medical care being required over several years.

3) Inflation Protection – Inflation protection riders come in both simple and compounded inflation varieties. Inflation protection riders are very important to younger purchasers of LTC insurance.

4) Shared Care – With a shared care rider, a couple can have LTC insurance that will pay for either or both spouses requiring long term care, up to the policy maximum. Since the odds of both partners requiring extensive long term care is small, this rider is a good option for many couples.

Like other insurance products, your health status may not allow you to qualify for LTC insurance at any price. Or, you may be able to “self insure” for LTC expenses. Let’s look at some alternatives to LTC insurance.

1) Whole Life Insurance – If a substantial whole life insurance policy is being considered, buy a policy with an accelerated benefit rider, which can provide both life insurance and long term care insurance. Accelerated benefits are proceeds paid to the policyholder from a life insurance policy, before he/she dies. These proceeds can be used for long term care expenses. Accelerated payments could be for as much as the face value of the life insurance policy. However, if proceeds are used for long term care expenses, the total amount paid on the policy will likely be reduced, due to the early payout of funds.

2) Deferred Annuity – If a deferred annuity is being considered, buy one with a LTC rider. This option can be especially useful when a LTC policy is desired, but the policyholder is denied LTC coverage due to existing health issues.

3) Charitable Remainder Annuity Trust (CRAT) ­– For the charitably inclined, appreciated securities could be donated to a CRAT.  The CRAT provides a fixed annual payout. The annual funds from the CRAT could then be used to fund annual LTC insurance premiums. This approach removes assets from an estate, provides for a charitable tax deduction, and provides guaranteed funds to pay for LTC insurance.

4) Self Insure with your home – By retirement years, many people will have their home mortgages paid. If one spouse requires long term care, a reverse mortgage can often supply up to one-half the home’s value. If the second spouse requires long term care, the sale of the house can help provide additional funds for LTC. This approach can even be combined with a LTC insurance policy having the “shared care” rider for added protection.

Long term care expenses can be frightening. It is important to remember that when someone requires long term care, many of their previous expenses may be eliminated. By working with a skilled financial professional, you can determine the most cost effective manner to provide for long term medical care, if it is ever required.

Wayne Farlow is the founder of Financial Abundance, LLC, a Registered Investment Advisor firm.  He is a Certified Financial Planner (CFP®), focusing on Retirement Planning, Investment Management, Small Business Owner Planning and Sudden Wealth/Inheritance Planning.  His book, “Financial Abundance Guide,” is available free at www.farlowfinancial.com .  He can be reached at wayne@farlowfinancial.com or at 303-554-0309.

Enjoy this article? Sign up to get ColoradoBiz Exclusives. The opinions expressed in this article are solely that of the author and do not represent ColoradoBiz magazine. Comments on articles will be removed if they include personal attacks.

Readers Respond

Thanks for you comments Ralph. As we do not sell any insurance products, including LTC, this article is only intended to help people be aware of the choices and alternatives to fund their possible requirement for Long Term Care. As every persons requirements vary, my intention was to help people understand what options they have and what questions they should ask an LTC insurance sales person, so they can pick the solution that best fits their requirements. By Wayne Farlow on 2012 03 26
Thanks for addressing this important topic. Regarding elimination period duration beyond 90 days, premium savings will not justify the additional out of pocket at time of care. For example, using your $80,000 annual cost of care today, at 5% compound inflation, one year of care will be $160,000 in 15 years and $320,000 in 30 years. A 365 day deductible to save of a few hundred dollars premium is not a great bargain. Regarding self funding care through reverse mortgages, if premium dollars are not available elsewhere, then a small reverse mortgage to fund a LTCi policy will generate more value and preservation of assets than paying for care using home equity. Ralph Leisle, President LTCi Decision Systems, Inc By Ralph Leisle on 2012 03 22
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