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Opportunity Cost and Your Long Term Care Decision

If you are out shopping for long term careThey can't spend the $91,300. It can't grow.
(commonly abbreviated as LTCI or LTC), I'mBasically, they have "committed" $91,300 of
going to encourage you to take a look at atheir assets to pay the premium on their LTC
way of providing long term care benefits thatpolicy. That's the one "job" of this $91,300.
is probably new to you. On the other hand, ifThe premium may only be $4,200 a year, but
you are in the crowd that thinks they willthe  opportunity  cost  is  $91,300.
never need long term care, I would also
suggest  you  evaluate this line of thinking.Let's take a look at another of their
alternatives. It's called asset based long
Dick and Jane are both age 65, recentlyterm care. How it works will unfold as I
retired and models of good health. They haveprovide  the  example  and  contrast  below.
ignored the long term care subject until
recently. They just put Jane's mother, who isOne approach to asset based long term care
88, into a nursing home. Talk about stickerinvolves re-positioning $91,300 of Dick and
shock! She is in a nice place, but Dick andJane's CD to a combination long term care
Jane are not 100% certain that her assetslife insurance policy plan with an insurance
will allow her to stay there for the rest ofcompany. Here's what moving this money does
her  life.for  them...
Consequently, they have been out looking atThe money on deposit with the insurance
long term care for themselves. They figurecompany grows at interest, but it is
they can afford to insure a portion of whattax-deferred interest so the insurance
it might cost them if they ever need somecompany will not send them 1099s every year
form of LTCI, so they are looking at afor an amount they have to pay tax on like
benefit of $3,000 a month. The premium isthe bank is required to do. In 10 years,
around  $4,200  a  year.assuming current rates, the $91,300 will grow
to $127,000; in 20 years $161,000. The CD,
Here's a new concept that Dick and Jane mustremember, does not grow, as its job is to
become accustomed to now that they arespin off interest to pay the annual $4,200
retired. They both had good jobs during theirpremium  on  the  traditional  LTCI  plan.
working years. If they ever wanted to buy
anything, it was just a question of lookingIf either Dick or Jane needs any form of long
at their income to see if they could swingterm care, the insurance company plan will
the  purchase.  Pretty  straightforward.pay them $3,900 a month for 50 months--$900 a
month  more  than  the  traditional  plan.
Now that they are retired, most of their
expenditures are going to come fromBut  here's  the  real  kicker.
investment returns on the assets they have
accumulated, not income from working. So theyIf Dick and Jane never need long term care,
need to understand the difference betweenthen the camp that doesn't buy it would have
premium cost and opportunity cost. Here'sbeen right. If Dick and Jane bought the
what  I  mean...traditional long term care plan, in 10 years
they would have paid out $42,000 in premiums
If they elect to buy this $4,200 a year longand about $7,400 in taxes on their CD
term care policy, the money has to come frominterest in order to net out the required
somewhere. Chances are it's coming from thepremium. That's a total of $49,700. The
interest earned on perhaps a CD or an$91,300 portion of their CD would still be
annuity. But there is an opportunity cost$91,300.
associated with paying the premiums from
earnings  on  any  asset.However, if Dick and Jane never need long
term care, chose the asset based long term
Let's say they are going to pay this $4,200care plan and both die, for example in 10
from the interest on a CD they own which isyears, the outcome is different. They have
earning 5.4% interest. Since interest ispaid no annual premiums and the life
taxable, and assuming they are in a 15% taxinsurance company will pay about $198,000 tax
bracket, they would have to have $91,300 infree  to  their  kids.
that CD to produce $4,200 after tax to pay
the  premium.Which sounds like a better plan?



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