| If you are out shopping for long term care | | | | They can't spend the $91,300. It can't grow. |
| (commonly abbreviated as LTCI or LTC), I'm | | | | Basically, they have "committed" $91,300 of |
| going to encourage you to take a look at a | | | | their assets to pay the premium on their LTC |
| way of providing long term care benefits that | | | | policy. That's the one "job" of this $91,300. |
| is probably new to you. On the other hand, if | | | | The premium may only be $4,200 a year, but |
| you are in the crowd that thinks they will | | | | the 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, recently | | | | term care. How it works will unfold as I |
| retired and models of good health. They have | | | | provide the example and contrast below. |
| ignored the long term care subject until | | | | |
| recently. They just put Jane's mother, who is | | | | One approach to asset based long term care |
| 88, into a nursing home. Talk about sticker | | | | involves re-positioning $91,300 of Dick and |
| shock! She is in a nice place, but Dick and | | | | Jane's CD to a combination long term care |
| Jane are not 100% certain that her assets | | | | life insurance policy plan with an insurance |
| will allow her to stay there for the rest of | | | | company. Here's what moving this money does |
| her life. | | | | for them... |
| | | | |
| Consequently, they have been out looking at | | | | The money on deposit with the insurance |
| long term care for themselves. They figure | | | | company grows at interest, but it is |
| they can afford to insure a portion of what | | | | tax-deferred interest so the insurance |
| it might cost them if they ever need some | | | | company will not send them 1099s every year |
| form of LTCI, so they are looking at a | | | | for an amount they have to pay tax on like |
| benefit of $3,000 a month. The premium is | | | | the 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 must | | | | remember, does not grow, as its job is to |
| become accustomed to now that they are | | | | spin off interest to pay the annual $4,200 |
| retired. They both had good jobs during their | | | | premium on the traditional LTCI plan. |
| working years. If they ever wanted to buy | | | | |
| anything, it was just a question of looking | | | | If either Dick or Jane needs any form of long |
| at their income to see if they could swing | | | | term 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 from | | | | But here's the real kicker. |
| investment returns on the assets they have | | | | |
| accumulated, not income from working. So they | | | | If Dick and Jane never need long term care, |
| need to understand the difference between | | | | then the camp that doesn't buy it would have |
| premium cost and opportunity cost. Here's | | | | been 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 long | | | | and about $7,400 in taxes on their CD |
| term care policy, the money has to come from | | | | interest in order to net out the required |
| somewhere. Chances are it's coming from the | | | | premium. 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 $4,200 | | | | care plan and both die, for example in 10 |
| from the interest on a CD they own which is | | | | years, the outcome is different. They have |
| earning 5.4% interest. Since interest is | | | | paid no annual premiums and the life |
| taxable, and assuming they are in a 15% tax | | | | insurance company will pay about $198,000 tax |
| bracket, they would have to have $91,300 in | | | | free 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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