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