Opportunity Cost and Your Long Term Care Decision

If you are out shopping for long term careproduce $4,200 after tax to pay the premium.
(commonly abbreviated as LTCI or LTC), I'mThey can't spend the $91,300. It can't grow.
going to encourage you to take a look at a wayBasically, they have "committed" $91,300 of their
of providing long term care benefits that isassets to pay the premium on their LTC policy.
probably new to you. On the other hand, if youThat's the one "job" of this $91,300. The premium
are in the crowd that thinks they will never needmay only be $4,200 a year, but the opportunity
long term care, I would also suggest you evaluatecost 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 retiredIt's called asset based long term care. How it
and models of good health. They have ignoredworks will unfold as I provide the example and
the long term care subject until recently. Theycontrast below.
just put Jane's mother, who is 88, into a nursingOne approach to asset based long term care
home. Talk about sticker shock! She is in a niceinvolves re-positioning $91,300 of Dick and Jane's
place, but Dick and Jane are not 100% certainCD to a combination long term care/life insurance
that her assets will allow her to stay there forpolicy 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 longThe money on deposit with the insurance
term care for themselves. They figure they cancompany grows at interest, but it is tax-deferred
afford to insure a portion of what it might costinterest so the insurance company will not send
them if they ever need some form of LTCI, sothem 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 mustgrow to $127,000; in 20 years $161,000. The CD,
become accustomed to now that they areremember, does not grow, as its job is to spin
retired. They both had good jobs during theiroff interest to pay the annual $4,200 premium on
working years. If they ever wanted to buythe traditional LTCI plan.
anything, it was just a question of looking at theirIf 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 theirmonth more than the traditional plan.
expenditures are going to come from investmentBut here's the real kicker.
returns on the assets they have accumulated, notIf Dick and Jane never need long term care, then
income from working. So they need tothe camp that doesn't buy it would have been
understand the difference between premium costright. 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 termout $42,000 in premiums and about $7,400 in
care policy, the money has to come fromtaxes on their CD interest in order to net out the
somewhere. Chances are it's coming from therequired 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 withHowever, 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 fromand both die, for example in 10 years, the
the interest on a CD they own which is earningoutcome is different. They have paid no annual
5.4% interest. Since interest is taxable, andpremiums and the life insurance company will pay
assuming they are in a 15% tax bracket, theyabout $198,000 tax free to their kids.
would have to have $91,300 in that CD toWhich sounds like a better plan?