Without Long Term Care Insurance,
Your Wealth Is Hanging Over An Abyss
Rick Zwetsch’s grandmother went through $500,000 (half a million dollars) for 5 years of home care and 6 mos in a nursing home - and that was in the 1980s, about a quarter century ago. Fortunately, he writes, she had the money to pay for it. Unfortunately, she would have been angry, he says, to know that it had gone to pay those expenses instead of handing the money down to her children and grandchildren.
Chilling, isn’t it? And yet there are thousands of stories like this. Statistics show that your chance of requiring long term care at some point is 50%. That’s right, one-half of all citizens will require long term care at some point during their life. So if you are a couple, it’s almost a certainty that one of you will require long term care.
Just to bring home the size of the risk, over half of the people who enter a nursing home will require care for over a year. More than one in five will require care for over five years. Cost of a year in a nursing home runs $210/day in California for a hefty $76,650 bill for a year of care in 2008. And costs have been going up at about 5.4% a year — meaning that the cost will double to over $150,000 a year within 14 years.
What are the options for long term coverage?
Many people are unpleasantly surprised to find that they are not covered for this expense. Your health care insurance doesn’t cover it. Neither does disability insurance, except, on occasion, for short periods. Medicare does not include long term care in its coverage, and neither do the Medicare supplemental (”Medi-Gap”) insurance policies. And few companies offer it to their employees. That brings it down to three possible resources: 1) your personal assets; 2) assets of willing relatives and friends; 3) Medicaid programs. But wait! In most cases, Medicaid programs will not pay unless you’ve pretty much depleted your own assets to pay for your care.
“Failure to prepare for the cost of a
nursing facility stay or other long-
term care is the primary cause of
impoverishment among the elderly.”
- The American Health Care Association, 1997
The answer to the problem, then, is long term care insurance (LTCI) — to shield you and your loved ones from what could be the devastating costs of long term care. Depending upon the policy, it can pay for not just nursing home care, but also home health care, which can be as expensive as nursing home care.
As you age, the cost of LTCI gets costlier. And should a health condition occur that necessitates long term care, obtaining it becomes impossible.
Yet LTCI is among the least utilized forms of insurance — which is odd for an event that that has such a high chance of occurring.
But in 1996, with the passage of the HIPAA (Health Insurance Portability and Accountability Act of 1996), LTCI premiums became deductible for the self-employed. The act allows LTCI premiums to be treated like health insurance premiums. However, to get these deductions, certain types of business entities are required, and some allow greater deductibility of the premiums than others.
Surprisingly, when set up correctly, it is possible to make the cost of LTCI literally free. How? Through something called a “return of premium” rider.
Let’s take an example to see how this might work.
Example Situation:
Doctor Smith, age 55, has an estate of $2,000,000 and an income of $400,000 a year. Dr. Smith is worried about possibly paying over $100,000 over his lifetime for LTC coverage for him and his wife. Dr. Smith also does not like buying insurance and does not want to pay LTCI for the next 30 years while he waits to become sick.
Plan:
Dr. Smith’s solution to his problem is through a
(1) limited pay LTCI policy paid for through his medical office in a
(2) tax-deductible manner with a
(3) return of premium rider.
How the plan might work out:
1. Dr Smith’s corporation pays a deductible premium of $8,985 a year for ten years (out-of-pocket cost for Dr. Smith: $5,391 a year).
2. Dr. Smith gets disabled at age 75 and needs home health care ($200 a day) until death at age 85. (Total LTC benefit for ten years = $730,000).
3. Dr. Smith dies at age 85 and his heirs receive the entire premium paid because of the return of premium rider. This amount = $89,850 which will pass income tax free to the heirs.*
*Some companies have a setoff on the return of premium rider for benefits paid.
How Did Dr. Smith’s Estate, and his heirs, make out?
Expenses:
$89,850 were paid in LTCI premiums over the 10 year period. Of that, only $53,910 was out of pocket due to the his corporation paying the premiums with pre-tax dollars
Total cost: $89,850
Benefits:
• $730,000 paid for the long term health care from age 75-85
• $89,850 received, tax-free, by his heirs through the “return of premium” rider.
Total Benefit: $819,850
In other words, Dr. Smith obtained nearly $10 worth of benefits for every dollar spent, and even more than that when compared to his actual out-of-pocket expenses.
So, the question to you is: How much money do you want to leave your heirs compared to (likely) expenses paid out for long term care?
One of the primary reasons given for purchasing long term care insurance (and there is a surprising number of lower income people who purchase LTCI policies) is to provide choice.
If you’ve been in long term care facilities, you know there are good ones and bad ones. Even if you don’t need to go into one of these facilities, it can mean the difference between burdening family and friends with your care, or being able to pay for home health care. Instead of the strain on your loved ones’ faces, you could know that they are well-cared for, both in the event of you requiring long term care, and as well as after you’re gone.
These are not easy issues to think about. Let us help you make the right decisions in setting up and choosing long term care insurance = call our office today.
And don’t forget to check out how you may be able to deduct the costs of Long Term Care Insurance.