Long-term care could be one of the most financially devastating events a senior faces today. Assisted living costs nearly $5000 per month, and skilled nursing care could cost over $8000 per month.
The impact of these expenses could affect your retirement, especially if it’s not included in your retirement plan. The cost of long-term care can be covered in one of three ways: pay out of your pocket, transfer the risk to an insurance company, or rely on state aid. Whichever option you choose needs an action plan to help achieve that goal.
I recently met with a client to discuss her desire for long-term care coverage. Our office process identified this concern early in our relationship, and we discussed it often. My client understood the value of long-term care protection and how it would help allow her to stay independent and remain in her home without putting a burden on her family.
Her biggest concern, like most of our clients, was the added expense for the monthly premium and not knowing if she would ever use the policy. Although financially stable, she felt the added expense would impact her travel budget. Her goal during retirement was to travel while healthy enough to do so.
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The issue to be solved: remaining independent and not putting a burden on her family. The dilemma: use the income now to travel or use it to remain independent later.
The solution: do both.
I explained our process helps allow our clients the flexibility to adjust their income plans as different needs arise. In her case, she needed to solve two different issues at the same time. Many of our clients find they could have long-term care protection without the out-of-pocket cost. We found the following solution is an option that can work well for them.
Use a disposable asset to create income to pay the long-term care premium AND pay the premium for a life insurance policy designed to replace the original asset. This can only be done using an asset not needed for current or future use. By using a three-tiered approach, we not only provide long-term care protection, but we eliminate the worry of paying for something that is never used.
Since we replace the original asset, we have not really spent anything. We are just using the money in a different way.
Let’s see this idea in action, starting with how I helped my client with her dilemma.
The Case Study
First, we identified a disposable asset, one she had but was not accessing. In her case, this was a bank CD. The funds in the CD were destined to be given to her grandchildren. Although the CD was safe from market risk, it had very low growth potential with a value of $150,000.
Second, we applied for a long-term care policy and got approved. We selected a policy with a monthly premium of $324.92.
Next, we applied for a guaranteed life policy with a death benefit of $150,000 and a monthly premium of $281.39. (It’s important to remember to apply for these policies and receive acceptance before moving to the next step). As an added benefit, the proceeds from the life insurance policy will be paid to the named beneficiaries income tax-free.
Total monthly premium outlay: $606.31
Finally, we repositioned the $150,000 CD and purchased a fixed annuity designed for income. American General provided a guaranteed lifetime monthly income of $731.25. We intentionally created more income ($124.94 per month) than was needed to offset any increase in premium from the long-term care policy and generate additional income for her travel budget.
*This client example is unique to this individual. Your unique results will differ based on your particular situation.
This annuity provided the lifetime income needed to pay my client’s monthly premiums, but it also has the potential to increase that income over time. An income annuity not only creates additional cash flow but can potentially provide additional funds for the grandchildren since most of the time, any amount left in the account at death will be given to the named beneficiaries.
If my client ever qualifies for claims under her long-term care policy, the premiums will stop, but the income will not, creating an additional increase to the cash flow. Of course, any income not needed is just going to maintain in the account, again increasing the amount left for the beneficiaries.
So, who benefits? Everyone. Our client has the added security of knowing she will not burden her family in the event of a long-term care issue. She will be able to continue traveling since her budget has improved and has the potential to increase over time. Her grandchildren benefit from receiving their inheritance tax-free and potentially more than initially set aside.
This solution can work well for anyone healthy enough to qualify for long-term care and life insurance policies and who has a disposable asset. Your income may pay for the policies, but your health buys them.