The truly scariest part of retirement is the need for long-term, non-skilled health care — a cost that can easily wipe out all your retirement savings in a few years.
Just check out the prices for nursing homes and home health aides at Caregiverlist.com, and you’ll see how quickly you can run through your retirement savings, leaving nothing for a surviving spouse or as a college fund for your grandchildren.
Today, it costs around $80,000 a year for a private nursing home — and only a bit less if you need full-time care at home. And when you run out of money, the only choice is a state Medicaid-funded nursing home, where costs are already pinched. When boomers overwhelm state budgets and facilities, you’ll wish you had planned ahead.
That’s why I’ve always recommended the purchase of long-term care insurance, preferably paying in full over 10 years for your policy, if you can afford it. But lately insurers are increasing premiums or cutting back on coverage they will offer. (See my recent column on changes coming by the end of this month in Genworth’s popular products). Policyholders have been caught in the squeeze.
Asset-based long-term care (combo products)
There is one other alternative way to plan for the need for custodial care: by using combination products that use life insurance or annuities to fund long-term care costs. If you have retirement savings that are now invested conservatively in bank CDs and money funds, now may be the time to “reposition” some of those retirement assets to do “double duty” as a source of funding for long-term care.
These fast-growing products are based on either a life insurance policy or an annuity, which allow your money to grow tax-deferred. This pool of money inside the insurance contract can be used to pay for long-term care if it is needed. But if you don’t use some or all of the money for that purpose, it remains an asset that can be left to your heirs.
There’s no “use it or lose it” feature with these combo policies. And there’s no worry about rising premiums as there would be with a straight LTC policy. Plus, unless the money used to pay for the policy comes from an IRA, all withdrawals to pay for care come out tax-free.
The most attractive feature of these combo policies is the “leverage” of the insurance contract, which allows you to create a larger pool of long-term care money than if you had just used your savings when the time comes. In fact, you can have as much as six times the amount you paid in premium to use for paying long-term care expenses. And, like all life insurance policies, your beneficiaries receive more than you paid in premium, assuming you live for at least two years.
Creative insurance companies
State Life Insurance Company, a division of OneAmerica ( assetbasedLTC.com), Lincoln Financial Group ( LFG.com) and Genworth ( Genworth.com) are the largest companies offering these combination products.
Here are a few examples of how you could build a combined LTC/life insurance pool with the State Life’s Asset Care product. Assume you have $100,000 in retirement savings in a bank CD or money market fund — money you’re keeping safely invested for just this possibility of needing care one day. That amount would probably cover only one year of care, given the way costs are rising.
But if a 50-year-old woman were to use her $100,000 to buy State Life’s Asset Care product, she would have a $276,000 life insurance death benefit, and an equal amount as a pool of money to draw upon if she needs long-term care. That would give her a monthly benefit of $5,520 for a 50-month period, just over four years. If she waits until age 65 to buy this product, her $100,000 deposit into the life insurance policy still generates $176,000 as a death benefit or LTC pool — a payment of $3,520 for 50 months of care.
In fact, State Life (OneAmerica) is the only asset-based long-term care product that can provide coverage for two people from the same policy.
The Genworth plan is called TLC — Total Living Coverage. It promises even greater leverage on that $100,000 deposit made by a 60 year old woman. With this policy, there is an initial death benefit of $238,000 and a benefit pool of more than $700,000. The difference occurs partly because Genworth is factoring in an interest crediting rate of 4 percent, while State Life is using 2.9 percent, the “net” figure, after expenses and mortality charges.
Lincoln Financial Group’s MoneyGuard Reserve Plus turns that $100,000 deposit made by a 65-year-old woman into a pool of benefits totaling $450,363 — or through use of a rider, a guaranteed six years’ worth of LTC coverage. The guaranteed death benefit is slightly over $150,000.
These complexities and differences require that you have a knowledgeable agent to compare the offerings and advise you which is appropriate for your situation.
So, if you have some money set aside, are worried about the potential cost of long-term care and have heirs to benefit from the life insurance, this kind of combo product could be the perfect answer. And that’s The Savage Truth.
Terry Savage is the Chicago Sun-Times’ nationally syndicated financial columnist, and a registered investment adviser. Post personal finance questions on her blog at TerrySavage.com and blogs.suntimes.com/savage.
