Trade Life Insurance for Long-Term Care
By Janet Aschkenasy, MainStreet
Time for some good news.
It is getting a bit easier for Americans to purchase long-term care insurance for themselves or their family members.
About time, too: The average cost for nursing home care is now more than $50,000 a year and climbing, according to AARP, and because costs tend to vary widely across the nation, that may be a conservative estimate for your neck of the woods.
Today only a fraction of people who need to pay for extended care actually buy any long term care (LTC) insurance, says AARP. But thanks in part to a pension law that was passed in 2006, which will go into effect next January, people who have built up equity in a life insurance or annuity policy and don’t feel they need it anymore (since their children are grown and fending for themselves, for instance), will soon be able to trade in their existing policies for LTC insurance and eliminate taxes they’d otherwise have to pay to realize the cash benefits of their life and annuity programs.
“One of the existing rules under the Pension Protection Act is, you can exchange a life insurance or an annuity policy for a single-premium long term care policy on a tax-free basis,” says Certified Financial Planner Michael E. Kitces, director of financial planning with the Pinnacle Advisory Group in Columbia, Md., and co-author of The Annuity Advisor.
According to Kitces, the following is a common client refrain: “'There’s a policy I’ve been paying on for 25 years while I’ve raised my family. Now, the kids are out of the house, my spouse is working, and if I go after my cash value, the proceeds are taxed as regular income.'”
Turn Life Insurance into LTC and Save
Soon, individuals will be able to use the cash value they have accumulated to purchase LTC coverage, and it’ll be “a tax-free exchange.” Insurers are still in the process of shaping their LTC strategies in response to the pension law. “This is what’s coming down the pike,” says Kitces, who expects insurance companies to begin marketing the programs within the next several months.
LTC insurance isn’t cheap, with premiums that can range from $1,000 to $8,000 a year depending on how old you are when you buy it, where you live and what kind of features you’re after.
In Tennessee, for instance, the premium for a policy that would cover $130 a day for three years of care once deductibles are satisfied would cost about $810 a year including inflation protection at age 50, whereas at 75 the same policy costs $4,500 a year, according to the Tennessee Health Care Association.
How do you make the new law work for you?
For one thing, you’d be buying a LTC program that charges a one-time, instead of annual, fee, Kitces says, and you'd possibly pay a single lump-sum premium of $150,000 for life. And you’d need to have enough cash value. “I suspect we’ll see LTC policy options pricing anywhere from $50,000 to $200,000, depending on the benefits chosen,” says Kitces.
Some other factors to consider if you’re wondering whether this exchange is right for you:
1. Do you have a need for LTC coverage? If you’re not eligible for Medicaid, and don’t have sufficient assets to fund nursing home care and other forms of long-term medical assistance yourself, the answer is most likely a long-term care health event would have a severely adverse financial impact on you and your family.
2. Do you have an existing life insurance or annuity program you don’t need anymore? You want to be very sure you have sufficient retirement proceeds, be it pensions or 401(k) money or personal investments, to forgo the equity in your life or annuity policy.
3. Keep in mind the nature of what you are buying, especially with a single premium policy that lasts as long as you live. Kitces notes that if you die before the policy is used, chances are no one will inherit that money. On the other hand, if your family tends to live well into their late 80s or 90s, and needs long term care, this is probably going to be “a very good deal.”
4. Not everyone will qualify. As with life insurance, it will be difficult, if not impossible, to purchase LTC coverage with a severe pre-existing condition like late-stage cancer, says Kitces.
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