Financial Advice for Retirement, Social Security, IRAs and Estate Planning

Key Elements of Your Long Term Care Plan

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In Part 1 of this article, I shared my thoughts on how to create a smart and effective long-term care plan, along with 3 key components that need to be considered in your long-term care plan.

This week let’s continue the discussion with 4 more critical components of your long-term care plan.

Long-term care insurance. Long term care insurance has been in turmoil since the financial crisis. Insurers were beset by low investment returns, rising costs, longer life expectancies, and more claims than they estimated.

Many insurers dropped out of the market. Most of those that remained increased premiums substantially over the last few years.

Even so, you should consider a traditional stand-alone long-term care insurance policy from the remaining major carriers as part of your long-term care plan.

Most of the insurers are diversified, so weakness in long-term care insurance can be covered by their other businesses.

They also seemed to have learned from past mistakes and are charging realistic premiums, reducing the potential for significant increases in the future.

However, a concern of many potential buyers is that their premium dollars will be wasted if they never need the care.

But long-term care insurance should be viewed the same as homeowners’ or auto insurance. You buy it to protect against a catastrophic loss that you hope never occurs.

Also, most long-term care insurance covers all types of care, even non-medical assistance at home. So, a good policy could help you stay in your home longer without having to burden family and friends.

Hybrid policies. Annuities and life insurance with long-term care riders are growing in popularity, out-selling traditional long-term care insurance in the last few years. Compare these to traditional long-term care insurance when developing your plan.

The appeal of these products is that you or your heirs receive something if you don’t need all the long-term care coverage. With the annuities, you or your beneficiary receives the account balance. With the life insurance, your beneficiary receives the policy benefit tax free.

The features, costs, and benefits of these hybrid policies vary greatly. And you do pay a cost for the long-term care.

With the annuities, the interest rate earned by your account usually is less than that of a standard annuity, and you’ll likely have less access to the money. With the life insurance, either you pay higher premiums or receive a lower insurance benefit.

Permanent life insurance. Some people choose permanent life insurance to protect their estates and loved ones from the cost of long-term care.

They plan to pay for long-term care primarily from their income and assets, even if that means spending down the assets.

They own permanent life insurance to ensure that their heirs inherit at least the policy benefit if the entire estate is spent on long-term care.

If long-term care isn’t needed, the loved ones inherit both the estate and the insurance benefit.

A straight permanent life insurance policy could be less expensive than long-term care insurance or life insurance with a long-term care rider.

The disadvantage is that you need enough income and liquid assets to pay for long-term care when it’s needed.

The strategy might also not be viable if you’re married and your spouse has a standard of living to maintain while you pay for long-term care.

Self-insurance. You’ll pay for at least some long-term care yourself. These other tools create some certainty and limit the extent to which your income and assets will be used to pay for long-term care.

Otherwise, you’ll self-insure for all long-term care needs and risk that the entire estate will be depleted in your lifetime.

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