Even though the possible need for long-term care is not something people enjoy thinking about, an estimated 70% of 65-year-olds will need this type of care at some point in their lives.¹ The average cost of a semi-private room in a nursing home was nearly $75,000 a year in 2012, and it’s been projected that the annual cost could reach nearly $165,000 in 20 years due to inflation.²
Some wealthy households can afford to pay for long-term care out of pocket. Many others with substantial financial assets might not be sure whether they have saved enough to meet their future needs. Thus, it may be wise to consider whether your financial resources would be adequate for a worst-case situation.
What would happen to your retirement savings if you or your spouse became severely disabled and had to enter a nursing home? How would writing a check for $6,000 or more every month affect the standard of living of the healthy spouse, who would still need to pay for his or her normal expenses?
One of the following strategies may help prevent your retirement savings from being wiped out by the escalating cost of long-term care and could significantly ease the burden on family and friends.
Some insurance companies offer permanent life insurance policies or annuities with long-term-care riders, either of which may be more cost-effective than a standalone long-term-care policy. The premiums are generally paid as a lump sum up-front or in fixed periodic payments, so you wouldn’t have to worry about future rate increases or the issuer canceling the policy (as long as your premiums are current).
Long-term-care benefits typically kick in when the policyholder needs help with two or more activities of daily living (such as eating, bathing, and dressing); payouts are normally tax-free. However, any payouts for covered long-term-care expenses would reduce (and are usually limited to) the death benefit or annuity value, so they could be much less generous than those of a typical long-term-care policy.
Permanent Life Option
If you are considering a long-term-care option with life insurance, you should have a need for life insurance and evaluate the policy on its merits as life insurance. Optional benefit riders are available for an additional fee and are subject to the contractual terms, conditions, and limitations outlined in the policy; they may not, however, benefit all individuals.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.
Annuities are insurance contracts that pay a lump sum or an income stream over a certain period of time. Generally, annuities have mortality and expense charges, account fees, investment management fees, and administrative fees. Most annuities have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the annuity. Withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty. The earnings portion of annuity withdrawals is taxed as ordinary income.
Insurance and annuity products are not insured by the FDIC or any other federal government agency. Any guarantees are contingent on the claims-paying ability of the issuing insurance company.
1) The Wall Street Journal, January 14, 2013
2) The Wall Street Journal, March 26, 2012
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