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How you can hedge long-term care costs

Updated: May 3, 2013 12:15PM

Q. I think it’s a waste of money to buy long-term care insurance because you may never use it. And as you’ve
written, insurers keep raising premiums. Isn’t there a better solution?

A. There are several solutions to hedging the potential cost of long-term custodial care, which is not covered by Medicare or any supplement. And, while the solutions are costly, they are far less expensive than the potential of using up all your assets to pay for care — and then being placed in a state-funded nursing home, even though you could otherwise have been cared for in your home.

10-pay policies. One solution to the potential premium increases is to buy an LTC policy that is fully paid up in 10 years. There’s no guarantee that the premiums will stay the same for the coming 10 years — but at least you’ll limit your exposure. For a 60-year-old woman in good health, seeking six years of coverage at $250 a day, the cost of such a policy would be about $6,800 per year. But if you add 3 percent compound inflation protection, the cost rises to $11,000 per year. Quotes can vary from company to company.

One extra benefit: A traditional “C” corporation can pay for LTC insurance using pre-tax dollars, while benefits are paid out on an after-tax basis, making this a valued employee benefit.

Combo life/LTC policies. If you were planning to use your savings to pay for any custodial care you might need, you are “self-insuring.” But instead of just setting that money aside in a money-market account, you might be interested in a combination product that ties life insurance and long-term care insurance into one package.

Genworth offers such a policy, the TLC or Total Living Coverage program. It leverages your savings to make sure that you can get care coverage, and also a potential death benefit — plus a way to get your money back if you change your mind.

You might start with an investment of $100,000 that would otherwise sit in a bank money-market account. Put it into a life insurance policy earning a guaranteed minimum of 3.5 percent — and that gives you at least twice your deposit in death benefits, and 6 times or more that in long-term care benefits. You can withdraw the cash if you purchase a rider that returns your premium.

For a 60-year-old woman in good health, the $100,000 deposit would buy a total of $593,000 of LTC benefits over 6 years, or about $8,250 per month. At the same time, the woman will have an immediate death benefit of $257,947 — an amount that decreases over the years to a minimum of about $197,000. This example does not include inflation protection, which can be added to the policy although only by substantially reducing the LTC and death benefits.

Lincoln Financial offers a similar combo product, called the MoneyGuard Reserve. And other companies offer combination annuity/LTC policies, which are less attractive these days because of the low rates offered on the annuity.

Peter Florek of MAGA LTC (800-533-6242), says these combo policies make sense for people who have savings, want some LTC benefits, and the death benefit, as well as liquidity. He advises those who do not have money for the cash deposit into such policies to at least purchase a small amount of traditional LTC insurance, despite the potential for rising premiums.

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