2 Ways to Hedge Long-Term Care Costs

03/26/2012 10:23 am EST

Focus: RETIREMENT

Terry Savage

Author, The Savage Truth on Money

Custodial care insurance is a very important part of a retirement plan, but with traditional approaches becoming more difficult and expensive, savvy investors have to take less-traveled roads, writes MoneyShow.com personal finance expert Terry Savage.

I’ve written a lot lately about rising premiums for long-term care insurance. Thankfully, MoneyShow.com readers are the most likely to be able to take advantage of some special ways to hedge the potential cost of long-term custodial care, which is not covered by Medicare or any supplement.

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.

Ten-Pay Policies
One solution to potential premium increases is to buy a LTC policy that is fully paid up in ten years. There’s no guarantee that the premiums will stay the same for the coming ten 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% compound inflation protection, the cost rises to $11,000 per year. (Quotes can vary from company to company.)

On 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 (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%—and gives you at least twice your deposit in death benefits, and six times or more that amount in long-term care benefits. And 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 six 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 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 and want some LTC benefits, and the death benefit, and 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. Warns Florek: “You might not like the kind of care the state provides through Medicaid 15 years from now. Even a small amount of coverage could make a big difference.”

And that’s The Savage Truth.