Wednesday, May 22, 2013

Long Term Care vs. Retirement Income

With Americans living longer than ever before and remaining active at ages that were unthinkable a generation or two ago, the need to plan for old age and retirement becomes increasingly important. And an important part of this is planning for health needs. The US Department of Health and Human Services estimates that 70% of people of the age of 65 or older will need some form of longer term care during their lives. This care could be for a few weeks, a few months or could be permanent.

The cost of this kind of care can be greater than most people realize. For example a private room in a nursing home can cost $205 per day or over $74,000 per year. A home health aide will cost $25 per hour. These are major expenses and when they arise can throw financial planning for retirement out of gear, leading to severe financial hardships. In many cases, assets that have been set aside for retirement need to be compromised. There are today insurance policies that can protect you from these contingencies and because of the money back guarantee and income tax free death benefit that they offer, should be treated as a saving cum insurance tool that does not require cash outflow with no chance of monetary return.

This type of insurance policy is a universal life insurance policy with long term care benefits incorporated into it. Here’s how it works:

If There Are Long Term Care Costs: In many cases the policy can provide you with up to 5 times the dollars needed to reimburse long term care costs. The specified death benefit amount is used to cover long term care costs up to the monthly maximum as lain down in the policy. There is also an option or a rider to provide for coverage beyond the depletion of the death benefit.

If Long Term Care Costs Do Not Arise: If you do not require long term care the full death benefit amount remains intact. If only a part of the death benefit amount has been used to meet long term care costs, the balance remains available as death benefit. The entire available death benefit amount will go to your beneficiaries free of income tax and will not be subject to probate if anyone besides your estate is named as the beneficiary.

The Option to Change Your Mind: A Return of Premium Rider is available on both single premium as well as certain flexible premium policies. If you should decide to discontinue the policy, the premiums paid by you till that time will be returned to you, less any loans, withdrawals or benefits paid. The terms of the Return of Premium Rider will govern the terms of the refund.

Here’s an example of how this type of policy could benefit you. Suppose you have set aside $300,000 of you retirement portfolio to cover possible long term care costs. If you move $100,000 into a single premium policy, you could get up to $80,000 plus per years for 6 years to cover long term care costs. That totals to $480,000 or nearly 500% of the premium amount. If there are no long term care expenses, your beneficiaries could receive over $150,000 as tax free death benefit. In case some part of the death benefit is used for long term care costs, the remaining portion will go to your beneficiaries’ tax free. The exact amount to benefit available will vary from case to case. And if you should change your mind about the policy, you can request for return of premium, less any benefits paid, loans or withdrawals.

An insurance policy to protect you from long term care costs can give you all the protection you need while freeing up a significant part of your portfolio for use where greater returns may be expected.

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