Long Term Care is a category of healthcare provided to people who are physically or mentally unable to provide independent care for themselves.
When creating your retirement plan, it is very important to understand that your chances of requiring long-term care are very high.
“ One out of every four persons aged 65 and above will require long-term care.”
“ One out of every two persons aged 85 and over will require long-term care.”
Other statistics show that 42 percent of Americans who are 65 today will enter a nursing home during their lifetime.
However, long-term care itself is not the problem. The issue is that the high costs of long-term care can spell financial ruin. Neither Medicare, Medigap nor private medical insurance covers long term care costs beyond a certain point. Most people will face a major healthcare crisis in retirement yet few people hedge against it. The money spent on long term care could significantly reduce or even wipe out your savings.
So, what is the average cost of long term care today? Right now, the average rate for a private room in a nursing home is between $6,000 – $7,000 a month, or about $72,000 – $84,000 a year. If the room rates reflect current annual increases in nursing-home costs, then by 2021, when today’s 60-year-olds might need such care, the average rate will have risen to about $480 a day, or $175,200 annually. Most retirees do not even have this much money saved for the entirety of their retirement.
Home health care, the least expensive alternative to long-term care, costs on average more than $1,000 a month, also pricey.
Few people have saved such large sums to cover their long term care needs. And the government is unlikely to pick up the tab, unless you are able to qualify for Medcaid benefits in a state that covers long term care.
The good news is that Life and Annuity plans provide additional riders to the contracts that can provide part or all of an individuals long term care including home health care.
It works like this. A hybrid annuity is purchased with an added income rider which pays you a hypothetical income of $1,000 a month for life at a certain age. That income will increase if long term care or home health care is needed. For example it may double for up to 5 years if you get confined to a nursing home or need health care assistance. Upon death, the surviving spouse receives the original income amount, in this case, $1,000 until his or her death.
The Single Premium Life Policies offer similar benefits. A single lump sum is deposited into a contract and earns an interest rate of approximately 5-6%. It
Is important to note that you also get long term care and death benefit while the money grows and the principle is completely liquid.
Let’s look at a hypothetical example:
Mary deposits $50,000 into a single premium life policy which gives her a long term care and death benefit of $100,000 each. Assuming after 5 years Mary”s initial deposit has grown at a rate of 6% to $65,000. Mary”s long term care and death benefit will also have grown proportionately to $130,000.
At any point, Mary has access to any of the three buckets. If cash is needed, Mary can withdraw the full amount of $65,000 paying only capital gains tax on the $15,000 earned. Alternatively, if Mary needs long term care of home health care, she receives the $130,000 benefit over 3-7 years. If neither the cash or the long term care is needed, Mary can elect the full death benefit of $130,000.
The IRS will let you use the long term care or death benefit free from any federal taxes!
It is important to note that any partial withdrawals from the policy will reduce the long term care and death benefit proportionately.