An income-rich retirement takes diligent effort to reach. Living well in the golden years means you have to start saving early. Over the years you save and invest some of your income in tax-advantaged retirement accounts, like a 401(k) or a Roth IRA. When retirement starts to draw near, it’s time to create an air-tight financial plan that generates the income that would make your ideal retirement possible.
But, if you’re like the majority of Americans, you may not have planned for a big-ticket item that can derail even the best-laid retirement plan: the nest-egg-depleting cost of long-term care.
We know from recent studies that we are living longer than previous generations. However, most of us have our blinders on when it comes to planning for long-term care (LTC). A study by Northwestern Mutual revealed that 56 percent of Americans say that saving for LTC is one of their top financial priorities. But a whopping 73 percent haven’t planned for this need.
Ignoring the Cost of LTC at Personal Peril
Perhaps this headline on Forbes.com sums up this threat the best: “Americans’ Estimates of Long-Term Care Costs Are Wildly Off.” The well-regarded Genworth Cost of Care Study found that the average American underestimates the cost of in-home long-term care, for example, by almost 50 percent.
The study’s eye-popping numbers for median annual costs of LTC—from an in-home health aide costing $61,776 a year to a private room in a nursing home costing $108,408—are even more unsettling when you realize how these cost estimates will rise in just 10 years.
Want to see for yourself? Check out Genworth’s LTC Cost Calculator, which lets you enter your state of residence and how many years from now you might need LTC services to see how these costs are expected to grow.
If you do that, you will want to get a cold compress and then meet us back here to learn about an intriguing new LTC planning option: asset-based long-term care.
Asset Based Long-Term Care Offers a New Strategy
Simply stated, an asset based long-term care policy is a life insurance policy or an annuity that allows you to use the policy’s death benefit or cash value for LTC costs. It provides financial resources for long-term care should you need them.
If you end up not needing the insurance, your heirs can then receive the policy’s death benefit. Another benefit is that these policies are generally protected from premium increases.
If you haven’t heard much about asset based long-term care policies, it may be because they were just introduced in the last decade. The Pension Protection Act (PPA) of 2006 provided new tax benefits for what are often referred to as LTC combination plans. The PPA became law in 2010, permitting tax-free distribution of life insurance or annuity cash value to pay for long-term care.
One reason this strategy is drawing interest is that it addresses one of the more common consumer objections to traditional LTC insurance…that if you never need the care, you may lose all those premiums you have paid.
Asset based long-term care policies may even offer a Return of Premium option that allows for a full refund of your premium at any time. If it does come with that option and you find that appealing, be sure to investigate all details of what may be involved.
A Cornerstone for a Retirement Plan?
More financial planners and insurance professionals are looking to asset based long-term care as a cornerstone in retirement income planning for clients who have deferred annuities that may have grown, but who have no need or desire for income (especially considering income-tax consequences). For them, moving that money into an asset based long-term care product can be worth exploring.
If this describes you, you may have an opportunity to initiate a 1035 Exchange. That is a provision in the tax code that allows you, as a policyholder, to transfer funds from a life insurance policy or an annuity to a new policy, without having to pay taxes.
This gives you tax-free use of your funds with a multiplier effect for LTC needs. If you have IRAs with similar tax constraints, you may also be able to leverage those into asset based LTC products.
Potential Cost Relief for Couples
There are even asset based LTC options that cover two lives, whether married or not, offering lifetime tax-free long-term care benefits for both people under one policy. That might be a valuable cornerstone of a couple’s plan for retirement income and survivorship. It’s easy to see why more people are interested in asset based or linked benefit LTC policies.
Asset Based Long-Term Care Scorecard
Linked-benefit annuity contracts or life insurance policies potentially offer these benefits:
- Premiums that never increase
- Benefits that never decrease
- Asset growth at guaranteed rates
- Access to funds if needed
- Death benefits if not used for LTC
- Return-of-premium options
- Lifetime LTC benefits
The association notes that provisions for linked-benefit contracts or policies vary based on the type of product (life or annuity), depending on the insurance company, and even by state.
When evaluating an asset based option, a few concerns may be, will you end up getting a lower LTC benefit than can be gained another way? Will you be spending money for life insurance that you may not need?
Working with a qualified financial professional — someone who understands retirement money matters, potential issues like costly long-term care, and various possible cost-relief strategies — can help you weigh your options and the pros and cons of different potential solutions.
Is This Strategy Right for You?
At SafeMoney.com, you can visit and connect with qualified financial professionals who have advanced knowledge of this strategy — not to mention other possibilities that can help you enjoy a comfortable, financially confident future.
Use our “Find a Financial Professional” section to connect directly with someone. You have the option to request a personal strategy session to discuss your needs and goals. And should you need a personal referral, call us at 877.476.9723.