Statistics and costs can’t be ignored when evaluating your retirement plan. Many of the people we talk to state they will never need Long Term Health Care ‘the crystal ball plan’ or they disregard it because premiums are too high. There is no doubt that the cost of long term care premiums are out of reach for many people and the traditional pay-as-you-go programs with no cap on premium increases can be an accident waiting to happen. However, as it relates to LTHC, some statistics are worth noting:
- According to AARP, the lifetime probability of becoming disabled in at least two activities of daily living or of being cognitively impaired is 68% for people over the age of 65.
- Among those aged 65 or older, 69% will develop disabilities before they die, and 35% will eventually enter a nursing home.
- 66% of older people with disabilities who receive long term care at home, get all their care exclusively from their family caregiver, mostly wives and daughters.
- According to a 2015 Genworth Life and Annuity Insurance Company report, the median annual cost of care in Illinois is as follows:
There are other options available to the consumer other than the traditional pay-as-you-go programs. These Hybrid Polices, in my opinion, do not get enough press.
Hybrid policies utilize a pre-funding mechanism using your own investable assets while locking in the cost of a lifetime rider. The major advantage is that you know what your costs and benefits are today and what they will be in 20 years.
The most common pre-funding asset we utilize is IRA assets. A portion of your IRA (depending on the monthly benefit you choose) can be transferred to this policy with no tax consequences. (Please note that these funds remain available to you if all other assets have been depleted). The pre-funding will cover costs for you and a spouse for up to 48 months based on the benefit chosen. The lifetime rider is the major benefit of this policy. A hybrid policy need not be considered if you don’t attach the rider for the extra fixed cost.
Another funding option is a non-qualified annuity. There is an additional benefit to using annuities to fund this hybrid policy. Gains on non-qualified annuities are taxed at ordinary income tax rates. The Pension Protection Act of 2006 made some significant changes to the taxation of annuities as it relates to long term care. Cash value withdrawals made to pay for qualifying long-term care expenses or to pay qualified long-term care premiums, will no longer be taxable income but considered as a reduction of cost basis.
Please keep in mind that long term care coverage is as much about the spouse that does not need it as the one who does.
Please send any financial questions you wish to have answered in this column to Dorion-Gray Retirement Planning, Inc. You may fax them to 815.455.4989 or email email@example.com. Paula Dorion-Gray, CFP® is CEO of Dorion-Gray Retirement Planning, Inc. located at 2602 IL Route 176, Crystal Lake Il 60014-2225. Securities offered through Securities America, Inc. Member FINRA/SIPC. Advisory