Part 1 of this post alluded to a perfect storm awaiting many long-term care insurance (“LTCI”) policy owners when they retire, an analysis of which should be included as part of the planning process when the potential purchase of a LTCI policy is being considered. The perfect storm is as follows:
- Due to potential sizeable ongoing benefits, LTCI premiums aren’t inexpensive.
- Depending upon when a policy is purchased, LTCI premiums may need to be paid for 30 to 50 years.
- While historically infrequent, LTCI premium increases can be significant.
- Although it may be needed in one’s 50’s, long-term care is more often required in one’s 70’s, 80’s, or 90’s.
- Premiums may be affordable when employed; however, this may not be the case when retired.
The last item in the list is critical. Given all of the foregoing items, when you purchase a LTCI policy, it needs to be a lifetime commitment. As part of this commitment, you need to have a plan in place for how you will pay for your LTCI premiums not only during your working years, but for the rest of your life.
Per last week’s post, one way to plan to pay for LTCI premiums during retirement is to purchase a fixed index annuity (“FIA”) with an income rider. Given the fact that the amount of lifetime income that you will receive beginning at various ages from a FIA with an income rider can be calculated at the time of purchase, this can be a good strategy to use for future LTCI premium funding. Specifically, you can determine the initial and ongoing investment amounts required to produce a targeted amount of income to match your LTCI premiums, including projected increases in same.
Let’s look at an example. Let’s assume that Ms. Nice, age 55 and single, is planning on retiring at age 68. Let’s further assume that she is currently, and is projected to be throughout retirement, in a 20% income tax bracket. Ms. Nice is considering the purchase of a LTCI policy with an annual premium of $4,000. This amount can comfortably be paid out of her current and projected employment earnings, however, this isn’t projected to be the case in retirement, especially with potential premium increases.
Ms. Nice’s retirement income planner, who specializes in planning, managing, and protecting retirement income, projects that she will need annual pre-tax income of $6,000 in retirement to pay for her LTCI premiums. This amount is projected to cover income tax liability on income allocated for LTCI premium payments plus modest premium increases.
One of the options that Ms. Nice’s retirement income planner proposes to her for providing her with the income she needs to pay her LTCI premiums throughout retirement is a FIA with an income rider. For the recommended FIA and income rider, by investing either (a) $54,000 today, or (b) $40,000 today plus $1,750 per year for the next 12 years, Ms. Nice will receive lifetime annual income of $6,000 beginning at age 68.
Given the fact that the purchase of LTCI needs to be a lifetime commitment and LTCI premiums increase with age, planning for the potential purchase of a LTCI policy should be included as part of the retirement income planning process. By taking this approach, you will increase the likelihood that your LTCI policy will be in force when you need it.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.