The need for long-term care is created by one or both of the following conditions/impairments:
- A chronic medical condition that compromises the individual’s ability to get through the most basic of daily routines
- A cognitive impairment that compromises one’s ability to safely interact with his/her environment
Long-term care is costly. According to Genworth’s 2012 Cost of Care Survey, national median hourly rates for licensed homemaker and home health aide services are $18 and $19 per hour, respectively, adult day health care is $61 per day, assisted living facilities are $3,300 per month, and semi-private and private rooms in nursing homes are $200 and $222 per day, respectively. These are median costs. Actual costs in specific areas of the country may be much greater.
Fortunately, there’s a planning opportunity that’s available to fund a portion, or perhaps most, of these costs and remove the physical and emotional burden of caregiving from family members. It’s called long-term care insurance, or “LTCI.” Guess what? Given the fact that (a) long-term care is costly, (b) the cost of providing care continues to escalate, (c) people can live for many years with cognitive impairments, and (d) the possibility of requiring long-term care services is very real, LTCI isn’t cheap. Furthermore, insurance premiums for new applicants continue to increase as carriers increase their claims experience.
Complicating matters, while individuals in their 50’s and younger may require long-term care, it’s more often an experience that plays out in one’s 70’s, 80’s, or 90’s. Unless you have a limited-pay policy where, for example, you pay front-loaded premiums for a fixed period of time, e.g., ten years, you generally need to make premium payments for a long period of time to realize the benefits from your LTCI policy.
While LTCI premiums may be affordable when employed, it may be another story once you retire. In addition, as we have seen in recent years, LTCI premiums can increase. While increases generally are infrequent with most carriers, when they do occur, it’s not unusual for them to be in the range of 15% or more. When you purchase a LTCI policy, it needs to be a lifetime commitment. You need to have a plan for paying premiums throughout your working and retirement years, including potential increases.
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.
Stay tuned to next week’s post to see an example of how a FIA with an income rider can be used as a planning strategy for funding LTCI premiums in retirement.
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.