Some Long Term Care Insurance Options You Probably Never Heard Of (Part 2)
Last week I told you about Jim and Judy who had passed on the opportunity to buy long term care insurance years ago and are now too old to get it. I told Jim that there are some options available to him and Judy, even now while in their late 70’s.
Jim told me that he had about $300,000 in CDs and savings accounts, another $350,000 in mutual funds and annuities and $200,000 in IRAs for each of them. In total they had just over $1,000,000, plus their home worth about $400,000, a nice nest egg but certainly not enough to pay a $125,000 long term care expense if either need 24/7 care. And if both need that type of care, a quarter of a million dollars in long term care would seriously deplete that sum, eliminating their ability to continue to help their son.
So, what options do they really have? First, I told Jim that he and Judy could purchase a type of annuity which could provide them with 2 or 3 times the amount of the initial premium for long term care. For example, if Jim put $75,000 into the product he would have available to him either $150,000 or $225,000 for long term care expenses, depending on his health. He must answer a few health questions but need not go through the entire underwriting process as would be necessary for traditional long term care insurance.
And what happens if they don’t need long term care? Whatever they don’t use of their original principal plus interest would be passed on to their heirs. The investment earns between 1 and 2 percent, not great but certainly better than a CD or savings account would pay, but I explained to Jim that the reason to buy it is not for the return on his principal but for the long term care protection.
Judy has an annuity she purchase 20 years ago, which has about $75,000 of growth in it. When she starts to pull money out of that annuity she’ll be taxed. However, if she uses that annuity to fund this new product, I told Jim that under the Pension Protection Act (see my August 25 and Sept 1 posts) any money withdrawn for long term care expenses is completely tax free, further raising the value of Jim and Judy’s nest egg.
Jim was captivated. “But wait”, I told him. “There are other options as well to address a very real problem for many senior couples, one which Jim and Judy have.” If Judy survives Jim, she will lose his pension, which is $3000 per month. That’s because when Jim retired, he chose the maximum pension option which means there is no survivor option for Judy.
I then told Jim about another product which, thru a trustee to trustee transfer, we could fund with his IRA. There would be no income taxes incurred by making the transfer. This second type of annuity would generate an income stream for life for Jim and then for Judy. It would replace the income she would stand to lose if she outlives Jim. In addition, if either of them needs long term care we could boost that income by 1.5 times for long term care. And again, whatever they don’t use gets passed on to their heirs.
Finally, I told Jim that the first product is available until just shy of age 80 and the second until just shy of age 86. There is no underwriting process to go thru with either product. Jim was amazed and he immediately set up an appointment for he and Judy so that we could determine what the right fit for them is.