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Solved! The LTC Rub

by smeneshi - Jan 26, 2015

When it comes to personal finances and retirement, most of you in government, like your private sector counterparts, worry mainly about two things: high long-term care expenses and inflation.

As for inflation, many pensions only go up at a flat rate of around 3%. But a flat 3% rate of increase over a 30-year period comes out to a compounded annual rate closer to 1.5%. If price inflation runs around 3% compounded annually, then you’re slowly losing purchasing power every year. It’s the financial equivalent of a death by 1,0000 cuts. Also keep in mind that more than 70 percent of Americans over the age of 65 will need long-term care at some point during life*.   For most of you in the public sector, the plan to pay for high long-term care costs is to pay what you can out of your current income (probably pension and Social Security) then make up the difference from your 457 plan or other savings. The main problem with this plan is your pension is not keeping up with the cost of living, let alone the cost of long-term care.

The other issue is investors tend to shift more assets into conservative holdings as the years go by because the time comes when you just can’t afford a major hit to your savings. So as you can imagine, this puts many of you in quite a jam. So what’s the solution? One way to protect your net worth from crushing long-term care costs is to buy an LTC insurance policy outright. The good part about this is if you continue paying your premiums, you’ll be protected from a major financial tsunami. The bad part is that the insurance company can raise costs at any time if there’s a business need to do so. Also, many of you are well aware of the need for long-term care insurance because you’ve seen your own parents get sick or deal with a chronic injury. The cost of insurance however, turns many of you away. The most common argument against buying a policy is that it costs too much and it may never even be used. These are legitimate concerns and while it’s true that paying $1,500 – $2,000 annually per person may seem expensive, it’s simply because the cost of actual LTC can range from $18,000-$90,000 or more per year†! Of course, insurance companies have to charge enough in premiums to pay the LTC benefits.  After all, insurance companies HAVE to have your benefits available.



In my book “The Public Sector’s Ultimate Guide to Protecting Your 457 Plan from Crushing Long-Term Care Costs” I show readers a strategy on how to use the income generated from a 457 plan or other savings to buy an LTC policy. If your investments continue to go up in value, then theoretically you should be able to produce more income which may be needed if your LTC insurance premiums goes up.

Another strategy is to buy a “paid up” LTC insurance policy, but the major drawback here is that you could be looking at putting down $75,000-$150,000 for such a policy. The good thing is once you’re paid up, you have no more payments. That’s it. There are no more premiums so you can begin to quickly replace the assets that you just shifted to your policy. This, for many people is understandably not doable, so where does that leave us?

A very powerful and effective yet very underused strategy is to use your deferred comp assets, other savings, or an annuity to generate the income needed to buy a life insurance policy. Ideally, to make this strategy work, you buy a permanent life insurance policy with lifetime benefits (I’ll explain what these are in a moment) with the income generated from your 457 plan, savings, or annuity. The benefits here are many:

  1. You’re making your assets actually work for you while keeping them very safe (with an annuity) or relatively safe (using low-risk investments in your 457 plan).
  2. When you pass away, the life insurance company will pay your beneficiary the face value of the policy e.g. $300,000.
  3. If you need chronic care , you can dip into the life insurance policy to protect your assets from the crushing costs associated with your chronic illness. Notice however that I didn’t say long-term care costs. There’s a major difference between LTC and chronic illness.

In order to qualify under most long-term care (and life insurance with living benefits) policies, you have to be unable to perform two of the six activities of daily living (ADLs). To qualify for benefits under an LTC policy, your doctor has to certify that you can’t perform two ADLs for a period of time. To qualify for chronic illness benefits attached to a permanent life insurance policy, your doctor has to certify that you will be chronically ill or impaired for the rest of your life.

For many of you who have thought about buying long-term care insurance, but are put off by either the cost or the chance of paying for a policy that may never pay off, using a life insurance strategy with living benefits is an ideal solution. The reason is that when you pass away, the value of your estate balloons and your family ideally will not suffer financially. Even better, you’re able to leave a legacy for your kids or grandkids which may include something like college tuition or a lump sum for a down payment on a home. Secondly, if you happen to need care for a chronic illness, you simply dip into the face value of the life insurance policy thereby avoiding spending down your 457 plan assets or other savings.  This obviously means more assets go to your family.   And finally, if you generate enough income to pay the life insurance premiums, you’re not pulling money from your monthly pension or Social Security payments, which means more money for you to enjoy life with!

The bottom line with using the life insurance with living benefits strategy is the assets that you worked so hard FOR will finally be working hard FOR YOU, all the while protecting those very same assets. And if you don’t need to pay for chronic care, then the entire face value of your life insurance policy is paid to your family.  In case you do need chronic care, it’s nice to know you have a large pot of money to dip into!

*  2014 Medicare & You, National Medicare Handbook, Centers for Medicare & Medicaid Services, September 2013

†John Hancock 2013 Cost of Care Survey

Securities and advisory services offered through Ausdal Financial Partners, Inc.  Member FINRA/SIPC 5187 Utica Ridge Road Davenport, IA 52807    563-326-2064  Public Retirement Planners, LLC and Ausdal Financial Partners, Inc. are separately owned and perated.

One response to “Solved! The LTC Rub”

  1. Trisha steele says:

    Hi Sev, this is interesting. Can you provide an example with numbers? At what point does this make sense; how much do you have to earn thru the 457 in order to implement this?

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