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Who needs long-term care insurance?

As I See It

One of the by-products of modern medical advances is that we are living longer. Though living longer is a good thing, outliving our financial resources is a very real concern. The insurance industry has developed a product to address our increased longevity. The longer we live, the more likely we are to spend some of our twilight years needing nursing care.

How will we pay for long-term nursing care? Many Americans mistakenly believe that Medicare covers nursing home and in-home medical expenses. Wrong. Medicare doesn’t cover these expenses on a long-term basis.

For this reason an increasing number of Americans are turning to long-term care insurance to buy peace of mind. Though the product has been somewhat slow in catching on, about six million policies were sold during the 1990s, reports LIMRA International, an industry research organization. That’s triple the number sold prior to the 1990s but still represents a miniscule percentage of the growing gray-haired population.

Why aren’t more people buying long-term care insurance? Probably cost and unwillingness to face our own mortality. Cost is a legitimate consideration. Most buyers are in their 60s and the premiums are pretty hefty by that age. A standard John Hancock policy, for example, providing a maximum daily benefit of $125 for a four-year term would cost $1,238 annually if purchased at 55. Wait until 60 and the premium rises to $1,638. Further procrastination until 65, results in a premium of $2,175. Hold out until 75 and the freight rises to $4,838.

If you won’t need it, paying anything is a waste of money. But how do we know if we’ll need it? Well, maybe a little analysis would help. First, we need to determine the likelihood of needing nursing care in our later years. If there is little likelihood of needing the care, then buying long-term care insurance is a waste. Just how one can make such a determination I’m not sure, but some say they can. So be it.

If we deduce there is a reasonable possibility that extended nursing care may be needed, then the next question is how the tab is to be paid. How much does it cost? According to John Hancock, the average nursing home stay is between two and three years at a daily cost of around $100. Going long in our analysis, it would cost $36,500 per year, or $146,000, to receive nursing care for a four-year period at $100 per day. This is the part that makes accountants eyes light up.

Total your projected retirement income — Social Security plus pensions and earnings on investments — and compare the total to $36,500 plus your ongoing expenses that would continue while you were under care. If this exercise produces a comfortable surplus cash flow, you don’t need long-term care insurance. If not, you can resolve the problem in one of two ways, depending on your age.

First, you can begin saving and adding to your investment portfolio with view to accumulating sufficient funds to handle any medical eventuality that might arise in later years. Otherwise, you might consider purchasing long-term care insurance.

If your analysis indicates that you are a prospective insurance buyer, there is some good news on the horizon. There is soon to be a bill before Congress to modify the tax law to allow some relief for long-term care insurance buyers. The measure is said to have bipartisan support and would allow an income tax credit of up to $3,000 for caregiving expenses and/or a deduction for long-term insurance premiums.

If you are a candidate for long-term care insurance when you buy is important. The younger you are the lower the annual premium but the more you will pay over the years. However, waiting too long could make the premiums so expensive as to be unaffordable. The better choice is to add sufficient funds to your investment portfolio to avoid the necessity of buying the insurance at all.

Thought for the Moment — In the depths of winter I finally learned that within me there lay an invincible summer.

— writer Albert Camus (1913-1960)

Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at cpajones@msbusiness.com.

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