Long Term Care – The Alternative Investment

When would you have thought that long term care insurance would be considered an investment?  For high net worth individuals, utilizing long term care insurance has very solid investment characteristics due to:

1)  the huge dollar upside if extended care is required; and

2)  little or no cost if care isn’t required.

In addition, many advisors feel long term care insurance can be used to reduce estate taxes and transfer wealth on a very tax-advantaged basis.

If preservation of wealth and minimization of taxes is a goal, then serious thought should be given to acquiring and having long term care insurance in one’s portfolio.  According to the Department of Health and Human Services, out of every 100 individuals living beyond age 65 20% will need care from two to five years and another 20% will need care for more than five years.  This equates to a 40% chance for a husband and wife that one of them will require care for some period of time beyond age 65.  The problem with continuing advances in medical sciences is that longer life expectancies will occur and are occurring today.  In addition, diseases and injuries that used to be fatal will instead now cause disabilities.  More alarming is the fact that 21% of all women who have attained age 65 will have some form of Alzheimer’s (AD) at some point during their lifetimes and 14% of all men will also have some form of cognitive impairment.  Further studies indicate that people age 65 and older with a cognitive disability will survive an average of four to eight years once the disease has been diagnosed.  Some will even live as long as 20 years.

The cost of long term care needed for extended periods of time can run into the millions of dollars.  The current cost of a private nursing home room can run in excess of $160,000 per year.  While the current annual cost of 24/7 home care needed for a cognitively impaired patient is in excess of $175,000 per year.  More alarming is that since 2004 the cost of long term care has grown at the rate of 4.7% to as much as 47% depending on the type of care required.  If you do the math, eight years of care due to a severe injury or disease beginning in 2011 with a current cost of $175,000 per year could be as much as $1,612,000 utilizing a 4% inflation rate.  If you project out 20 years from now at the same 4%, those costs might be as high as $3,397,000.

These are the hard dollar costs.  If you were to examine the soft dollar costs, you would realize that every dollar spent for long term care is a dollar that has been lost in investment return.  Those investment losses can be significant and may even equal the cost of the care itself.

If the dollars for the cost of care are drawn from a qualified retirement plan, then the distributions will then be subject to income taxes at the highest bracket.  As an example, if one needs $175,000 and must take this money from their retirement plan they would need to liquidate $291,000 in retirement assets, assuming a 40% federal and state marginal income tax rate, in order to have the needed $175,000 for care..

The worst case scenario would be those high net worth individuals who have an illiquid estate and must now start to liquidate assets in order to provide for care.  Those assets which need to be liquidated could be real estate or stocks in closely held corporations.  This forced sale of these types of assets often involves a deep discount and significant losses.

Enter long term care insurance to solve the investment risks.  It is possible today to purchase a long term care policy that will return 100% of premiums plus interest at a current gross crediting rate of 4% guaranteed if one does not need to use the monies invested in the long term care policy for care.  Naturally, any benefits that are used will reduce the amount returned at the time of death or surrender of the policy.  Therefore, the only cost of the long term care insurance if care is not needed becomes the opportunity cost of the money, i.e. the earnings the premiums and/or the repositioned assets could have generated had they been invested.  However, this is offset by the guaranteed crediting rate of 4%.

In addition, the US government and many states allow for a tax credit and/or deduction against premium payments made.  Thus, if viewed as an investment the policy has the capacity to supply millions of dollars in benefits while the cost is limited to the opportunity cost of the premiums.

Why is it that more than 90% of those eligible to purchase long term care choose to self insure?  The reason is that most of the policies sold today are non-guaranteed annual premium policies.  The rub is, if you do not need care or utilize the policy, then all of the premiums will have been lost; therefore, when considering long term care insurance it is imperative you seek out a policy which will

1)  guarantee that the premiums will never increase;

2)  provide an interest crediting rate on the monies deposited to pay the premiums;

3)  have a 100% return of premium if the policy is not utilized or a return of unused premiums if part of the policy is used to pay benefits;

4)  provide additional leverage of a death benefit in addition to returning the unused premiums with interest.

If the above parameters are followed, then the only cost to protecting potentially millions of lost dollars due to extended care is the opportunity cost of the money transferred.