Your clients may have chosen to retain the risk and responsibility of funding future long term care costs. While it may appear that they can financially afford to do so, is this strategy prudent? Is this plan consistent with their retirement portfolio objectives? And can a long term care event be absorbed soundly within their existing portfolio?
A risk management tool
If not, then consider LTC insurance as a risk management tool that can help protect clients’ assets and enhance the probability they will meet their portfolio objectives.
It is a life insurance professional’s responsibility to help clients recognize that LTC insurance is an important of part of a retirement portfolio. Increased media attention is helping to educate on the rapidly rising cost of long term care and the growing importance of being financially prepared for this potential expense. LTC insurance can transform a potentially huge negative impact on one’s assets (e.g. the cost of a LTC event) into a manageable stream of premium payments, transferring this risk to the insurance company.
Though a client may understand the risk management advantages of owning a LTC insurance policy, an objection I frequently hear is that retirees do not want to have the burden of paying the policy premium indefinitely into their retirement years. However, clients can dedicate a portion of their retirement assets–allocating a part of their retirement portfolio now–to cover this risk. How can this be done? Read on…
Lifetime income annuities
Many high-net worth clients diversify their portfolios by investing in a combination of money market accounts, stocks and bonds. Over the past two years, lifetime income annuities have also become an increasingly popular staple of a well-diversified retirement plan.
The products provide income for life or for a specified term. This further diversifies a portfolio by helping protect the client from longevity risk (the risk of outliving one’s money.) Moreover, the benefits are calculated off of a one-time premium payment, eliminating the burden of regular contributions.
You can extend this technique to allocate a portion of retirement assets to LTC needs, while reducing the large contingent risk associated with doing it yourself. Thus, you can use a lifetime income annuity to fund future LTC insurance premiums. You cannot guarantee that you will cover all future premiums (since LTCI premiums are not guaranteed) but you can cover most reasonably expected premiums.
Consider John, a 65 year-old client, who is retired and wealthy. John purchases a lifetime income annuity for $500,000 that would produce a monthly payout of $3,009, which would be $2,749 after taxes for the duration of his life. (Only a portion of the GLI payout is taxed. Example assumes that the client is in the 28% tax bracket.)
If John were to purchase a LTC policy, with 100% in-home care, a $300 daily benefit for a 5-year term, and an inflation rider (a guarantee to adjust to the Consumer Price Index annually at no additional premium cost), it would cost him approximately $691 monthly.
John can direct a portion of his lifetime income annuity payments to pay the LTC insurance bill. By doing so, John avoids the burden of another expense. He preserves his estate in the case of a LTC event and has inflation protection.