Long Term Care Deposit Products vs. Traditional Long Term Care
Long Term Care insurance provides needed Protection against the costs of home health care, Skilled Nursing care and institutional care. While there are a number of reasons to purchase a Long Term Care Policy, one of the most important is to protect hard earned assets. If some form of care is needed, the LTC policy will help to cover the additional expense associates with that care and alleviate the need to spend assets in order to cover the cost.
While it is a needed benefit for many, LTC does have drawbacks. The first is the prohibitive cost of the policy. LTC premiums can represent a substantial investment over time and is increasingly expensive for those who purchase it later in life. A second drawback is the risk of carrying the policy for years to ultimately never use the benefits. There are some LTC plans that provide a return of premiums feature but they are restrictive and full of exceptions.
LTC deposit Strategy (Using Lincoln Money Guard or similar product)
An LTC deposit strategy will also protect assets against the cost of Long Term Care and offers major advantages over a traditional LTC policy. The deposit program uses a portion of the invest-able assets as leverage in the event future Long Term Health Care expenses are incurred.
The money is deposited in a non interest bearing account. In the event that Long Term Care is needed, the money is leveraged by a multiple to cover the cost of care. If Long Term Care is never needed, the account will pay out as a leveraged death benefit. Finally, if the money is needed for some other purpose, it can be withdrawn from the account any time without penalty.
We will use a 65 year old female as an example of how the strategy works
•65 Year old female has $100,000 in a CD or other investment. She has no long term care or has long term care and is paying a high premium for it.
•She can deposit $100,000 into the account which will leverage to provide $435,666 of long term care protection if it is needed. This leveraging starts from the first day the money goes into the account.
•In the event she passes on some day without the need for Long Term Care, the money would be paid as a non taxable death benefit of $233,128.00.
•The $100,000 could be returned to her at any time without penalty in the event her priorities or situation changed causing a need to utilize the money in a different capacity.
If she purchased a traditional Long Term Care policy, the annual premium would cost approximately $5,000 a year. She would need to earn 5% on her $100,000 in order to provide the premium payment. In today’s rate environment, it would not be possible to secure a fixed rate at 5%. She would also most likely give up flexibility with the lump sum in an attempt to generate the revenue to pay the LTC premium. Lastly, there would not be leverage provided in the event of early death and a portion of the non qualified account would most likely be taxable.
The final flaw with a traditional LTC policy is the money she may spend on premiums without ever needing long term care. If she lives to her actuarial life expectancy and then passes on without ever needing Long Term Care, she will be paying a large sum of money needlessly. Annual premium multiplied by the number of year s in her life expectancy ($5,000 x 21) would add up to $105,000.00 of premiums paid without any benefit.
The deposit strategy cannot be utilized by everyone since there needs to be accumulated assets that can be dedicated to the account. For those that have the funds available, this strategy will result in premium savings and added flexibility over Traditional LTC plans. One factor to keep in mind is that the products such as Lincoln Money Guard are not state partnership approved which can be a negative depending on your specific situation.