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How To Get All Your Long Term Care Premiums Back If You Never Need Long Term Care

 

Insurance that gives premiums back if the policy is never used? What’s with that? In the long term care market place this is a reality. Here’s a typical situation…

John and Betty are in their mid sixties and recently retired. John was the sales manager for a local store which sold business machines in their area. Betty was a paralegal for a prominent firm in town.

Their home is all paid for. They have been good savers and have $400,000 invested in a combination of mutual funds, IRAs and stocks. And they have a $125,000 raining day CD down at the bank. They don’t owe anyone a dime and are darn proud of it.

They have both worked hard and what they want to do now is have fun, travel and spend time with their grandchildren. When it is all said and done, they want to leave their estate to their three kids.

One of the things that could throw a monkey wrench into their plans is, at some point in their remaining lives, is having to go into a nursing home or needing to receive some form of assisted living.

But, even though they realize this is an eventual reality, they do what most people do: retreat into denial. Their reasoning is, “We are in good health—we’ll never need to worry about long term care” and “Why should we pay all those premiums for a long term care policy when it’s like throwing money out the window?”

However, their objectives of spending their hard earned money on having fun and eventually leaving their estate to the three kids could be what goes out the window.

Long Term CareNursing homes are expensive—about $70,000 a year. You don’t need to be an economist to see that this figure will increase as time goes by. There are 70 million baby boomers right behind them. It’s just simple supply and demand—nursing home facilities may not be able to be built fast enough.

So here is one solution for them to look at that can leverage what they have by providing more funds for long term care if it’s ever needed while passing all the funds used to pay for this protection to their kids if long term care is never needed. Here’s how…

When asked, John and Betty both agree that if any type of long term care is needed (home care, assisted living, a nursing home) the first money they would tap would be their $150,000 CD. That may not last very long, so here’s what they can do…

They could transfer the CD into a special kind of long term care policy. In very simple terms, here’s how it would work for them:

  1. At their ages, this buys them somewhere around a $300,000 second-to-die life insurance policy.
  2. The policy pays dividends which buy more insurance each year, so the death benefit increases.
  3. The $150,000 they put in grows at an annually-set interest rate based on market conditions. And it accumulates on a tax-deferred basis, unlike their CD.
  4. The policy has a “worst case” guaranteed interest rate, no matter what.
  5. If they ever need to tap the money, i.e. for emergencies, they can.

Now, here’s where the long term care benefit comes in:

  1. If either or both of them ever need long term care, they can start drawing down on the policy at somewhere around 2% per month. But not 2% of the cash value, 2% of the death benefit! In this hypothetical example, 2% of $300,000 is $6,000 a month. And keep in mind that the death benefit increases each year—so by the time they may need to use the policy for long term care, it could be substantially more.

And here’s the icing on the cake (and what sold John and Betty on this approach):

  1. If they never need long term care, the policy is paid to their kids at the second of them to die—whatever it has grown to at that time—and all tax-free.

There are a lot of applications and scenarios of this approach to covering the long term care base I will cover in future articles. But this gives you a basic overview of the concept.

 

 

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