October 13th, 2007
Regardless Of Your Post-Employment Plans, Seek Out A Policy For Long-Term Care - Brief Article
DON’T THINK THAT RETIREMENT IS ALL ABOUT TRAVEL and leisure. As you grow older, you could become frail and dependent upon others for constant care. If you need to go into an institution or hire professional home-care aides, the stratospheric cost could wipe out the retirement fund that you worked so hard to build.
That notion has been a concern for 56-year-old Ronald Henderson, Ph.D., who resides in Upper Marlboro, Maryland. Henderson, the director for the Washington, D.C.-based National Education Association, and his wife, Inez, have built up their nest egg through their respective company-sponsored plans. He has invested in the Vanguard family of funds, including its Capital Opportunity and Primecap offerings. Inez, a 56-year-old educator, has stashed away a portion of her dollars in the equity and fixed-income funds in her 403(b) plan.
So, to protect himself and his wife, Ronald, a self-professed golf enthusiast, instead of dreaming of golf courses in faraway places, has been clipping articles on long-term care. He is actively shopping for a policy so that, if necessary, he and Inez can receive top-notch health care. “If you’re going to rely on the government, you’ll have to spend down all of your money first,” he says. “There’s a big hole in the safety net.”
Indeed, falling through the hole can be downright catastrophic. For example, experts say that nursing home costs can grow to $4,000 to $5,000 per month in the Southeast and even higher in other parts of the country. Where is the money to pay for the home going to come from? Out of your pocket. Or maybe your children will have to foot the bill, putting a crimp in their retirement savings plan.
Your key to fighting the danger of rising health costs in the future may be long-term care (LTC) insurance. Financial planner Edward Fulbright tells his clients that they don’t have to wait until they’re senior citizens to consider purchasing an LTC policy. “If you buy before age 70, these policies can be affordable, perhaps $1,500 or $2,000 per year,” he says. “With a good company, those premiums will remain constant over the years. After age 70, though, premiums become much more expensive.”
In fact, his 37-year-old wife, Genevia, a CPA and business advisor, says she purchased an LTC policy several years ago. “I’ve had one since I was 30,” she says. “I did some volunteer work in a long-term care facility, so I saw the need for this coverage. I also saw how much it costs. One of our elderly clients is paying $6,500 per year for coverage. Since I bought a policy when I was so young, I’m paying under $200 per year.”
Besides timing what other factors should you consider when shopping for an LTC policy?
QUALITY OF THE INSURANCE COMPANY
Experts say you should do your homework and buy a policy only from an established company in excellent financial condition. John Haslett, a long-term care insurance specialist in Reston, Virginia, agrees. He advises consumers to choose a nationally recognized insurance company that has not raised rates for existing policyholders. “Some companies have made honest mistakes and priced their policies too low,” Haslett says. “Claims have been higher than expected, so they’ve had to raise premiums. Other companies have used bait-and-switch tactics, enticing consumers with prices they knew would be raised in the future. Either way, you should avoid the companies that have increased premiums in the past.”
Haslett mentions companies such as GE, John Hancock, Transamerica, and Unum as financially sound industry leaders that are likely to maintain premiums. “Insurers like these don’t want to attract negative attention in the media nor do they want to trigger adverse legislation,” he says. “Therefore, they can’t afford to be too aggressive in raising rates, so it’s likely that your initial premium will remain fixed.”
INFLATION PROTECTION
“Your policy should have an increasing benefit,” says Fulbright. “You might buy a policy that pays $100 per day but, by the time you need care, which might be 10 years from now, that $100 won’t cover the costs.” A sound policy, he says, will increase that benefit each year, so it might pay $150 per day when the policyholder is in need of care.
FULL COVERAGE
Home care is now as expensive as institutional care, so your LTC policy should pay benefits in either situation. An exception to the rule is single women–especially widows–who live alone. They are probably better off in a facility if they need care. Home-care aides can present a huge security risk to these women since background checks on these workers are rarely performed.
Since single women may be better off in a nursing home or assisted living facility, they might as well buy an LTC insurance policy that covers only facility care. Such policies are usually 40% less expensive than those that cover home healthcare.
TAXES
Before buying LTC insurance, consider the tax consequences. “Federal law permits deductions for the premiums in some cases, but only 4% of all taxpayers will qualify,” says Haslett. “Therefore, at least 30 states offer tax breaks of their own. Often, you can take state income tax deductions for the premiums not deductible on your federal tax return.”