You've worked hard all of your life, and it shows. Your kids have finished school, the mortgage is almost paid off, and you and your spouse are both healthy and looking forward to retiring. You've even managed to amass a comfortable nest egg to live on once you stop working. It should be smooth sailing from here on, right? Not necessarily. The average American is living longer than ever. Yet more and more elderly people find themselves spending time in a nursing home — often at great cost. A recent study showed that 40% of the people who turn 65 each year will spend some time in a nursing home. And long–term care does not come cheap–while costs vary widely from one part of the country to another, the average nursing home costs $60,000 a year. What you may not be aware of is who usually pays for the cost of long–term care.("Some Observations About the Senior Citizens' Freedom to Work Act of 2000." Journal of Financial Service Professionals, January 2001.; Jefferey Steele, "How to Shop for Long–Term Care Insurance", Chicago Tribune, June 19, 2001, Page 5.)
The single largest payer of long–term care costs is the federal government. In 2000, Medicaid paid about 48.1% of all long–term care costs. However, Medicaid recipients contribute most of their income–most of which comes from Social Security payments–toward their cost of care. Middle–income Americans become eligible for Medicaid only after spending down their savings to meet strict eligibility guidelines. Medicaid may also reduce your options as to the type of care you receive, and when and where you receive it. Medicare, on the other hand, pays only about 11% of long-term care expenditures, and limits these services to short stays in a nursing home following a hospital stay.(Best's Review, April 1, 2002.; Benefits Quarterly, Second Quarter 2002.)
This means that the remainder of the costs are paid by private sources, either out of pocket, or by insurance companies. Many people, whether they know it or not, accept the risk that if they need long–term care, they will have to dip into their nest egg or their children's inheritance to cover the cost. When you buy long-term care insurance, what you are doing is shifting that risk to an insurance company.
How Does It Work?
In a traditional long–term care insurance policy, you pay premiums to an insurance company and the company promises to pay a daily benefit to help cover the cost of long–term care, should you need it. The amount of the daily benefit, the length of time the company will pay, and other factors vary by policy. If you do wind up needing long-term care, the policy can help defray the cost. If you do not, the policy may include a return of premium feature if you die without using any benefit. But the typical policy will not develop any cash surrender value.
Blended Insurance Products
Recently, a new kind of insurance product has been developed, blending the benefits of life insurance with the protection of long–term care. The concept is quite simple and creates a win–win situation. When you purchase a blended insurance policy with your lump sum premium, you purchase a universal life insurance policy which will pay a death benefit to your heirs. Should you require long-term care, this death benefit can be accessed to help pay for the cost. The policy also accumulates cash value, tax–deferred. Any amount of death benefit that is not used to pay for long–term costs is passed on to your beneficiaries as life insurance proceeds–generally free from federal income tax.
Planning Ahead–How a Blended Policy Works
Mr. Jones has worked hard all of his life, and decides that it is time to retire when he turns 60. The combination of his social security benefit and his pension will allow him to live comfortably. Among his other assets, he has $50,000 put away in a bank CD. He does not need this money to live on, and likes the idea of passing it on to his daughter after his death.
Mr. Jones is aware, however, that if he were to need long–term care, the cost could deplete his assets quickly, leaving nothing for his daughter. Though he is healthy now, he has seen how the cost of long–term care has affected some of his friends. After consulting his insurance agent, Mr. Jones decides to use the money in his CD to purchase a single premium blended insurance policy from New York Life Insurance and Annuity Corporation — NYLIAC Asset Preserver®*. His $50,000 premium buys approximately $94,575 worth of coverage. Mr. Jones is comfortable knowing that, were he to need long–term care, he would be able to use $3,940 a month from the policy for at least two years to help defray that cost. Additionally, if he does not use the long–term care benefit, the death benefit will pass to his daughter, as income tax–free life insurance proceeds. Finally, if an emergency arises and Mr. Jones needs immediate funds, the flexibility of NYLIAC Asset Preserver® will allow him access to the policy's cash value through partial withdrawals and/or policy loans. As you can see, the NYLIAC Asset Preserver® policy is a valuable piece of Mr. Jones' financial picture. (*Issued by New York Life Insurance and Annuity Corporation (A Delaware Corporation), a wholly owned subsidiary of New York Life Insurance Company.; Values are examples only. Actual values vary according to age, gender, health, initial premium, and options selected. Ask your New York Life agent for an illustration based on your situation.; Amount of death benefit will be affected by interest credited, and any loans or partial cash surrenders taken.)
A blended insurance policy can be a powerful tool in helping to defray the costs of long–term care. Of course, this type of policy may not be right for everybody. It is important to discuss your specific situation with a representative who can recommend a long–term care insurance solution to help meet your unique needs.
Please note: Partial cash surrenders and loans may be taxable, and partial cash surrenders may also trigger a surrender charge. Loans accrue interest. Benefits may be reduced when loans and/or partial cash surrenders are taken. Monthly administrative charges and cost of insurance charges are deducted from the policy's cash value each month. Because taking loans or partial cash surrenders reduces the policy's cash value, it is important to make sure that the policy's cash value is sufficient to pay all monthly charges
Asset Preserver is not available in NJ and NY
13764MD(01/04)/ SMRU 281199CV(01/04)
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