A few weeks ago my wife and I celebrated our 23rd wedding anniversary. But being a married couple who always do things a little differently, we didn’t go out to a high end dinner at a fancy restaurant. We celebrated by having breakfast at June’s Café in Heber. While chowing down on their always excellent food we got to chatting with the middle aged couple sitting next to us. When we got to the subject of what we do for a living I mentioned that one of my jobs is to write a financial column for the Mogollon Rim News. It was then that the subject turned to all things financial and investment related. After a while the subject turned to long term nursing care insurance.
Now I realize that the subject of insurance of any kind is incredibly boring to a large segment of our population. It is, however, a subject that has to be discussed and addressed sooner or later with all individuals regardless of their financial situation. With the ageing of our baby boomers, the prospect of them needing long term nursing care later in life is slowly coming to the forefront of many financial and investment related discussions. I have been involved in many consultations with client and prospects where they have a good idea of what nursing home care costs but are in denial as to how to pay for it. Good nursing homes are extremely expensive and can drain an elder’s assets down to nothing in a very short period of time. My own mother who recently turned 90 is in a home that provides memory care as she is suffering from dementia. The cost is $8000 per month! Fortunately she has substantial assets and can afford the bill. But in my experience, this is more the exception not the rule.
But what to do? This is where I feel there is a great deal of dated information and misinformation circulating about long term nursing care insurance.
For many decades long term nursing care insurance policies were, at best, a poor solution to the problem. Some of the drawbacks to these policies are as follows:
- You had to purchase the policy at an early age thus forcing you to pay into them for many many years.
- The premium payments were extremely high.
- If you died before going into a nursing home, the coverage was voided. The insurance company kept the premiums you paid and your heirs got nothing.
It was for these reasons that the couple that my wife and I met at June’s were told by their investment advisor to stay away from long term nursing home insurance policies. At that point they had finished their meal and said their goodbye’s.
So, what is the correct information regarding long term nursing home insurance? First of all, the policies of roughly a decade ago have been mostly phased out. The new policies that are available have benefits that give the client a lot more flexibility in how they fund the coverage and how they collect the benefits.
To begin with there are policies that have issue age cutoffs at age 80, so you do not have to start making payments in your 30’s or 40’s. Also in addition to making premium payments, the client can contribute a lump sum to the policy.
The best benefit that these new policies have in my opinion is that if you don’t use the policy, you don’t lose it. You can have your payments or lump sum refunded back to you or your heirs with interest. There is of course a holding period of several years that the money has to stay in the policy.
Let me give you an example. A client age 60 who has a $30,000 lump sum to put into a policy can invest that sum and earn a nominal rate of interest. However, if he has to go into an assisted living facility the policy will pay up to three times the amount invested to that individual or $90,000 in benefits. This individual can also, (but is not required to) add to the policy or leave it as a one-time lump sum payment.
But what if this individual dies before going into a nursing home or simply decides that he no longer needs it? With the new policies the client can cancel them and take their cash or leave it to their heirs as part of their estate.
In my experience I have run across many middle aged couples who have money set aside in a savings account or certificate of deposit at their bank and will not put it in the securities markets. This is their ‘rainy day’ fund, just in case an emergency pops up. With a long term nursing home policy they can shift those funds into it, earn interest, still keep it as a rainy day fund if they need it and have up to three times that amount invested as a benefit.
So if your investment advisor tells you to stay away from long term nursing home insurance policies, I highly recommend you keep an open mind and take another look.
If you have any questions regarding this article or other financial issues, feel free to call me at 480-296-9556.
Vice President, pwa
Financial Advisor, RJFS
4111 E. Valley Auto Dr. #104
Mesa, Arizona 85206
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