If you’re thinking about retirement, the odds are you’re not too old to think about long-term care insurance. Since this is not (yet) a common policy for people, I thought I’d give you a peek at the policy I recently purchased.

How Does Long-Term Care Insurance Work?

My wife and I recently purchased a long-term care insurance policy. We don’t have kids to rely on in our old age, and we don’t live near any other family who might help out. Plus, there’s no guarantee the people related to you will help you.

There are plenty of types and options for long-term care insurance. Our policy is a pretty lengthy contract, but here’s the gist:

  • We pay an annual premium.
  • If one or both of us have dementia or any two of several other disabilities, we have access to the policy’s cash benefits.
  • There is a maximum monthly benefit and a maximum total benefit.
  • The cash benefits can be paid to service providers and paid directly to us to cover nursing homes, in-home medical care, and assistance in daily activities.
  • The benefits are tax-free.
  • Our premiums can go up.
  • If we don’t use the policy during our lifetime, we lose it, just like our car insurance.

Converting a Taxable Investment Into a Tax-Free Contract

To pay our annual policy premium, I’m using the dividends generated from a taxable investment account. In this way, I’m leveraging a taxable investment to purchase a tax-free contract, in part to control the risk posed by poor health.

My dividends might not be enough to pay the entire premium every year. I’m fine with that. I can sell a few shares from the underlying account to make up the difference. That helps me spread out my tax bill on this account. I still get the benefit of underlying growth in the share values.

We could have chosen monthly premiums but decided the annual plan was easier to manage since we’re paying using dividends collected throughout the year. Plus, the annual plan gave us a discount.

Our insurer offered a compounding option, which we took, for a small increase in the premium. Our benefit amount will grow by three percent each year. With our economy’s recent track record of low inflation, this compounding could outstrip inflation and provide real growth.

Why Not Buy Life Insurance?

More people buy life insurance than long-term care insurance. We decided to go the other way, for several reasons:

  • Life insurance mainly supports your dependents after you die. We don’t have dependents.
  • My wife’s employer provides a small life-insurance policy as part of their employee benefits. We don’t need to buy more.
  • We’ve named each other as beneficiaries on all our various accounts. We figure if one of us passes away, the other will have enough to live.
Introduction to Long-Term Care Insurance
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2 thoughts on “Introduction to Long-Term Care Insurance

  • June 25, 2019 at 8:25 am
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    Most contracts have an exclusion provision that says you have to pay the first 3 months or so of long term care before the policy kicks in. Does your policy have such a feature?

    How did you chose the insurance company? A financial planner friend of mine no longer sells these policies since his clients have had a hard time making legitimate claims on the policies. I would think the insurance provider is just as important as the policy terms.

    Reply
    • June 25, 2019 at 9:43 am
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      I found an agency that specializes in LTC, I think through an article that you sent me. He represents two well-established companies. We ended up choosing the company that the agent says he personally uses, Mutual of Omaha.

      As explained to us, it is our healthcare provider who certifies to the insurance company whether we have dementia or two of the other qualifying conditions needed to access the policy.

      We didn’t need to think about minimum number of monthly payments, since we paid an annual premium.

      Reply

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