 |
|
|
"You Know You're Rich When--'you don't need long term care insurance'--"RE: "You Know You're Rich When--'you don't need long term care insurance'--" Getting Going / By Jonathan Clements, The Wall Street Journal Sunday, Orange County Register, March 13, 2005Dear Mr. Clements, If I read your article correctly, another premise is that any individual rich enough to self-fund care should skip LTC insurance. This is a continuation of your item 11 in your January 16, 2005 article, "Why It's Good to Be Rich" (requires wsj.com subscription). In it you state, "Because you and your spouse will each be worth well over $1 million at retirement, you can skip long-term care insurance and instead plan on paying your own nursing-home and home-care costs." Your premise to self-fund care costs is not unique, but why shouldn't wealthy individuals consider insurance if it is more cost effective? In reality, affluent and executives now constitute important LTCi markets. This is likely due to a growing awareness of LTC financial risk, current tax code opportunities, more substantial insurance companies in the business, improved products, and more effective analytic tools. The following scenarios illustrate that LTC financial impact is far greater, and insurance less costly, than most people realize. For example, in the first scenario, let's use your $70,000 annual ($192 daily) care cost figure. This is approximately today's national average for private room nursing facilities. Let's assume an age 55 individual purchases a policy with benefits of; 30-day deductible; $192 daily benefit; 5% inflation; 5 year benefit period; and annual premium of $2642 to age 80 when care begins. Additionally, we'll assume money for care and premium would otherwise have remained in an investment portfolio earning 4% after tax. At age 80, when care begins, after receiving claim payments for about 6 months, the insured will have received back from the insurance company an amount equivalent to all premiums, plus loss of investment opportunity on premium paid over the 25 years since age 55. If insured needs care for one year, the cost of the care event without insurance will be $258,000. If five years care, cost without insurance will be over $1.5 million versus $137,000 with insurance. In the next scenario, we'll look at affluent clients and those living in higher cost areas whom are currently paying $300 and much more for 24/7 home care or high quality facilities. At $300 daily or $110,000 annual cost growing at 5% inflation, a five- year care event starting today will cost $605,000. Cost of care is only the beginning of the financial impact on family wealth. Given the following assumptions, impact on the estate will be over $1.0 million today. Assumptions are: 10% asset liquidation or tax cost; 4% loss of investment opportunity on funds during the 5 year care event; and, financial impact on a surviving spouse who lives 4 years beyond the care event. The $1.0 million is if care starts today. Projecting a future care event with the same assumptions, except inflation, the impact on the estate grows to $3.0 million. Care costs historically exceed CPI inflation rates and are expected to continue that trend. Estimating 6% inflation, the current $300 daily cost will be $1000 in just 22 years at which time a current age 55 will be age 77. In future dollars, starting care at age 77; the negative impact on the client's estate reaches $3,000,000 versus about $300,000 with insurance. The insurance includes coverage for both client and spouse, but only one is assumed to need care. The premium and investment opportunity cost for both policies would be recovered after 280 days of claims for one insured. The Internal Rate of Return on premium and claim cash flows is 17 % and Net Present Value is $696,000. If both insured needs same amount of care, the cost of care without insurance doubles to $6.0 million. It seems WSJ readers, presumably including the countries largest cohort of corporate executives, would appreciate knowing or being reminded the LTCi policies could have been funded with corporate tax- deductible premiums. In that event, the policy premiums and all future benefits could have been income tax free to the executive and spouse. Rather than multi-million dollar estate erosion, the insurable portion of the five-year care event could have had no impact on the executive's estate. Instead of, "Are you 'rich' enough to not need insurance?" Perhaps the question should be; "Have you run the numbers to accurately determine if insurance is a good business decision? As illustrated above, your readers, particularly those with substantial resources, may find insurance the most cost effective way to fund future care events. The exhibit following this note includes key financial projections based on $70,000 annual care cost used in the first scenario. It illustrates economic impact of a future one-year care event and a five- year event, without insurance and with insurance, for a single individual. To help perform LTC financial analysis for typical and affluent families, I created the LTC Economic Impact Planning Model (TM), an objective, totally neutral, patent pending software program. The software assists users determine the impact of long-term care events from an estate-planning standpoint and helps them determine if insurance is a sound financial decision based on user assumptions. Additionally, it aids in selecting an optimum mix of benefits, co-pay and premium. The idea is that assumptions ought to be debated and refined, but the math should be accurate and beyond debate. Accurate projections, based on stated assumptions in this letter, were created in just a few minutes using the software. Thank you for considering these comments. Please advise if you wish more information or if we may be of assistance at any time. Respectfully yours,
Ralph D. Leisle, President Exhibit
Scenario: Single Client Age 55; Current Care Cost $70,000 Annual Learn more @ www.ltcia.com
LTCi Decision Systems Inc |
| ||||||||||||