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Federal Employees News Digest : Oct 7, 2013
Many employees who are nearing retirement have been advised by their financial advisors that buying a long-term care (LTC) insurance policy is a must for anyone looking forward to a financially stable retirement. In a perfect world, those individuals who choose to purchase LTC insurance will qualify for the insurance, pay the premiums for a period of time, and then be guaranteed that the insurance company will pay for any LTC expenses that the insured will incur in their declining years. This scenario unfortunately is not the world in which the LTC insurance industry currently operates. The cost of LTC insurance is unlikely to become attractive to those employees nearing retirement today and in the future. But fortunately LTC insurance is not the only option for paying LTC expenses. This column discusses some alternatives for purchasing LTC insurance. Before discussing these alternatives, it is important to pres- ent some current statistics about LTC. According to a 2012 Metropolitan Life Insurance Co. market survey, the average nationwide monthly cost for a private room in a nursing home was $248 per day, or about $7,500 per month. A room in an assisted living facility averaged $3,700 monthly. While these costs can shock current and future federal retirees with decent CSRS and FERS annuities, Social Security retirement benefits and Thrift Savings Plan (TSP) accounts, there are some statistics that may mitigate any "LTC panic" among today's and future retirees. Not every individual will need to live in an assisted living facility or a nursing home, and those who do may have a stay that is measured in weeks, not years. A study recently cited by the National Health Policy Forum estimated that although one-fifth of Americans who became age 65 in 2005 would need more than five years of LTC; more than one-third would need no LTC. The same study said that only 6 percent of those who were 65 in 2005 would incur more than $100,000 in out-of-pocket LTC expenses and another 12 percent would pay a total of between $25,000 and $100,000. In other words, 82 percent of Americans who became age 65 in 2005 will pay less than $25,000 out of pocket over their lifetime for LTC costs. Rather than buying LTC insurance to pay for future LTC expenses, some individuals may want to "self-insure." There are advantages to self-insuring, most important of which is that any money or invest- ments set aside to pay any future LTC expenses and not used can be gifted or bequeathed to family members. Some alternatives to LTC insurance include: • Home equity. Homeowners have several ways to tap accumulated home equity to help pay for LTC expenses. Perhaps the easiest way is via a pre- established home equity line of credit (HELOC) that can be tapped on an "as-needed" basis. Another way is to take out a new 30-year mortgage via a refinanc- ing for as much as the lender will allow---usually 80 percent of the home's appraised value. Then the pro- ceeds are conservatively invested in a money market account or savings account to be used for any future LTC costs. Both the HELOC and the refinancing have two drawbacks. The main drawback is that the lender needs to approve the borrower for the loan. The other drawback is that the money has to be repaid with interest by the borrowers or their heirs. • Reverse mortgage. Both drawbacks associated with the HELOC and the refinancing can be overcome with a reverse mortgage. Reverse mortgages are available to homeowners age 62 and older with equity in their homes. But since a reverse mortgage is permitted only if the borrower maintains his or her home as a primary residence, a reverse mortgage should only be considered as a source of funds for short-term nursing home or assisted living stays or if one spouse is able to remain in the home when the other spouse enters a facility. • Life insurance. Many life insurance policies contain "living ben- efit" riders that allow some or all of the anticipated death benefit to be used to pay assisted living or qualified nursing home expenses. But even if a life insurance policy has no living benefit rider, the eventual death benefit proceeds may help a surviving spouse or other family member replenish assets that were spent on assisted living facilities or nursing home costs. For this reason alone, some employees keep their life insurance in retirement even though there may be other reasons -- for example, not having a mortgage or financially dependent family member -- to drop their life insurance policies. • Annuities. Funds in tax-deferred annuities can be withdrawn to pay for future LTC expenses and any taxation of withdrawn investment gains may be offset by the medical expenses deduction for qualified LTC expenses. Also, in recent years a more attractive option has emerged, a result of one of the provisions coming from the Pension Protection Act of 2006. Funds can be withdrawn tax- free from specifically designated annuity contracts to pay LTC expenses. Individuals who are interested in purchasing such an annuity should contact a qualified insurance and tax professional for more information. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor Are there viable alternatives to long-term care insurance? October 7, 2013 Vol. 63, No. 12 7 Visit us on the Internet at www.FederalDaily.com
Sep 30, 2013
Oct 14, 2013