INSURANCE - How to Plan For a Long Life with Longevity Insurance

People are living longer than ever, but that doesn’t mean they are healthier. While modern medical science has done much to lengthen life spans, it has been less effective at preventing chronic illnesses that are common in old age. The fact is, the longer you live, the more likely you are to suffer from high blood pressure, diabetes, heart or respiratory diseases.

That’s why it’s important not just to plan for an active retirement, it’s also important to have a plan for your later years – a time when you might be less mobile and even require assistance with daily life.

Today, the median annual cost for care in an assisted living facility is $39,600 nationally, according to the Genworth 2012 Cost of Care Survey. You might be under the impression that this cost will be covered by Medicaid; however, Medicaid requires that you spend down your wealth before coverage kicks in. That’s why it’s important to create a separate plan for your later years. You might not think you’ll live well into your 80s and 90s – but what if you do?

One of the ways to prepare for a long life is to buy long-term care insurance (LTCI). Long-term care insurance covers costs that Medicare and other health insurance policies don’t cover, such as in-home care, assisted living, adult day care, nursing home care and hospice care. You should consider purchasing a long-term care policy while in your 50s, because premiums become substantially more expensive with age. Also, once you’re in poor health, you might not qualify for long-term care insurance.

An alternative to the traditional LTCI policy is to purchase a universal life policy that offers a long-term care insurance rider for an additional fee. The policy will issue an accelerated death benefit so that you can pay expenses related to long-term care while you’re still alive. The advantage of this approach is that you know you will use proceeds from the policy one way or the other. With an LTCI policy, you run the risk of dying suddenly and never using the benefit.

In early 2012, the Treasury Department offered new guidelines that encourage employers to offer a longevity annuity as a 401(k) option. The longevity annuity account balance would convert to annuity income later in the participant’s life, starting around age 80 or 85. The rest of the 401(k) account options would be available for withdrawals during the first phase of retirement. This arrangement assures that you have a second leg of income available so you don’t run out if you live well into your 80s and 90s.

You could also purchase an annuity on your own that offers an additional rider specific to long-term care. For example, the rider might increase the annuity payout for a specific period of time if you become unable to perform a certain number of basic activities of daily living set forth in the rider. Be aware that this type of rider could require a waiting period and physician’s statement to receive the additional payouts.

Another alternative is a long-term care annuity. This is a contract you purchase for a single premium that may double (with inflation protection) or triple (no inflation protection) the premium amount for distributions used to pay for long-term care. Your premium will grow tax-deferred and there is a death benefit for loved ones when you pass away. Your beneficiary will inherit the greater of the accumulated annuity value if you have not made any withdrawals, or your initial premium minus the amount of any payouts made for long-term care.

One thing you can be sure of: Whatever the baby boomer generation needs, the marketplace will respond. And with millions of baby boomers hitting their senior years over the next couple of decades, it is likely that even more products and policies will become available to help people plan for a longer life.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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