Couple look at whether to purchase long-term care insurance; introducing stocks to a 10-year-old.
Q: My wife and I are considering whether to purchase a long-term care insurance plan and, if so, what type. Our adviser has suggested considering asset-based long-term care. With this type of plan, we would pay the premium in a single payment, or over a three- to five-year period. The upfront cost of asset-based long-term-care insurance is high (we have been quoted about $220,000 each), but it has some advantages:
We are both 63, in good health and plan to retire this year. My annual pension benefit will be $60,000. My wife’s pension will be $50,000. Both will pay out 100 percent for both of our lives. I will be eligible for Social Security, but my wife (a teacher) will not.
We have no debts. Our assets are our house, valued at about $600,000; $275,000 in cash; taxable investment accounts valued at $1.3 million; and IRAs and annuities valued at $1.6 million.
What do you think is our best option to provide for potential future long-term care needs — a traditional policy, an asset-based policy, or self-insure?
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A: With a net worth of $3,775,000, you are a good candidate for self-insuring, particularly if you defer taking Social Security to maximize your guaranteed income. (By self-insuring, I mean using personal assets to pay for long-term care if needed.) If your Social Security benefit is about $30,000 a year, your total guaranteed income would be $140,000.
If you check the most recent Genworth cost-of-care survey, it says that the median annual cost of nursing care in a private room in Texas is $71,175. So if both of you were in a nursing home at the same time your cost, about $142,350, would be very close to your guaranteed income. That’s before you sell your house or dig into the returns from your investment money.
Studies have estimated a lifetime risk of needing nursing care at 23 to 38 percent. So more people will escape nursing care than receive it. Second, according to a study in the Medicare and Medicaid Research Review, of all those admitted to nursing care, 78.3 percent stayed less than two years and 54.2 percent stayed 11 months or less. Only 21.7 percent survived three years or more.
Conclusion? Financial exposure, in the majority of cases, is limited. For example, there is a greater than 78.3 percent probability that a reserve fund of about $280,000 would be more than enough.
And while a financial exposure that size would be disastrous to most, your exposure is minor compared to your assets and guaranteed income. Self-insuring is probably a good risk for people with far less in assets than you have.
Q: My 10-year-old grandson has shown an interest in stock and is gung-ho to purchase Hilton. Can you recommend reading material appropriate for his age? I would like this opportunity to share something with him besides cars!
A: Start him off with George S. Clason’s classic, “The Richest Man in Babylon.” It’s an easy read, it’s a story, not an equation.