Rich Widow
We get excited every time we can help someone. Sometimes the results of our research surprise even us. This recently happened when we were developing a long term care plan for a client of ours, let’s call her Anna (a pseudonym). Anna is 80 years old, a widow, and has 2 grown children. She resides in a house she owns which has no mortgage. She has a net worth of $2.3 million, excluding her house. Also, she has $1,500,000 in liquid investable assets.
Anna wanted a LTC policy that would protect her, her estate, and her children from the costs associated with a lengthy illness.
Solution: We proposed that Anna purchase a single premium annuity for LTC at a cost of $400,000. In exchange for this $400,000, she obtained a LTC policy that will pay up to $16,667 a month for long-term care for six years, which is a benefit potentially worth $1,200,000.
If Anna dies in year one of her policy, the insurer will pay her estate a death benefit of $407,572. Should this happen, the LTC will have actually cost nothing since her estate will recover more than the amount she paid for the LTC policy ($407,572 versus $400,000).
On the other hand, if Anna never uses the LTC policy and cancels or surrenders the policy in year ten, the insurer will pay Anna $482,505. Again, in this case Anna also comes out ahead because she has obtained a LTC policy for 10 years at zero cost. In fact, she has come out ahead by $82,205 ($482,205 versus $400,000). The beauty of this is that Anna has obtained a LTC insurance benefit of $1,200,000 with an upfront outlay of only $400,000. In other words, Anna will potentially get $800,000 tax-free from the insurer.
If Anna were self-insured and in the 50% tax bracket, she would have to earn $2,400,000 to pay for $1,200,000 in LTC. Under our proposal, Anna pays only $400,000 — an amount that is refundable — and obtains a LTC insurance benefit of $1,200,000.
If this sounds interesting to you, please give us a call. We are always happy to run the numbers for those who are interested in a LTC policy.