No. of Recommendations: 5
DH bought a whole life insurance (WLI) policy before we met, over 25 years ago. This policy yields sufficient dividends that it pays the premiums and also increases the cash value. Current dividend yield is about 4%.

We do not have any children and I don't need the cash value of the policy should DH die. (Hopefully DH will not predecease me because I like having him around).

On the other hand, it is possible that one or both of us will someday need long-term care insurance (LTCI). Last week, we set up LTCI which will be funded by the WLI policy in a tax-exempt exchange. We will pay the WLI premiums out of pocket and the LTCI premiums will be paid by the WLI, whose cash value will gradually decrease. The LTCI premiums generated by the WLI policy are about twice our out-of-pocket payment of the WLI policy.

This kind of WLI to LTCI exchange is now being encouraged by several states.

Covering the Rising Cost of Long-Term Care

New York Times: May 14, 2013

FEW sticker shocks are as bracing as the price of hiring someone to help with the simplest activities — bathing, toilet use, dressing, eating and moving. Whether recovering from surgery or a stroke or suffering a chronic illness like arthritis, those needing skilled help need deep pockets indeed....

State lawmakers are also pushing insurance companies to make clear to policyholders that they can sell a life insurance policy to pay for long-term care. State Representative Robert R. Damron, Democrat of Kentucky, is spearheading the battle through the National Conference of Insurance Legislators.

Only seven or eight states have a statute requiring insurers to notify policyholders, or their heirs, that they have unclaimed property, policies whose face value can be worth thousands of dollars. “I’ve settled three estates in my family, so I’ve been through this personally,” Mr. Damron said. “I was never sure if they had policies or what they were worth. People put them away, or lose them.”

Some insurance companies also allow life insurance holders to convert the value of a policy to a long-term care policy, but this varies by carrier. Mr. Damron said he had personally chosen to buy only life insurance and cash in its value later, if necessary. ...
[end quote]

The deal that DH and I are doing pays $1500 per year out of pocket into the WLI policy, which has a cash value of about $50K. The WLI then pays $3000 per year into the LTCI policy, partly from dividends and partly from cash value, which will provide LTCI up to $250K each = $500K, usable for home or institutional long-term care.

Like all insurance, I hope that we will never collect on this because LTCI only kicks in if the situation is dire. In my opinion, $1500 per year is a reasonable price to pay for additional peace of mind. By buying insurance at a fairly young age (I am 59, DH is 61), the annual cost is relatively low. This arrangement multiplies the value of the WLI policy by 10.

Paul Eckler has written that he does not believe LTCI is worthwhile because only 1/3 of the people who buy it actually use it. Of course, spreading the risk is the principle of all insurance. If everyone collected, there could be no insurance. We all carry fire insurance (even if we don't have a mortgage), even though the incidence of fire is < 1/3.

The question is always one of risk-benefit and the value of peace of mind.

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