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.

http://www.nytimes.com/2013/05/15/business/retirementspecial...


Covering the Rising Cost of Long-Term Care

By CAITLIN KELLY
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.

Wendy
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(Wendy:)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.

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My wife and I also just took out LTC insurance at the start of this year. Coincidentally, I'm 59 and she's 60 (at least for now.) So by now you realize you're not really that young!

But seriously, this is about the prime age to be buying LTC, trading off the monthly premiums which will increase, vs. the number of years to be paying.

Did you get an inflation-adjustment feature?

Bill
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Hi Wendy,

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.

Just curious; Have you looked at asset-based LTC (versus non-refundable premium based)?

I know of at least a couple carriers approved to offer it in WA;
OneAmerica & Sagicor

The 50,000 foot view of the differences in asset-based versus premium-based are;

Asset-based is built on a standard whole life chassis,
(This means you *could* do a straight 1035 exchange, if it made sense, instead of the cashflow transfer you are doing now with surrenders or loans,)

If it is surrendered prior to triggering benefits, you get a full return of your premium*,
(Minus the income taxation on the dividends/interest accrued on that premium... the dividends/interest having been used to cover the LTC coverage,)

The underwriting on asset-based is streamlined... much less stringent,

The benefits are directly paid, not institutional reimbursements,

The benefits are generally about 3:1 over whatever assets/premiums you pledge,
(If you pay $100,000, you get up to $300,000 of benefits,)

If you pay $100,000, and only need to use $50,000 of benefits (due to recovery or other funding sources becoming available,) you can get the unused premium returned (minus taxes on dividends/interest, yadda.)

If you do pass, the $300,000 death benefit remaining (minus the LTC benefits paid out) is still paid out to your beneficiaries.

It requires a pledging of significant assets up front, which really won't generate any rate of growth return from that point forward.... (or could be said to be losing the opportunity costs of those funds,)
HOWEVER,
It has zero "sunken premium costs" for the benefits.


If you haven't looked at it... its an interesting consideration, IMO.
Not a "no brainer" either way... just another alternative with a different risk/reward profile.

Cheers,
Dave Donhoff
Leverage Planner
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<Did you get an inflation-adjustment feature?>

No, because I wanted to minimize our out-of-pocket and the inflation adjustment feature was expensive, according to the agent.

I have other inflation-adjusted assets, such as I-Bonds.

Wendy
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