Senior Market Advisor. January 2006. www.SeniorMarketAdvisor.com

LTCI Insider. With Margie Barrie.

When to Self Insure

Q. I work with wealthy clients and am frequently asked about the advantages of self insuring instead of buying LTC insurance. How do you suggest I respond?

Note From Margie - This column is a continuation of the topic discussed in the two previous issues. This month, we focus on concerns to discuss with clients to help them better evaluate the potential downside of using specific income and asset sources to pay for LTC expenses.

A. Various amounts of assets have been mentioned as a rule of thumb to self- insure. Whatever that number may be, I believe, however, that just as important and maybe even more important are the kinds of income and assets a client may own, as well as timing and liquidity issues. Let's look at income sources first.

In their calculations most people include their monthly Social Security income. Many boomers, however, aren't banking much on Social Security with tight Federal budgets and talk about lessening benefits.

If a person has a portfolio tied to interest rates such as Certificates of Deposit and bank savings accounts, there is an interest rate risk - the possibility of interest rates being lower than hoped and planned for.

If bonds are the source of income, the risk of premature calls could result in having to reinvest at lesser rates. When bonds mature, reinvestment of proceeds may occur during a low interest period.

If a client's portfolio is tied to stocks, from which income is derived, dividends can always be "iffy."

Issues may also arise if a client's source of income is a systematic payout from an annuity. If the income recipient of a life annuity dies, the surviving spouse may get nothing for his or her future care costs. If some other arrangement is in place, the surviving spouse may be left with lower income amounts after the death of the annuitant.

Now let's look at assets as principal. Certain portfolios may have liquidity problems, sometimes tied to timing and market conditions. A good example is real estate which often is illiquid. If money is needed to pay for long term care costs, it may take a long time to sell the real estate asset. An immediate sale may result in a distressed sale situation. The money coming from the transaction may be well below actual value. Unloading real estate for cash stirs up income tax issues, especially if the cost basis of the real estate is low.

The same kind of problems may arise if a business is the underlying asset. A distressed sale could lead to netting proceeds that are well below potential market value. With businesses, other weighty issues surface, such as transfer of company ownership, assigning new leadership personalities and roles as well as concerns for the future of loyal employees.

Also in any calculations, one probably should inflate costs for care well beyond industry averages because Boomers may not settle for "ordinary" care. For example, if the desired goal is care at home for as long as possible, expenses for a Registered Nurse for 24/7 could be very substantial.

For all of these scenarios, long term care insurance makes sense. That way, clients are assured of leaving their hard-earned dollars to heirs and/or charity, rather than using them to cover care costs.

Another perspective was provided by Lynn Lavender, an agent in Ardsley, NY. She agrees that there is no upper net worth limit on who should consider LTCI. "For those who have considerable assets, LTCI is not a necessity, but may be a prudent choice with regard to risk management."

She suggests considering some advanced planning strategies using LTCI. Some the carriers will allow 3rd party ownership of LTCI, therefore trusts similar to ILITs can be established to own the insurance. The insured gifts the premium to the trust. By law, the policy owner not the insured receives all benefits. Thus, when the insured goes on claim he/she pays for care from the taxable estate and the policy benefits are paid to the trust. The return-of-premium rider for some carriers returns all premiums at death regardless of claims paid to the trust beneficiaries. So, by gifting premiums to a LTCI trust for a policy with a full return of premium, a wealthy person can use LTCI to transfer significant amounts of money from the estate.