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Patrick S. O’Connor: Long-term care insurance: Who needs it?

Who needs long-term care insurance? “Not me,” you say. You’re young. You’re healthy. You eat right, exercise and get regular check-ups. Those are just a few of the reasons people today are living longer. In fact, according to a 2011 Society of Actuaries study, since the 1960s, life expectancy has increased between 1.5 and 2 years each decade.

But before you get too caught up in the good news, you may want to think down the road a bit. What are the odds that you’ll enjoy this same level of good health when you’re 80, 90, or even 100? Especially since about 70 percent of people older than 65 will require long-term care at some point based on a 2011 John Hancock Cost of Care Survey.

With people living longer, protecting your financial assets so that you’ll have enough money to last during your lifetime is every bit as important as accumulating them in the first place. But with health care costs rising every year, one illness or disability can wipe out a person’s savings due to ongoing medical expenses. According to Genworth Financial, a leading provider of long-term care insurance for individuals, the average cost for a private nursing home room in 2013 was more than $80,000 a year. 

Footing the bill: First of all, you need to know that Medicare generally doesn’t pay for long-term health care. It pays only for skilled nursing facilities or home health care that falls under the category of medical necessities. While it may be possible to use your savings to pay for long-term health care expenses, several factors enter into the picture. For example, you’ll need to determine how much money may be needed. And to figure out that dollar amount would require estimating the type and length of service that may be necessary.

Additionally, income and assets that you’ve set aside for other retirement goals may be jeopardized if health care costs are higher than expected. And while you could invest for the potential expenses, investment risk may be a factor. Putting money in a conservative account may not keep up with inflationary costs of health care. A more aggressive account may be affected by market downturns when money is needed.

A potentially more efficient and effective alternative is an insurance policy that would provide the dollars needed to cover long-term health care expenses. There are some advantages:

Policy guarantees: A guarantee, backed by the claims-paying ability of the issuing company, provides the assurance that money will be available to pay long-term care expenses when needed. 

Investment freedom: You won’t need to be concerned with investment performance of assets set aside to pay expenses since an insurance policy shifts the responsibility for asset availability to the insurance company. 

Leverage: The capital required to buy insurance protection is typically less than that needed to pay for expense due to the leverage insurance provides. As a result, you may have additional capital.

Tax benefit: Qualified long-term care insurance policies pay an income-tax-free benefit.

In addition to combining long-term care benefits and death benefits, some products even offer a return-of-premium feature, which ensures that if the policy is surrendered prior to claim, the original premiums paid will be returned to the policy owner.

Bottom line, you’re the only one who can determine what kind of policy is right for you. Work with your financial adviser to determine a plan to meet your needs and protect your financial future.

• Patrick S. O’Connor, CRPC, is the managing principal, senior financial adviser and PIM portfolio manager at Wells Fargo Advisors Financial Network in Algonquin. He can be reached at 847-458-0142, p.oconnor@wfafinet.com or via www.algonquin.wfadv.com.

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