The Tax Attic with Jerry Coon — May 20, 2010

Final discussion on long-term care insurance

I have a few final items to cover this week concerning long-term care insurance policies. Specifically, there are three areas I want to discuss. This week, I am using a quote Deb and I received from Genworth Life Insurance Company.

Jerry Coon, Enrolled Agent

First, instead of Deb and I buying individual policies, should we take the alternative of buying a joint policy? Second, should we buy a survivorship rider that will pay up all future premiums should Deb or I pass away? Third, should we buy a rider that will return our unused premiums if we die before making a claim?

First, it does appear to be cheaper to buy a joint policy than Deb and I each buying individual policies. The joint policy annual premium for the quote was $2,415 for a total of 72 months of coverage. That compares to a total annual cost of $2,815 for individual Deb and Jerry policies that covers 36 months for each of us. On the joint policy, we do get a little more flexibility, because it doesn’t make any difference which one of us uses the 72 months. I could use two months, for example, and the other 70 months would be available for Deb, or vice versa. The minimum months of coverage on joint policies does appear to be 48 months of insurance coverage, while individual policies can be purchased for as short a period as 36 months. It might make sense for Deb and I to purchase a joint policy for 72 months rather than individual 36-month policies.

Of course, that presumes we will never let the policy lapse. If we have two individual policies, we could let one lapse, mine for example, and keep Deb’s in force. We would not have this option available to us if we had just one policy. Dropping that policy would drop everything. It can’t be a snap decision to buy the joint policy.

Second, the question becomes should we buy a rider that pays up all future premiums should Deb or I pass away? As part of this particular policy, and at no extra cost, should we pay in for 10 years without making a claim, and then Deb or I pass away, and the policy automatically becomes a paid-up policy for the survivor? Based on our current ages and good health condition, hopefully we can make it for another 10 years. However, there is an Enhanced Survivorship Rider that is available for approximately $120 that would pay up the policy if Deb or I passed away after only seven years.

Finally, the question comes up as to whether we should purchase a return of premium rider that will pay us the portion of our premiums back that we don’t recover via making a claim. There are two options available in this return of premium game. This policy has a rider included in the everyday price that will pay all premiums back if either of us dies before the age of 65 as long as we haven’t made a claim. If we want the rider to stay in place after the age of 65, we would expect to pay about $200 per year.

Most likely, it makes sense to purchase the additional return of premium rider. I know it is buying insurance on the insurance, but it still might be a good deal. Let’s look at the math. For example, the total annual premium we end up paying is $2,800 per year. Adding another $200 for the return of premium rider brings the total annual premium up to $3,000. Say we pay that amount for 30 years for a total of $90,000, of which $6,000 is for the return of premium rider. If neither Deb nor I ever need to use the insurance, our heirs can apply for a return of the total return of premium paid which would be $90,000. We have paid $6,000 to protect the $90,000 and are guaranteed to get the $90,000 back in the form of a claim or in the form of a refund.

In today’s environment, that’s a pretty darned good return. On the downside, it does increase our annual premium and could eat into our cash flow during our retirement years. All in all, it is a rider that definitely deserves some consideration.

This concludes my series on long-term care insurance. Call a professional if you are considering buying this type of insurance. There are so many variables within each policy, and each carrier has variables within the variables that it does take a professional to sort them all out. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns Action Tax Service on Northland Drive in Rockford. Contact him at www.actiontaxservice.com.

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