Opportunity costs and the decision of long-term care
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Author: If you are looking for long-term care (LTC or LTCI often abbreviated as) shopping, I recommend a look at a way to make money long term care is probably new to you. On the other hand, if you people who think they never need long-term care also encourage you to evaluate this way of thinking.
Dick and Jane are 65 years old, who recently retired and models of good health. They ignored the problem of long-term care until recently. She is the mother of Jane, who is 88, in a nursing home. Each sticker shock! It is a beautiful place, but Dick and Jane are not 100% sure that their assets may remain for the rest of his life.
Therefore, they seek care for themselves. They think they can for that part of what they can as a kind of LTCI cost to ensure they are looking to make a profit of $ 3000 per month. The premium is $ 4,200 per year.
Here is a new concept that Dick and Jane are used must already receive in retirement. Both had a good job during their working life. If you always wanted to buy something, it was only a matter of look at your income to see if she could swing the purchase. Simple enough.
Have accumulated in retirement now, most of their production costs to assets, profits. Therefore, the difference between the cost of the premiums and the opportunity cost of understanding. That’s what I mean …
If they buy the $ 4,200 per year, the policy of long-term care, the money must come from somewhere. It may have come from interest on a CD or an annuity. But there is an opportunity cost associated with the premium payment from the proceeds of an asset are connected.
Suppose you go from $ 4,200 to the interest on a CD that you deserve to pay interest of 5.4%. Since the interest is taxed, and assuming a tax rate of 15% you are, you have $ 91,300 to produce this CD to $ 4,200 after taxes, the premium.
You can not spend $ 91 300th It can not grow. Basically, they have “committed” to pay $ 91,300 for their ability, the premium on your long-term policy. This is the “work” of $ 91.300. The bonus is only $ 4,200 per year, but the way costs $ 91 300th
Look at other alternatives. The focus is on the capital. How were the works, as in the example below, and contrast.
One way to long-term care assets is $ 91,300 CD repositioning of Dick and Jane with a combination of long-term care / life insurance with an insurance company. That makes money for them …
The money from the insurance company to a rise in interest rates, but tax-deferred interest for the insurance will not be sent any taxable year 1099 with an amount in the bank is obliged to do. In 10 years, assuming current prices by $ 91 300 to $ 127,000, $ 161,000 increase in 20 years. The CD, remember, do not grow, because their work must be paid in the distribution of annual premium of $ 4,200 in the traditional plan LTCI important.
If Dick or Jane to pay a long-term care needs of all, in terms of the insurance $ 3,900 per month for 50 months – $ 900 per month more than the traditional plan.
But here’s the real problem.
If Dick and Jane never need long term care, then do not buy the stock would have been correct. If Dick and Jane the traditional plan of long-term care in 10 years, have $ 42,000 in premiums and $ 7,400 in taxes on CD interest on the premium required to separate. It is a grand total of $ 49 700th The share of its $ 91,300 CD would be still $ 91 300th
But as Dick and Jane never need long term care, asset-based and long-term care or die, for example, passed, 10 years, the result is different. They paid an annual premium and the insurer pays about $ 198,000 in tax-free their children.
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