In my last blog, I talked about the pros and cons of life insurance as an investment to protect your future.
Two other types of insurance also should be examined, as well.
Long-Term Care Insurance
Long-term care insurance is appropriate for many people, but if you have accumulated adequate assets to support your lifestyle, you should consider self-insuring. If you are living on a retirement income of $150,000 to $250,000 a year, you are in a position where you can afford the cost of long-term care out-of-pocket, should it become necessary. Your expenses inside a nursing home probably would be less than your expenses outside. People worry about that situation where they get Alzheimer’s and are in a long-term care situation for many years. We discuss family histories with clients, and if Alzheimer’s is a risk, we discuss the cost and trade-offs of insurance versus self-insuring.
Certainly, there are people who spend a long time in a nursing home, but they are the exception, not the rule. The premise that you must have long-term care insurance does not necessarily make sense for wealthy clients.
Frankly, a good relationship with your spouse and maintaining a great marriage is one of the best forms of long-term care insurance. The reality is that there are many couples where one of the spouses would be in a nursing home, except that the other is able to provide loving care. That works when the spouse who needs help is still relatively mobile and when the caregiver still has sufficient energy and is up to the challenge, perhaps with some outside help. Spouses who are dedicated to looking out for and taking care of each other can live independently for much longer.
Most of my clients who are wealthy are used to independent living. They don’t anticipate that they will be going into a nursing home and will do what they can to stay out. Those who have needed assistance have been able to hire people to come to their homes. They are able to remain independent, in some cases until hospice care is needed. For many clients, long-term care coverage gives them a sense of security knowing that there will be funds available to take care of them. As advisors, we certainly think it is important to review clients’ feelings about long-term care and to offer a cost-effective policy if they are interested.
Guarantees are based on the claims-paying ability of the issuing company. Long-term care insurance or asset-based long-term care insurance products may not be suitable for all investors. Surrender charges may apply for early withdrawals and, if made prior to age 59 and-a-half, may be subject to a 10 percent federal tax penalty in addition to any gains being taxed as ordinary income. Please consult with a licensed financial professional when considering your insurance options.
You obviously will need auto and home insurance, but you should also consider what is known as an umbrella policy. As people build wealth, their prosperity means that they face a greater potential that they could be sued. An umbrella policy covers you in the event that a lawsuit seeks damages that exceed the limits of your auto or home policy. This is no small matter. A lifetime of savings could be at stake. A $1 million umbrella policy can cost as little as $200 a year. This is a lot of protection for your wealth.
To learn more about the pros and cons of different types of insurance, check out my book, The Power of Persistent Planning: A Review of Successful Financial Planning Strategies, here.
Any opinions are those of Douglas Gross and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.