Get creative to fund long-term care insurance

The most unexpected and costly expense of retirement is the need to pay for long-term custodial care— a burden that is not covered byMedicare or supplements.

No onewants to think about needing help to eat or shower or do the basic activities of daily living. But you ignore the possibility at your peril.

Once you retire, the odds of needing that care increase dramatically.

A SOLUTION

Long-term care insurance is expensive— and traditional policies are subject to increases in premiums. That’s led to more interest in a "combo" policy, which combines long-term care benefits with life insurance, so if you don’t need care, your beneficiary gets a death benefit.

The latest twist is a creativeway to pay those premiums: You can use your IRA to purchase this policy, pay for it in full over 10 years, get your long-term care benefits tax-free— and have a death benefit if the care portion is not used.

THE CONCEPT

Read this section carefully. It revolves around doing a tax-free rollover of a portion of your IRA retirement money into an annuity. (Note: This is not the investment annuities I’ve advised you to avoid.)

Instead this annuity is designed to pay out once a year for 10 years to directly pay the premium on a life insurance policy that contains a long-term care insurance rider.

That annual distribution to pay the premium is taxable to you, so you’ll receive a 1099 for the annual amount. It can count as part of yourRMDif you’re older than 73. You don’t actually get the money, since it goes into the life policy, which pays for the long-term care insurance coverage. Once the 10-year payment is completed, there will be no further premiums.

You need a qualified expert in long-term care insurance towork the numbers for you. I turned to Brian Gordon of Gordon Associates, whose agency specializes in onlyLTCinsurance. He ran some numbers on the costs on the OneAmerica Asset Care policy described above for two scenarios.

It gives $6,000 a month in unlimited long-term care benefits and can be used for any level of care, fromhome to institutional.

Firstscenario: A62-year-oldwoman in good health could pay $15,650 a year for 10 years to purchase this policy. Or she could get a significant discount if she paid the entire amount up front— a cost of $125,184. That’s a huge amount!

Butwait. The money is in her IRA, invested very conservatively. So she uses it in the strategy described above, purchasing an annuity that automaticallymakes the policy premium payments over 10 years.

If she happens to die the very next year, her beneficiary gets a death benefit of more than $250,000, or $150,000 death benefit after the ninth year.

Secondscenario: Amarried couple, husband 65 and wife 62, get an even better deal. Jointly, they could pay $21,000 a year for 10 years to get this coverage. But the one-time premium (funded over 10 years, using the strategy above) would be $168,024— again a huge amount. But if rolled out of an IRA into the annuity to pay the life premiums, theywould each have a $6,000-a-month lifetimeLTCbenefit, all tax-free. And a $150,000 life insurance benefit on the second to die.

Yes, it’s a complicated strategy. But if the long bull market has given you a surprisingly large IRA balance, it’s one you might consider.

You can’t just call your homeowners insurance agent to get a quote. You can reach Gordon Associates at 800-533-6242.

There is no charge for an illustration.

I get nothing out of this, other than the knowledge that I could be helping a lot of peoplewhowill face this expensive challenge downthe road. And that’s the Savage Truth.

Terry Savage is a registered investment adviser and the author of four bestselling books, including "The Savage Truth on Money." Terry responds to questions on her blog at TerrySavage.com.

Terry Savage

The Savage Truth