by Archie M. Richards, Jr., CFP^®
August 5, 2002

Kevin Tucker, a financial planner in Topeka, Kansas, writes that buyers of long-term care insurance may not need policies covering 100% of the cost of nursing care. Part of the cost they may absorb themselves, using income from Social Security, pensions, and investments. Such people might acquire long-term care policies that pay only $100 or $150 a day, not $200.

You're correct, Kevin. I might add that many people who need nursing care may spend considerable time receiving it at home.

Charles Hicks, a long-term care insurance specialist in Saratoga Springs, NY, tells me that approximately 1.6 million people are in nursing homes in the U.S. But at least 12 million and possibly as many as 32 million receive care at home.

On this score alone, consider long-term care insurance that pays, say, $160 a day for both nursing home and home care. The $160 would cover significant care at home. If and when a nursing home becomes essential, longevity thereafter may be short.

The $160 benefit amount could be further reduced to $100 or less if, as Kevin points out, you can pay for some of the care yourself. All these reductions would cut the premiums for a long-term care policy significantly.

Joan asks, "Do any long-term care insurance policies have cash value that can be withdrawn by the policyholder?"

No, Joan. No long-term care insurance policy has cash value. Neither do fire, auto, or disbility insurance. The only kind of insurance that has cash value is life insurance. This is because death is certain. Not everyone has a house fire, but everyone dies.

Here's why cash value becomes necessary. Let's say a person is 99 years old and relatively healthy. She buys a life insurance policy requiring the insurance company to pay $100,000 to her beneficiaries if she dies during the next 12 months.

If the company accepts such a policy at all (which it probably wouldn't), the premium would be something like $99,500.

The company's risk is only $500. It assumes that the person will live for at least a few months. The company invests the $99,500 in the meantime, earning enough to cover the $500 risk, pay for expenses, and make a modest profit.

Okay, now let's assume the person buys a $100,000 policy when she's only 30 - a policy she intends to keep no matter how long she lives.

By the time she reaches age 99, with death imminent, the insurance company wants the policy to contain a cash value element of at least $99,500. To accumulate this amount, the company charges extra from the beginning. The policy is called "whole life."

When the policyholder is only 30 years old, the insurance company is willing to accept almost all of the $100,000 risk. But when the person reaches age 99, it wants little or no risk, because the $100,000 payout is sure to occur soon. The policyholder is then insured by the savings element that has accumulated within the policy.

Those who have young children, whose family depends on their income, and who have relatively few investments need lots of life insurance. But they should avoid whole life.

They might acquire five-year term or ten-year term instead. With five-year term, for example, the premiums remain the same for five years and then rise at each successive five-year period. Until age 65, the premiums remain remarkably low.

Five-year or ten-year term insurance develops no cash value. At advanced ages, the premiums would be extremely high. But long before this, the policy would be dropped. By then, the person should have accumulated her own savings in retirement programs and other investments. Diversified portfolios of domestic stocks, foreign stocks, real estate investment trusts, and bonds will grow faster, even after tax, than the cash value of any insurance policy.

Inexpensive term insurance can be acquired through www.selectquote.com. But at least ten times the annual premiums should be set aside in a separate savings program. After a few decades, the person will have insured himself.

To return to your question, Joan, acquire long-term care insurance, by all means. But set aside funds in suitable investments as well, to accumulate your own cash value.