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Friesen -- Is your farm protected from the nursing home? Tuesday, June 3, 2008
By Myron Friesen
Is our farm protected from the nursing home?
I get this question often.
It's a delicate subject and one has to be careful on the advice given. There are several ways to answer that question.
One solution may be with some estate planning and gifting and one may be with some insurance. For this article I will focus on the insurance questions.
Based on my observations the last six months, it appears that long-term care insurance is receiving renewed interest in the farming community. There may be a variety of reasons for this interest -- including the potential of having more available cash and possibly recognizing there is more to lose.
The bigger questions are: Do you need long term care? How does it fit into your plan? What type of long-term care coverage would you need?
I frequently observe that those who don't need insurance buy it because they can, and those who need it don't buy it because they can't afford it. When asking a farmer their reason for purchasing long-term care insurance, they would most likely respond that they don't want the nursing home to take their farm.
The first step is analyzing the need for long term care insurance. This can be determined by estimating your cash flow on an annual basis at retirement. Using today's numbers, a farmer with 500 acres receiving $150 per acre cash rent, would have $75,000 a year plus approximately $12,000 of Social Security totaling $87,000 of annual income. Then add in miscellaneous investment income such as securities, CD's, ethanol, etc., and a farm couple may have $100,000 of annual income in retirement. Reducing that number for property taxes and other maintenance expenses would leave approximately $75,000 of annual income. If both husband and wife ended up in a nursing home at today's cost, their income would likely cover their long-term care expenses.
A key factor in the above calculation is using "today's numbers.'' It 's hard to project what some of these numbers may look like 15 to 30 years from now. So, long-term care coverage may be appropriate, but you may not need to buy 100 percent coverage.
Another important factor with long-term care is determining if you should add a "cost of living" rider. This referred is referred to as a 5 percent cost of living adjustment.
For younger people (under 70) this can be a valuable consideration. Using the simple rule of 72, an investment will double when multiplying years times the rate or by figuring the other way and dividing the interest rate into 72. In this example, if you had a 5 percent COLA rider on your policy, (72 divided by 5 percent = 14.4 years) your coverage would double in about 14 years.
So essentially, $100 of coverage would multiply to $200 of coverage 14 years later. Therefore a 50 year-old who adds a 5 percent COLA rider could easily have 28 years or more before they need nursing home care. As a result the policy they purchased with a benefit of $100 a day would be worth $400 a day by the time they reach age 79.
There are other riders like home health care rider, adult day care rider, return of premium, elimination periods and indemnity riders, and length of coverage. These riders as well as other riders should be considered and understood before making any decisions.
Even if you think long-term care will meet your needs, there is one more "major issue" to consider. Long-term care insurance doesn't have near the history of life insurance. As a result, it's difficult for long-term care companies to accurately project the costs associated with nursing homes and care facilities.
These costs have risen dramatically and the ability of the long-term care companies to pay benefits in the future could be challenging. Also, because they don't guarantee a lifetime level premium, one way they can make up for rising costs is to increase premiums.
As a result having a limited pay period could become the best rider to add even if that costs more the next 10 years.
Long-term care companies are among the best marketers and they know that the cost of the premium is important at the point of sale. If they can put their product out there with a low premium combined with enticing bells and whistles, the end result is a good chance of a sale. My focus of discussing this subject is to make sure you will have something when you need it.
I have seen numerous situations where people purchased long term care 10 years ago and dropped it when the premium began to increase.
Don't get me wrong, there are times when long term care may be great option to fill a gap. First you have to determine if you really need it, how much benefit you need, which bells and whistles work with your situation, and how long you want to pay for it.
Don't wait with estate protection strategies or long-term care considerations until you start feeling ill. Some people have a tendency to procrastinate and then when they are near a crisis point they want to do the last-minute estate planning and wish they qualified for the insurance.
How are you protecting your farm today?
Friesen is a co-owner of Farm Financial Strategies in Osage, Iowa. For more information, he can be contacted at 1-866-524-3636.
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