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Long-term care insurance test

By Jennie L. Phipps · Bankrate.com
Wednesday, September 1, 2010
Posted: 4 pm ET

Long-term care insurance could be an unnecessary part of your retirement planning if you can afford to maintain two households, says David Keator, a principal in the Keater Group of Massachusetts-based financial planners.

But it takes a lot of retirement savings. Keator calculates it this way:

He estimates the cost of nursing-home care to be about $8,000 to $10,000 a month -- depending on where you live. The bill will be slightly less in the first year because there may be 100 days of compensation from Medicare if the patient has been hospitalized before being moved to the home. After that, Medicare pays nothing unless there is further hospitalization.

To pay this kind of bill every month, a couple needs at least $2.5 million in investments so they can pull 4 percent -- $100,000 -- annually. The spouse who is not in the nursing home will need to rely primarily on other income like Social Security and pensions.

If it is just a single person, Keator believes a $1 million investment pot is probably sufficient, especially if the person living in the nursing home also has a home that can be sold.

You might ask, why not use the principal? The answer is, you could, but you'd be whittling away at your ability to pay, betting that you and your spouse's demise will come before the end of the money. You'll also be leaving the surviving spouse in a precarious position, if he needs nursing-home care later.

One thing long-term care insurance does is help insure that heirs will get some money. If you have no heirs or don't care whether you leave anything behind, preserving principal may be retirement planning that is unimportant to you. After all, the single or the half of the couple who lives the longest can always spend down to the last $2,000 and then rely on Medicaid. It isn't always a pretty solution, but it can work.

Keator says that if children are concerned about their parents' reluctance to spend money on long-term care insurance that they step up and pay the premiums. Divided among two or three siblings, the bill may not seem so hefty. It's not only a gesture that could make mom and dad feel more secure in their retirement, it also greatly increases the likelihood  that there will be something left at the end for the kids.

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