Saturday, March 20, 2004

Long-term coverage needs right balance


Insurance

Did an insurance agent ever come into your home and ask you a lot of personal questions about your family, your assets and your liabilities?

For those who have not experienced that, it might sound too nosey or just plain pushy. But there were good reasons for those questions.

The goal was to compare current liabilities and projected family-income needs with one's assets, including Social Security, to see if one's life insurance was adequate to meet the needs. I do not think that training in this technique goes on much today. But I - and many agents who came before me and along with me - were trained in such probing questioning.

This is called "programming" one's life-insurance needs and was the way most family-income life insurance was sold for generations.

The same concept can be applied to a newer type of insurance, long-term-care (LTC) insurance.

Most agents who sell LTC insurance simply find out what the going rate is for a semi-private or private room in local nursing homes and tell the prospect that this is the amount that should be applied for.

To take care of future increases in that going rate, the agent recommends building in inflation protection through a special, optional benefit available with most policies.

But this technique will probably lead to overinsurance. After all, when people are living in a nursing home, they are not spending what they used to spend on the outside. Perhaps their home was sold or apartment re-leased. Food and transportation costs are gone. All these have been replaced for these residents by a daily room and board charge. And if a person obtains LTC insurance, that pays part or all of that room and board charge.

So one's cash flow from Social Security, savings, pension and investments is no longer needed for normal living expenses. This is where the "programming" can help. Why not factor that cash flow into the projected need for LTC insurance? It seems unnecessary to let that cash flow accumulate in a savings account when it could be helping to pay for the nursing home. That would reduce the amount of LTC insurance needed.

So one could buy just enough insurance to make up the difference between the cost of the nursing home and the available cash flow. But remember: The projected numbers are just estimates. So one should err on the side of conservatism.

How much of one cash flow should be relied upon? Surely some outside expenses will continue even after the move into the nursing home. Insurance on one's possessions, gifts to children and grandchildren, charitable donations and other budgeted items might need to continue.

One estimate suggests that 85% of one's cash flow should be redirected to the nursing home.

The calculation has to differ, of course, if a spouse remains in the community after one moves into a nursing home. Because of higher ongoing outside expenses in this situation, perhaps only 40% of joint cash flow should be allocated to pay for the nursing home.

The inflation protection described above should be included, at least at younger ages.

One should be careful not to reduce too much the amount of home-care benefit available in most LTC policies. Such care incurred in the home can be expensive, especially if around-the-clock care is called for. One should build in the maximum amount of this type of coverage available in the policy.

J. Brendan Ryan is a Cincinnati insurance agent. His column appears every other Saturday. Contact him at 2212 Victory Parkway, Cincinnati 45206; 221-1454; fax 221-3447; or e-mail ryanatpineridge@aol.com.




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