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A tax freight train is bearing down on your retirement. To protect yourself, you'll have to harness The Power of Zero.
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Hello. David McKnight here of The Power of Zero show. Grateful that you took out a little bit of time from your schedule to spend some time with me. As usual, you can find out more about me at davidmcknight.com. You can find out more about our books, The Power of Zero, of course, the updated and revised version through Penguin Random House, one of the best-selling retirement books out there. I hope that if you have not yet bought a copy that you do so. We also have the sequel to The Power of Zero which is Look Before You LIRP which talks about the 10 attributes I look for in an LIRP if it's something I'm going to be married to for the rest of my life. Then my latest book, which is The Volatility Shield: How to Vanquish the 4% Rule and Maximize Your Retirement Income which is a little bit different from the other two as I've noted in previous podcasts, it's a story with a crime that has to be solved, $5 million goes missing, and Jack Wheeler is hot on the trail, but there are very important financial principles couched within the story. If you want to learn about financial principles in a fun way, about an hour-and-a-half read, about a hundred pages where you won't even be aware of the passage of time, I would recommend this book that can be bought on Amazon only at this point, bulk sales are coming out shortly.
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Today, I would like to discuss, not an article, so much as it is a chart that appeared in Kiplinger's Personal Finance magazine in March of 2019. The title of the chart is Four Ways to Pay for Long-term Care. Now, I have long maintained that the best most heartburn-free way of paying for long-term care protection is by way of a permanent life insurance policy. Why? Because with permanent life insurance, if you die peacefully in your sleep 30 years from now never having any long-term care, someone's still getting a death benefit. There isn't that sensation of having paid for something you hope you never have to use. I'll post this article to my blog so if you go to theperfecttaxbracket.com, you'll be able to see this actual chart, I'll post that along with the announcement of this blog going live next week so you'll be able to see this if you want to. But I just want to go through it because I think it really drives home this idea that permanent life insurance really is a compelling way to solve the long-term care dilemma.
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Now, remember, why do we need long-term care? We need long-term care because if you are married—and I usually go through this conversation with clients, I'll look at Mr. and Mrs. Jones, I'll say, “Mr. Jones, you know I love you, right?” He'll say, “Yeah, I know you love me, Dave.” I'll say, “I love you, but you're better off dying than needing long-term care.” He'll say, “Why is that?” I'll say, “Because at least, if you died, your spouse would be beneficiary on all of your retirement accounts, she's beneficiary of your 401(k), your IRA, so on and so forth. While we would miss you terribly if you died, life for Mrs. Jones here would go on relatively unchanged because she's going to be the beneficiary of all these different accounts. However, if you didn't die, if you almost died, and you ended up needing long-term care now, she gets to keep one house, one car, a minimum monthly maintenance needs allowance, which is in most states is about $2,500 a month and about $126,000 of cash, everything else gets earmarked for the long-term care facility. What was shaping up to be a perfectly rosy retirement for Mrs. Jones here turns into bare-bones subsistence-type living which is not something she was really looking forward to. Given that 70% of people will need long-term care insurance at some point in their retirement, this is something that people should be thinking about.”
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We know it's a big deal for 70% of the people, if you're between 50 and 65, chances are you have at least one parent that is going through long-term care, even as we speak and you're thinking to yourself, “How do I deal with long-term care?” If you're looking to ensure the need as opposed to self ensuring, relying on your children, or paying out of pocket, what have you, there's really four ways to do it. The first way is through a traditional long-term care policy. Now, these are really falling out of favor, the sales are plummeting. One of the big reasons is that the prices are not guaranteed on these programs and actuarially, they've had a tough time figuring out how much to set aside to pay for all these benefits and it's been much more expensive than the actuaries ever anticipated, they just don't have enough field experience to understand how expensive it is to cover a long-term care event. While this option is going to be the least expensive of all the options, they reserve the right to increase the price at their leisure. I'll tell you what, if you give an insurance company 30 years to make up their mind on how much they want to charge you, that's a little bit like having their fox in your chicken coop, sooner or later, they're going to make a decision that doesn't ultimately benefit you.
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In this particular chart, this little matrix, traditional long-term care policy is going to cost $1,533 for the male and $2,475 for the female. We're assuming that these premiums would be paid over 25 years which means that the male will have paid $38,000, the female $61,000, and we're assuming a 3-year payout of $329,313 each. That's a decent benefit, that’s over $100,000 per year to be able to cover long-term care. When supplemented by Social Security, that's going to cover a lot of the long-term care. Here is the big deal, when you get down to the very last row in this matrix “Value if no care is needed,” in other words, how much money is still there that can be passed on to heirs if these people died peacefully in their sleep essentially 25 years from now never having needed the coverage. By the way, this is on a 55-year-old man and a woman, and what they're looking for is $4,500 a month of coverage over 3 years. These are the various options they're looking at. The big number here on traditional long-term care is zero, they get nothing at the end, it's like renting the coverage, if they died peacefully in their sleep never having used it, they get nothing back at the end. That is one of the primary reasons why people are not approaching this because it gives you that heartburn knowing that you can pay, pay, pay for 30 years, die peacefully in your sleep never having to use it, nobody gets anything at the end.
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The second option is what we call hybrid life insurance/long-term care or what we call the asset-based approach. What you do is you can either do a lump sum or maybe you do like a 10-pay, in this case, they're doing a 10-pay. The husband is putting about $9,500 in, the wife's putting in about $10,300 over the course of 10 years. Cumulatively, over those 10 years, they put in $95,000 for the man, $103,000 for the woman, roughly 3 times as much for the man and roughly not quite double for the woman over the traditional long-term care approach, but they get a slightly superior payout for long-term care over 3 years, they each get $339,291. Those payouts are starting at age 80. First scenario, they pay 25 years, and at age 80, they need the benefit. Here, they're paying for 10 years, then they need the benefit at age 80. The death benefit left over at the end—should they die peacefully in their sleep never having used it—is basically a little bit more than a refund of what they've put in, they put in $95,000 for the man, they get back $108,000 at death. They put in $103,000 for the woman and they get $119,000 back at death. If you're looking at this from a pure investment standpoint, over 25 years, they put in $200,000 and they got back a little bit over $200,000. If you were to do the internal rate of return on that, it's pretty low, it's less than 1%. But you do get $339,000 each should you end up needing long-term care. I don't know how warm and fuzzy I would feel at the end of the day getting only the $108,000 and the $119,000 back at the end but it's certainly superior to what you're getting for the long-term care, but you're putting quite a bit more into it than you did with the traditional long-term care.
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Now the third column is my favorite, I'll let you choose which one you like the best, the male is going to put in $6,500 per year over 25 years, the female is going to put in $5,600 per year over 25 years, total premium for the male is $162,000, total premium for the female is $141,000, about $300,000 which is about $100,000 more than what they put into the asset-based approach, which is their second option here. They get roughly an equivalent payout over those 3 years, the male gets $336,960, the woman gets $344,160. That's the payout, that's what they would get over the course of those three years. It's equivalent to the first two options.
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Here is the big difference, here's where I believe that life insurance makes the other two options pale in comparison. With the life insurance, if no long-term care is needed, if they die peacefully in their sleep 30 years from now never having used it, guess what, the male gets $468,000 of death benefit that gets passed on to his heirs tax-free, the female gets $478,000 of death benefit that goes tax-free to the heir. We're talking about $940,000 of death benefit that goes tax-free to your heirs in the event that you die peacefully in your sleep 30 from now, in this case, 25 years from now never having needed the long-term care. That's a compelling option. There's a reason why more and more people are starting to look at traditional life insurance as a way to handle long-term care.
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Interesting scenario, I had a life insurance agent out of Nebraska, he called me the other day and he said, “Dave, I gotta give you some kudos,” I said, “What did I do? What happened?” He said he had a former client who was figuring out how to handle the long-term care, had somebody offering an asset-based care approach, another person was offering a traditional long-term care approach, and he had offered the permanent life-insurance approach. The client wasn't really sure what to do, sort of hemmed and hawed and didn't really get off a square one. He gave them a copy of The Volatility Shield which has a couple of different financial principles couched within it. Chief among which are this idea of The Volatility Shield that you can maximize your withdrawal rates in your retirement if you have life insurance to help you offset the volatility, but there's a second one which basically says, “You can use permanent life insurance cash value life insurance to pay for long-term care in retirement, and whatever's leftover at the end goes tax-free to the heirs. They read the book and they came back and they said, “We like your option, we'll go with that.” We're starting to get more and more of these types of success stories that people are finding permanent life insurance to be the best option when it comes to paying for long-term care.
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Now, there's a fourth option here which is a deferred-income annuity, many of which have long-term care options. This couple, the male puts in, at age 55, drops a lump sum in $298,000, the female drops in $362,000, what have they put in over the course of the 25 years? It's just those two lump sums, for the man, $298,000, for the woman, $362,000. They're able to get the same amount of long-term care out, $339,000 each, but they also have $113,000 per year guaranteed annuity that goes every year until death, that actually starts at age 80, they're giving you that $113,000 per year starting at age 80 and going until essentially life expectancy. That's a little bit of a different animal accomplishing two things at the same time. You certainly have to have a lot more money upfront to be able to accomplish it. When you look at this matrix, the thing that really jumps out at you is with the permanent life insurance, what's leftover at the end should you die without ever having any long-term care insurance and it's almost $1 million that's left there that gets passed on to the next generation.
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There's another thing that you got to remember that's great about permanent life insurance is when you die, you don't have to liquidate your other assets right away. Why? Because your permanent life insurance is—especially if you're not using the VUL, you’re using either whole life, universal life, or fixed indexed universal life—a safe and productive way to grow your money, you are not having to liquidate 401(k)s and IRAs if in the year that you die—to pay for taxes, to liquidate debts, or what have you—the stock market is down because you have this life insurance that you can liquidate in that year to pay for expenses which serves as a volatility shield. In other words, that life insurance is not affected by the downward turn in the market in the year in which you die, therefore, that's the best place to draw money from to pay for funeral expenses, liquidating debt, what other expenses there may happen to be, incident to the death of a person, and then that, of course, gives a chance for your stock market portfolio to recover. But the fact that in this scenario, you put in about $300,000, you had the long-term care production a long way, should you die peacefully in your sleep never having used it, you're still $1 million left over at the end, that's a big deal and that's why, at least, with 50 to 65-year-olds, it's one of the main things that we talk about. We talk about LIRP, yes, it's safe and productive, yes, there's a death benefit, but that long-term care which is so critical to any retirement plan—because there's a 70% chance you're going to need it—that long-term care is a big, big deal and it's so attractive to be able to feel like you got that covered without ultimately feeling like you're paying for it, in other words, that death benefit will go to the next generation should you not need it.
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That's the show for today. If you want to see this matrix, I would encourage you to go to theperfecttaxbracket.com and you will find it there and take a look at it, I think you'll be as impressed with it as I was.
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Once again, I think a confirmation that if you have adopted The Power of Zero worldview, that you're certainly on the right path and you're going in the right direction. Again, subscribe to the podcast if you want to be updated any time, it comes out on iTunes, of course, you can find it on YouTube, you can subscribe to my YouTube channel, so on and so forth. Thanks, everybody for being on the show today. We look forward to seeing you next week. Bye for now.
