Battling the Current Interest Rate Environment….One Idea

All over the country traditional C.D. investors are looking at renewal rates when their maturity date comes and not liking what they are seeing.  According to bankrate.com the national average for a 1-year certificate of deposit is 1.10%.  The 5-year average isn’t much better at 2.27%.  Even at a low inflation rate (CPI was up 0.87% in 2010) it is quite possible that a short-term C.D. investor could lose purchasing power after inflation and taxes are considered.

Where should you go? 

There are always a myriad of options for investors that vary in their risk, return and complexity.  Here’s one idea to consider:

Leverage your dollars by purchasing a hybrid long-term care policy. 

What makes a policy hybrid is that it offers coverage for long-term care costs as well as a residual death benefit if those costs are not incurred.

Here are a couple of reasons why:

Estate Preservation

Long-term care costs have skyrocketed.  Annual assisted living facility cost could be $40,000 according to a Met Life Survey .  Nursing home costs could be double that amount.  If you have a $50,000 C.D. with the idea of passing it along to your heirs, consider the fact that $50,000 for a female age 65 could be leveraged into $250,000 of long-term care coverage.   In order for someone that is “self-insured” to turn $50,000 into $250,000 by the age of 85 they would need an after-tax annual rate of return of 8.38%.

If you don’t use the policy for long-term care cost there is a death benefit feature that could be as much as 167% of your original premium or $83,500.  Although traditional long-term care policies can offer more coverage for care, there is no death benefit if the money isn’t used for it.

Flexibility

The great feature of these hybrid policies is they have a “trap door” feature that allows you to get back the premiums at any time, for any reason.  Let’s say five years down the road 1-year C.D.s are paying 5% and you felt like you made an awful mistake.  No problem, you can withdrawal your premium.  The drawback is that you wouldn’t get paid any interest over that time.  But considering that at 1.1% $50,000 would only turn into $52,811.17 in five years it might not be that big of a deal.  In fact if rates did go up that much you would make up most of the lost interest in one year.

Stay at home

Nobody’s goal is to go to a nursing home or similar type facility, which is why some refuse to plan for it.  Using the same logic I could argue against home owner’s insurance because I don’t want my house to burn down.  It doesn’t make sense.  Long-term care planning can include your plan to stay out of the nursing home by paying for in-home care.  If remaining in your home is your ultimate goal you are going to get more for your money from some type of long-term care policy.

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