Long-Term Care

Long-Term-Care Scare

This month Kim answers your questions about buying a long-term-care policy, selling savings bonds, claiming tax breaks for refinancing and more.

By Kimberly Lankford, Contributing Editor

From Kiplinger's Personal Finance magazine, July 2009

If you have sufficient assets set aside, would it be better to self-insure against potential long-term-care costs rather than pay premiums for long-term-care insurance?
--R.W., via e-mail

You should consider buying long-term-care insurance no matter how much you have in savings. The potential price tag of a long illness is scary: The average cost for a private room in a nursing home is $74,208 a year, or $203 a day, according to Genworth Financial's 2009 cost-of-care survey. If those figures continue to rise at the current rate (more than 4% per year), a year in a nursing home could cost more than $270,000 in 30 years.

That means a stay in a nursing home or an assisted-living facility could quickly deplete your retirement savings, even if you start out with a substantial nest egg. Right now, most long-term-care claims involve in-home care, but that can cost even more than a nursing home. The Genworth survey found that the average state-licensed home health aide charges $18.50 per hour, which tops $220 per day if you need 12 hours or more of daily care.

To figure how much coverage you should buy, start by looking at the average cost of care in the area where you plan to live. The cost of a private room in a nursing home averages $49,153 per year in Idaho; but it runs $125,925 in Connecticut, according to the Genworth study.

Buy inflation protection so that your coverage keeps up with climbing costs, especially if you're in your fifties or sixties. The more difficult decision is the benefit period. Premiums for lifetime benefits are usually about twice as much as they are for a three-year benefit period, which is enough to cover the average length of care.

For more information about buying a policy and selecting an insurer, go to Kiplinger's Long-Term Care Center.

Tax breaks for refinancers

Are there any special tax breaks for people who refinance their mortgage this year?
--Deenice Galloway, Bowie, Md.

If you itemize deductions, you can write off points that you pay to refinance your mortgage, but the rules for refinancing are trickier than for buying. Instead of deducting those points (each point equals 1% of the loan amount) all at once, you must spread the deduction over the life of the loan -- that is, on a 30-year loan, you may deduct only one-thirtieth every year.

But if you refinance the mortgage again, you can generally deduct the remaining points in the year that your loan is paid off with the second refinancing. Then each year you could deduct a portion of the points paid for the new loan. One exception: If you refinance with the same lender, you cannot deduct the remaining points in one year. Instead, they are added to the points charged on the second refinancing and deducted over the life of the loan.

You can also deduct private mortgage insurance on loans taken out in 2007 or later. The deduction applies to premiums paid for mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration and the Rural Housing Service as well. But this write-off phases out as income rises above $50,000 for married taxpayers filing separate returns or above $100,000 for single filers, heads of household or married taxpayers filing jointly. The deduction is set to expire at the end of 2010, unless Congress extends the provision (for more information, see Refinance, If You Can).

Less than zeros

In a recent column, economist A. Gary Shilling wrote that if you had invested in zero-coupon bonds over the past 25 years, you would have earned 11 times more than you would have investing in Standard & Poor's 500-stock index. If that's true, is it a good idea to buy zero-coupon bonds?
--Tom Ambalam, Richland, Wash.

This is one of those instances in which the past is almost certainly not prologue. Zeros are bonds that pay no current interest but are sold at a deep discount to their maturity value. So, for example, if you buy a zero-coupon Treasury bond that comes due in 25 years, you'll pay about $320 today and get back $1,000 at maturity. But on a day-to-day basis, zeros are volatile. If interest rates rise and you must sell before maturity, you'll lose a lot more with zeros than you will with regular Treasuries. (There are also corporate and municipal zeros.)

If you bought zeros in the early to mid 1980s, when long-term Treasury bonds sported double-digit yields (peaking above 15% in 1981), and held until today, you scored big. We don't know how Shilling arrived at his figures, but a good proxy for the long-term perform-ance of Treasury zeros is the American Century Target Maturity 2010 fund (symbol ACTRX). From March 31, 1985, through March 31, 2009, the fund, which invests in Treasury zeros that mature next year, returned 11.4% annualized. Over the same period, an index of Treasury zeros returned 12.5% annualized, and the S&P 500 gained 9% a year.

We can say with virtual certainty that zeros won't do as well as they did during the previous quarter-century. In the case of the Treasury zero cited above, if you buy today and hold until it matures, your guaranteed rate of return is 4.6% annualized. You'd be wise to hold off on buying long-term zeros until Treasuries offer more-generous yields.

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