NEWARK, N.J.--(BUSINESS WIRE)--Whether it’s taking stock of all your potential income sources, making sure you don’t miss out on maximum Social Security benefits or figuring out how to fund post-retirement health-care coverage, there are a number of critical investment decisions Americans in The Retirement Red Zone—the five years before and after retirement—should make.

Prudential Financial can help with those decisions. Its retirement experts have developed 12 practical tips to help you manage financial risks so you don’t see, well, red, in The Retirement Red Zone. And some of these decisions are best made right now, during tax season. This week’s tip marks the eighth in a series that will run through May 6.

Tip No. 8: Look at current long-term care insurance needs.

Individuals often purchase long-term care protection for the purpose of insuring that they will have sufficient funds to pay for the cost of long-term care. Assuming individuals cannot afford to self-insure this risk and do not want to spend down their assets in order to become eligible for Medicaid, such insurance may be a good way to manage the risk of significant long-term care expenses.

For many, though, the cost of long-term care insurance is prohibitive. “There are alternatives, such as buying some coverage with a lengthy elimination period—that is, the period between when the need for long-term care arises and when the long-term care coverage begins,” notes Robert Fishbein, a vice president and corporate counsel in Prudential Financial’s Tax Department. “This will reduce the cost yet still provide a type of limited stop loss protection in the event the long-term care need exceeds the lengthy elimination period. While perhaps not the ideal solution, some long-term care protection is better than none in managing this potentially significant expense.”

Another alternative to explore is funding a long-term care policy with a life insurance or annuity contract that is no longer needed. Fishbein points out that starting in 2010, an individual can exchange a life insurance or annuity contract, on an income tax-free basis, for a long-term care contract. “For example, a life insurance contract with $100,000 of cash surrender value and a tax basis of $50,000 can be exchanged for a single premium long-term care insurance contract with a $100,000 premium. Prior to the change in law, an individual would have had to pay tax on the $50,000 of gain from the life insurance contract, reducing the amount available to purchase long-term care insurance by approximately $20,000—assuming the $50,000 of gain is subject to federal and state income tax at a rate of 40 percent,” says Fishbein. Because not all companies that sell long-term care insurance sell a single premium policy, a variation on this approach would be to take some of the cash surrender value over time in the form of partial exchanges to provide funding for long-term care insurance, also without subjecting the gain in the contract to tax. “Of course, it’s critical to determine whether the individual’s insurance protection needs have indeed changed,” Fishbein adds.

Given that the likelihood of needing long-term care increases with age, purchasing a policy should be given important consideration in The Retirement Red Zone.

Prudential Financial, Inc. (NYSE: PRU - News), a financial services leader with approximately $648 billion of assets under management as of December 31, 2007, has operations in the United States, Asia, Europe, and Latin America. Leveraging its heritage of life insurance and asset management expertise, Prudential is focused on helping more than 50 million individual and institutional customers grow and protect their wealth. The company’s well-known Rock symbol is an icon of strength, stability, expertise and innovation that has stood the test of time. Prudential's businesses offer a variety of products and services, including life insurance, annuities, retirement-related services, mutual funds, investment management, and real estate services. For more information, please visit www.prudential.com/retirementincome.

The Prudential Insurance Company of America, Newark, New Jersey.

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Source: Prudential Financial, Inc.

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