Sample Chapter

The adage “people don’t plan to fail, they just fail to plan” has echoed through the minds, across the lips, into ears and read through the eyes of financial planners round the world for decades. With 78 million baby boomers now aging – many of whom cared for their parents – a long forecasted tsunami is now imminent. It is no secret that baby boomers have grossly underestimated the cost of living in retirement and overestimated income from Social Security. Millions falsely believe that Medicare will pay all their long-term care costs. The Employee Benefits Research Institute (“EBRI”) Retirement Confidence Index (“RCI”) study of 2009 reports only 17% of pre-retirees ages 45-54 have saved $250,000 or more, excluding home equity, for retirement. Further, the RCI reported the cost of medical care for 40% of retirees is greater than expected verses pre-retiree estimates. Consider that 64% of people age 21 to 75 state they believe they’ll live to age 85 yet fewer than 31% of those surveyed have done any LTC planning. Only about 10% of the adult Americans any have long-term care insurance, LTCI. In fact, the plate of financial planning and management, elder care, and emotional burden of elder health and welfare is largely shifted to the surviving family.[1] However, the lion’s share of the cost of long term care, a multibillion dollar annual price tag, is billed to taxpayers via Medicaid. What does this mean to you and what if anything, can you do?

There are key things that most of us can do. It begins and ends with a plan.

  • List your values and compare them to your mate’s values to see where they are harmonic and where they are different.
  • Set goals. Start from the simple, such as an automatic savings plan and work up.
  • Set an action plan in place with specific steps and a new sense of urgency
  • Enroll other players in what you are up to. Families who talk together are more likely to stay intact. Remember, aging for those lucky enough to reach it, is a reality for the majority. It should not be shameful to discuss it or to share your plans with friends and family.
  • Have specific dates and times for accomplishing each goal
  • Make yourself accountable to others and vice-versa for accomplishing each task.

Next, determine the financial hole that you will need to fill in and then decide how best to do just that. For example, if you project that long-term care expense will be $82,000 per year and you feel confident that you can fund $12,000, where will the other $70,000 come from?  This is a critical question because what you do here determines what happens to you and your assets down the road – which may be sooner than you think. Your options from best to worst are listed below.

    1. Purchase qualifying [2] long-term care insurance, LTCI to fill the gap.
    2. Be wealthy enough to afford this cost. The risk here is that your financial standing could change and you could be facing a mountain of bills tomorrow you can’t afford to pay.
    3. Do nothing and chance that you will be one of the financially lucky healthy people who die suddenly.

Of these three options the smart choice is purchasing a LTCI. The purpose of LTCI like all insurance is to pool and spread your risk. In other words, instead of you alone assuming all the risk, a large pool of people will pay your costs (and you theirs) should you incur an insurable loss.  First consider how much, if any, LTCI you have with your group plan at work. Where are the gaps in coverage? Will it cover you if you leave work? Then think individual policies: What should you look for in a policy? Here are a few policy provisions that can save you money and increase your coverage.

  • Medicare coverage. Medicare can cover you during the elimination (waiting period) of your LTCI policy. If you have or will have Medicare, purchase an LTCI policy with at least a 60 day waiting period. As long as the insured is discharged to a skilled facility after 3 nights in a hospital, Medicare picks up 80% of the tab for up to 60 days in any given year. Assuming you have good Medigap insurance your cost should be covered.
  • Age verses cost. The cost of long-term care varies significantly by state. In 2002, a policy offering a $150 per day long-term care benefit for four years, with a 90-day deductible, cost a 50-year-old a national average of $564 per year. For someone who was 65 years old, the national average cost was $1,337, and for a 79-year-old, the national average cost was $5,330. The same policy with an inflation protection feature cost, on average nationally, $1,134 at age 50, $2,346 at age 65, and $7,572 at age 79.[3] Today’s rates are much higher because insurance claims have risen substantially. Check rates and benefits with your financial planner.
  • Elimination period. Cover your elimination period with cash savings. Beyond 60 days determine how many days you can pay for out of pocket. For example if the cost is $300 per day and you can front the $9,000 from savings, you may elect a policy with a 90 day elimination period. The premium savings over a 30 day elimination projected over 10 years can be significant.
  • Pooled benefit policies. Some policies permit couples to pool their benefit. LTCI may pool years of insurance benefits of the couple to benefit one or both for the cumulative number of years both are insured. So if both purchase a 4-year policy any combination of one or both may use up to 8 years of benefits. This will stop when eight years of payments have been made whether one or both beneficiaries used it. Premiums are a little higher, but weighed against the potential longer term benefit, it can be a bargain.
  • Lifetime benefit means just that. The policy will pay for the lifetime of the insured. Because of the unlimited term and thus risk to the insurance company, these are expensive policies. They should be taken only if you have reason to believe the insured has such a risk or you do not wish to place your assets at risk for sale or liens.[4] Lifetime policies should be carefully weighed against the benefits and lower costs of shared and individual ones.
  • Waiver of Premium: This provision allows you to stop paying premiums during the time you are receiving benefits. Read the policy carefully to see if there are any restrictions, such as a requirement to be in a long-term care facility for a certain length of time (90 days is a typical requirement) before premiums are waived.[5]
  • Medicaid lien protection. Partnership plans are specific plans approved by most of the 50 United States that offer a degree of asset protection to policy holders. Some older plans have been grandfathered under these laws. Basically, these laws say that if you have a certain amount and term in years, of LTCI, certain assets like your home or bank and financial funds to a certain limit will be exempt from a Medicaid lien. Not all states have partnership plans, but most are developing them. The reason is to encourage people to purchase LTCI and shift more of the cost of LTC to insurance companies and less from increasingly over-burdened state budgets and the consequence of that; tax rates. Rules vary by state. Generally, to qualify, the policy must have upwards of 2 years of benefits. Contact your state to see if it has partnership status.[6]
  • Reciprocity. Planning to move to a new state or country? Got an LTCI? At this point you may have a good marriage with your mate, but does your policy marry up with your new state’s partnership plan? Will your policy pay for care outside of the USA? These are things you want to discuss with your financial planner and insurance agent. A wise adage is to plan liberally and live conservatively.
  • What do you tell your insurance agent when you apply? What do you need to say? Fully disclose all medical history to him or her so he or she may obtain the best policy from the best company at the best price for you.
  • When should you buy LTCI? Buy your coverage on your fiftieth birthday to save the most on premiums and to increase the likelihood that you will be insurable. The better your health and the younger you are, the lower your costs will be. Experience taught me that it is a lot easier to pay a small very affordable premium over a very long time than a large premium over a short time especially when I consider the weight of a large and increasing premium during fixed income years.
  • Inflation protection. Inflation, of course, means that everything costs more tomorrow than it does today. LTCI is no exception. Plan on cost increases at a rate of at 2-4 times the annual inflation rate. This is another reason to insure early; a 6% increase of $100 is much more palatable than a 6% increase of $1,000 for those who wait into their sixties to insure.
  • The Money Tree[7] is a way to obtain long-term care insurance and profit by using other people’s money, OPM. This strategy smartly invests loan proceeds and then pays premiums from investment earnings. The foundation of the strategy in this example is a home equity loan at a low interest rate. Since the home is the largest asset most Americans have it makes sense to integrate it into financial planning and cash flow planning– if it can be done safely. Here’s but one example of how it could work.

Al and Betty, a healthy non-smoking couple when both age in their early 50’s and with excellent credit borrowed a total of $251,000 (they owed only $1,000 on their present mortgage) from their bank in the form of a 30 year fixed rate at mortgage at 4.625%[8] on their personal residence valued at $460,000. Guided by their written financial plan, they immediately transferred this cash to a living trust fund their Financial Advisor helped them establish at their brokerage firm. They invested the money in a diversified growth and income portfolio with an average total return of 10%; generating an average $25,000 per year in tax-favored capital gains and dividends. The couple used $1,290 per month, or $15,480 annually to service this debt. With annual surplus cash flow of about $9,520 they each purchased 30 year term life policies for about $1,406/year total.[9] From the remaining cash flow of $8,114, they bought a pooled benefit LTCI with a 90 day elimination (waiting) period that will cover each of them for costs of $400/day.[10] Some of the various scenarios are depicted in the following table.

Future cash flow scenarios for Al & Betty

Number of people Surviving 29.99 years Nursing home 4 Yr cost W/O LTCI[11] Nursing home 4 year cost with LTCI Life Insurance Death Benefit Trust Fund Balance at Years 5, 20, 30 MortgageBalanceYears 5, 20, 30 Net Gain Less Home Loan Balance[12]
0 0 0 $500,000 $256,993 $227,675 $529,318
1 $548,000 0 $250,000 $315,603 $119,516 $994,807
2 $1,096,000 0 0 $438,411 0 $1,534,411

 


 

 

 

How will this all end for Al and Betty? Who knows? In the best case scenario this couple ends life about 1.5 million dollars ahead of where they would have been had they elected to do nothing and go naked into the future. Financially speaking (but happily for them) the worst case scenario neither uses LTCI, both survive the 30 year term life insurance policy which expires, but reap around $438,411 before taxes in their trust fund after making the final payment on their 30-year mortgage. Even if the trust fund did not perform nearly as well as expected, a healthy balance would likely still remain. Best of all, no matter what is in the couple’s future the trust fund would likely have paid their LTCI and life insurance premiums with no net cost to them for the remainder of their lives except for continued LTCI premium cost – which the trust could easily pay until their deaths. An added bonus is both their mortgage interest and LTCI premiums may be tax deductible.

What if one partner dies? If one or both partners die while their life insurance is in force, premiums for LTCI and life insurance will no longer need to be paid from the trust. This adds about $3,100.00 per year cash flow back into the trust balance for compounding per person. These figures are not included in table 1. Also, the long term care daily costs are adjusted to reflect Al and Betty’s out-of-pocket expense for the first 90 days assuming Medicare and other insurance pays zero.

How could they lower premiums and lower their investment risk too?

If Al and Betty chose one year less of LTCI benefit, three verses four years, or a guaranteed purchase option instead of the 5% simple inflation rider were selected, LTCI premiums would reduce by more than $1,000 per year for two. To shrink premiums further, they could reduce the daily coverage to $300 if that was the rate they expected to pay in their state.

Furthermore, to provide insurance benefits beyond the three years, married couples like Al and Betty can select a pooled benefit option whereby either spouse may use the others unused benefits up to a lifetime total, for example, four or six years. They could cut each policy coverage period and thus the premium cost, in half. These additional annual positive cash flows would allow the Money Tree user the opportunity to require a lower rate of return less than 8% verses 10%, a more realistic outcome. Almost infinite other adjustments can also be made to further cut the required rate of return and the concurrent risks associated with it.[13] I used this Mercedes level LTCI plan to demonstrate how even the best insurance is affordable and attainable for healthy people with good credit and home equity.

With low, low interest rates that will bounce upward in time, now is the best time ever for the Money Tree strategy. Why?

  1. As of June 24, 2011, 30 year fixed rates have dropped from 4.625% to 4.25% and payments are reduced to $1,205. This rate adds $1,020 in positive cash flows to the trust annually.
  2. As interest rates rise, earnings in the trust fund will likely rise with it with a professionally managed asset allocation.
  3. With the fixed rate mortgage, interest rates remain static allowing the interest spread and account earnings to increase with time.
  4. As inflation takes root, the fixed rate mortgage will be paid with inflated dollars against low fixed costs. A $100,000 balance on a mortgage may only be worth half that much, or far less, in today’s dollars. By the time our parents, for example, paid their last dollars on their mortgages they had seen their wages and purchasing power increase perhaps a hundred fold but the value of the dollar had shrunk to pennies when compared to the day they made their first payment.
  5. Over a 30 year span home equity value will likely increase at least as much as the consumer price index, CPI, to a multiple of the amount borrowed. This is an additional asset that can be used for living expenses or a use asset whether or not long term care is required.
  6. The Tax Code has never favored this strategy more than right now. The maximum tax rate on the living trust income is 15% and the tax deduction on home loan interest is still your highest marginal tax rate, the rate you are charged on the last dollar of income for the tax year.

Tax benefits:

      • Trust earns $25,000/year and pays out $15,480 annually to bank at 4.625%, 30 year fixed rate.
      • Trust pays for two long term care insurance policies 5% simple inflation adjusted for $400 per day individual benefit and 4 years for $2,400 per year each.
      • Trust funds two 30 year $250,000 level term life insurance policies for $1,406 total cost.Death proceeds payable to their trust fund.

If you currently own a home consider President Obama’s Making Home Affordable program for refinancing your home at the lowest possible interest rate and longest fixed term, up to 40 years.[14] You may be surprised to see how flexible this program is to the financial needs of home owners. You can owe up to $729,750 and still qualify for a loan modification to affordable terms. Once you are back on your feet, your surplus cash flows may be added to further fund your financial security.

You don’t have a home you say? Well then why not start by planning to be a home owner and build equity while you have a good place to hang your hat too? Homes and interest rates are at historically low, low prices. This phenomenon may not repeat for decades. When opportunity knocks, don’t slam the door. The first step is to decide who to title the home to. It can be you, your spouse, both, or a trust. (Page link) Before you make that decision, determine who has the best credit score (page link) because that is the person who will get the lowest interest rate and the most favorable mortgage terms. If you are fortunate to buy a home at a deep discount through short sales or foreclosures you could witness your equity increase within a year or two. This is especially true if you fixed up your home. An increased bank valuation would vault you into added borrowing capacity that might qualify you for a Money Tree strategy sooner than you think. It really depends on you and the economy. One thing we all know is that time changes everything!

Ethical question: Is borrowing money directly (Farmers Home Administration)[15] and  Making Homes Affordable[16], or indirectly from the federal government (FHA, VA) to make enough money to fund your long term care needs ethical? I guess the answer depends on what you think is best for your family and our nation. It certainly is legal, but just because it’s legal does that mean it’s also ethical? Was it ethical for your parents and grandparents to obtain federally backed loans at low interest and pay down fixed costs with vastly inflated dollars over a 30 year period in what amounted to a huge government subsidy? Is it preferable to taxpayers for you to decline this strategy and risk stiffing them and the next generation with a huge long term care cost by going on Medicaid? It’s a catch 22. Chances are that it would cost taxpayers far, far more if you chose the latter. As long as you are honest and truthful with yourself and in all your dealings planning your finances, your financial security is the responsible thing to do. If you compromise on this personal and family responsibility you may be creating a worse financial cloud for our nation as well as yourself.

Long term care insurance is affordable and within easy of most Americans through smart planning today. It can fill the gap between what we need in long-term care and what we can afford. It can also save our assets and our families from surprises like high costs, liens, and huge care burdens that afflict millions of spouses and children today. Most of all, LTCI allows elders to retain dignity and have the choice of not only where to live, but the quality of their lives by choosing a facility that best suits their needs. Keep in mind that there is a lot of choice these days. Living arrangements can step from home care to community care, at an elder’s home, or moving away to a semi-skilled communal assisted living and finally 24-hour skilled care, aka, nursing home.

With anyone of these choices the quality of care and the attractiveness of the facility scale from poor to excellent and near to far. Small things like in house activity programs, email access (to stay in touch with family and family photos) often make a big difference for the elder’s spirit. The degree of community involvement at a facility can make the difference between a twinkle in the eye and frequent happy smiles of your elder to a loss of the will to live in an environment bereft of effective social involvement (some places may have great calendar schedules of events but staff make little effort to effectively enroll residents in activities). LTCI can take the question of “how will we be able to afford to pay for this?” off the table because it is already paid for when it’s planned for. The Money Tree strategy is just one of many means to a secure this end. A further benefit of policy owners is that insurance companies often become the care coordinator providing choices and lifting much of the burden from the shoulders of medically untrained family members when an emergency occurs. Move over Fido: LTCI can be a family’s best friend when they most need it and planned right, it needn’t cost them a cent!

In this chapter we have hovered over how LTCI works, why you may need it and how it could work for you. Blended with life insurance, debt and an investment strategy, the Money Tree, readers can better understand the power and wonderful possibilities that often arise when planning wisely. By taking charge of the future today, tomorrow becomes less worrisome. Wise families love together, learn together, plan together and plan together. They embrace the future as an opportunity. They create lasting, loving and happy legacies. A serendipitous product of that is transcendent wealth and wisdom.

Where can you find more information on LTCI?  Look here to find more helpful resources on this vital topic.

American Health Care Association
1201 L Street, N.W.
Washington, D.C. 20005
(202) 842-4444
www.ahca.org

National Association of Insurance Commissioners
2301 McGee Street, Suite 800
Kansas City, MO 64108
(816) 842-3600
www.naic.org

National Council on the Aging
300 D Street, SW, Suite 801
Washington, DC 20024
(202) 479-1200
www.ncoa.org

University of Minnesota Extension Service
www.financinglongtermcare.umn.edu

National Association of Insurance Commissioners

 

To obtain a free “Consumer Action Handbook” and a listing of state insurance regulators from the Federal Action Website go to http://www.consumeraction.gov/insurance.shtml

 


[1] Greenwald & Associates survey in 2006 for John Hancock Life Insurance Companyhttp://seniorjournal.com/NEWS/Money/6-07-05-AmericansLess.htm
[2] Plans that qualify for a federal tax income deduction for premiums paid
[3] http://www.pueblo.gsa.gov/cic_text/health/ltc/guide.htm#policies
[4] Under certain circumstances, Medicaid by law may attach liens on real and personal property of beneficiary and their spouse to recoup monies paid for LTC. Check your state’s regulations.
[5] http://www.pueblo.gsa.gov/cic_text/health/ltc/guide.htm#policies
[6] http://www.consumeraction.gov/insurance.shtml
[7] Money Tree is a strategy invented by the author to fund large cash needs with positive repeating cash flows through risk adjusted returns and low risk debt strategies.
[8] May 2, 2011 rate with published fee of $430.00. Quoted at: http://www.zillow.com/mortgage/BorrowerQuoteDetail.htm?quote=ZQ-PZQDZCF
[9] www.SBLI.com as of May 2, 2011
[10] $400 per day rate
[11] In today’s dollars with a 5% simple interest inflation rider and a $400.00 per day benefit.
[12] Balances are tax neutral. Dividends and capital gain income from the trust are currently taxed at a maximum 15% rate. Home mortgage interest is deductible at the highest marginal rate likely to be 25% or more for many taxpayers providing a positive net tax benefit. Income tax benefits and deductions are not factored into these equations. Capital gains rates are currently 10-20 points lower than a given marginal rate.
[13] Assumptions: The couple is in excellent health, the home owner has excellent credit, and they are age 50 at the time of purchase.
[14] www.Makinghomeaffordable.gov
[15] www.rurdev.usda.gov
[16] www.Makinghomeaffordable.gov
From:

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