Long Term Care Insurance

by  /  Health Care, Long Term Care Insurance

A recurring question raised by clients regards the advisability of acquiring long-term care insurance (“LTCI”). The ballooning cost of home health care, assisted living and nursing home care is general knowledge. In central North Carolina, Genworth Financial released monthly costs for 2016 and projected for 2026, including:

    2016   2026
Home Health Aide (8 Hours Daily)   $3,956   $5,317
Assisted Living Facility Private Room   $3,841   $5,162
Nursing Home Care Semi-Private Room   $6,920   $9,300
Nursing Home Care Private Room   $7,924   $10,649

As aging baby boomers approach their retirement years, projected medical expenses represent a large budgetary consideration, that can be alleviated with Medicare and Medigap insurance policies. The above-listed long-term care expenses, current and projected ten years from now, represent an even more significant drain on a retirement budget. Experts estimate that more than two-thirds of individuals age 65 or older will require long-term care for some period. The advisability of using LTCI to hedge against the significant financial risk represented by long- term care expenses has been the subject of considerable debate.

LTCI pays for some or all of the costs of nursing homes, assisted-living facilities and home health care for people unable to care for themselves. According to Limra, a research firm funded by the insurance industry, about eight million people have some form of LTCI. In the early 2000s annual sales of LTCI policies peaked at 750,000, but have decreased to around 131,000 annually recently. Only about a dozen companies remain in the LTCI market, down from about ten years ago. In launching LTCI products, which originally offered unlimited lifetime benefits, many insurers underestimated factors such as number of claims, how long claimants would receive benefits, rising health care costs and lower return and yield on insurance company investments.

As the market has tightened, premiums have been rising. Next submission we will speak more specifically on pricing of various provisions in an LTCI policy. For now, know that premiums have been rising at rates as high as 40% per year. The older you are when you commence the policy, the longer and the larger the coverage and the inflation increases, the higher the premium.

In November 2015, Boston College’s Center for Retirement Research published a study on LTCI (the “Study”), indicating that previous research on LTCI understated the risk of going into nursing home care, but overstated the average length and cost of those days.

  • The Study found that Medicare had paid as much as 25% of nursing home costs in recent years.
  • Nearly half of men’s nursing home stays, and 36% of women’s, are less than three months, within Medicare’s 100-day maximum for stays following hospitalization.
  • The Study places the risk for men or women, age 65 or older, of needing nursing-home care at, 44% and 58%, respectively, up from previous research indicating 27% and 44%.
  • The Study further concluded that nursing-home stays are shorter than previously believed, 10 and 16 months for the typical single man or woman, respectively, versus the 16 and 24 months previously accepted.

The real question is whether it is a smart idea to acquire LTCI or use the premium dollars for other investment purposes?

  • People with low income and assets may need to rely on Medicaid.
  • Those with over $2.5 – $3 million in retirement assets can likely afford to pay their long-term care expenses individually.
  • The people in the middle are the potential LTCI clients.

 If staying at home is the goal, round-the-clock home-based professional care can be costlier than a high end nursing home. In 2012, according to the American Association for Long-Term Care Insurance, roughly half of newly opened claims were for home-based care, versus 31% for nursing homes and 19% for assisted care facilities. Reverse mortgages could assist with these costs of staying in your home. Homeowners borrow against a home’s equity and continue to live in the house. The loan and accumulated interest are paid off when the house is sold, or the borrowers move out or pass away.

We will discuss other alternatives and what to look for in a LTCI next time. Stay Tuned!


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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Create Your Own Pension

by  /  Retirement Planning

The vast majority of those reading this submission find themselves, either currently or prospectively, saving for retirement using a defined contribution plan (such as a 401(k) plan), rather than the defined benefit pension plans that our parents or grandparents enjoyed. This is because few employers, other than governments, can afford to fund traditional pensions. Instead, we live with defined contribution plans, where our ultimate benefits will depend on our level of funding, our employer’s optional matches, and the performance of the securities markets throughout our lifetimes. Gone are the days when we would work for a corporation for 35 years and they would tend to our needs throughout our remaining lifetimes.

The new prototypical retirement involves our leaving our employer and:

  • Rolling our 401(k) plan balance into an IRA that we manage ourselves or hire someone to manage for us.
  • Collecting social security, depending on our ages when we start (waiting to age 70 maximizes our draw) and our work and social security payment history.
  • Assembling our after-tax investments, such as securities accounts, investment properties, or our principal residence to determine what cash flow might be attainable.

We will discuss at another time the issue of proper investing of, and withdrawal rates from, retirement assets, assessing the likelihood of out-living our limited retirement assets, but let us discuss some sobering numbers:

  • The federal General Accounting Office says around 29% of households age 55 and older have no retirement savings or accounts.
  • The federal Census Bureau says the average net worth for an American age 55-64 (excluding home equity) is $45,447.
  • Social security, with an average monthly benefit for retired workers of $1,354.04 as of October 2016, was intended to be a safety net or insurance policy, not a sole source of retirement income.

What can we do today to protect against outliving our retirement resources? Let us focus on a slightly more favorable example:

  • Joe, age 70, has been making $150,000 per year but is retiring with an accumulated 401(k) balance of $1 million, that he is transferring to an IRA. Mary, Joe’s wife is also 70.
  • Joe’s social security benefit, when he claims at age 70, will approximate $3,600 per month. Mary did not earn social security.
  • Joe and Mary have non-retirement investments and savings of $500,000.
  • Assuming 80% of prior salary in retirement, Joe and Mary would need $10,000 per month in cash flow.
  • If they invested the IRA and withdrew 4% per annum, that $40,000, or $3,333.33 per month, would add to the $3,600 per month social security, leaving just over $3,000 per month shortfall to be paid out of after tax investment assets.
  • What would happen if the markets had a 50% drop in value as happened in 2000 or 2008? The resulting $500,000 IRA balance results in $1,670 per month from the IRA at a 4% withdrawal rate, furthering the cash shortfall.

This is where we depart the accepted, conventional world of fee-only financial planning and stride boldly into the world of the commissioned brokerage industry. One solution to this risk and this cash shortfall is the use of a single payment immediate income annuity (SPIA). Let’s revisit our last scenario using the SPIA solution:

  • Assume $500,000 of the IRA were used to purchase an annuity, payable for the joint life expectancy of Joe and Mary.
  • $2,859.66 would be payable monthly during Joe’s life, decreasing by one-third upon his death, through Mary’s life.
  • So long as Social security and the insurance company issuing the annuity survive, Joe and Mary will receive $3,600 + $2,859.66 = $6,459.66 per month until Joe passes and slightly less thereafter. Basically two-thirds of their cash flow nut has been covered by a pension that they created with social security and a SPIA.
  • The projected $1,670 from the IRA (based on 4% of the $500,000 balance) and whatever can be generated from after tax investments should be able to make up the other third of needed cash flow. The IRA could be invested more robustly, because the annuity is supporting their cash flow needs.

Please note that interest rates are still near historic lows and the rates payable on SPIAs lock in at the time of purchase and will increase if and when market interest rates increase, making these numbers even better. If your retirement strategy can allow time for rates to rise, patience is encouraged.

In the past, annuities have been used to generate fees to brokers, to the potential detriment of the client. Placing expensive variable tax-deferred annuities into tax-deferred IRAs (“layering your tax deferral”) is tough to justify under a fiduciary standard. Nevertheless, there exist times and places for low-cost SPIAs in the crafting of your “do-it yourself” pension plan.


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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