This past week, the Administration announced that it would not attempt to actually implement that Class Act. Although technically still part of Obama Care, without rules in place to create and operate the plan, it is DOA. This was not unexpected because most experts inside and outside government believed that it would be too expensive to be sustainable.

Let’s be more specific: Once the actuaries started crunching numbers, they determined that the monthly premiums would be so high that only the wealthier workers would participate. With so few participants, the government would end up having to subsidize the program which it cannot afford to do.

This is unfortunate because so many of us need an affordable option to address long term care risk. Counting on Medicaid is a particularly sad alternative because of the requirement that you spend yourself into the poor house first.

One option that is gaining some traction in the U.S. is a hybrid annuity/long term care insurance product. These are sometimes marketed by the different insurance companies as a “life care annuity”  (LCA), a “living care annuity”, a “total living coverage annuity” or simply as “annuity care.”

In a typical LCA product, the policyholder (you) pays a single premium for a deferred annuity with a long term care “rider.”  (Compared to an immediate annuity, a deferred annuity doesn’t begin paying benefits until sometime in the future. ) The annuity value will increase from the single premium amount by a minimum guaranteed interest rate.  That guaranteed interest rate will usually be less than for a simple deferred annuity because you are also paying for the LTC rider by premiums that are withdrawn from the annuity interest earnings each month.

When a LTC claim occurs, daily or monthly LTC benefits are paid in accordance with the terms of the hybrid insurance contract. The maximum benefits may be equal to the accumulated annuity value divided by the number of days (or months) of a defined time period, e.g., a two year benefit period. The maximum lifetime LTC benefits may be equal to two or three times the full accumulated annuity value.

If the LTC benefit is not needed within a defined period (e.g., 8–10 policy years), you may be allowed to annuitize (pay out over time) the accumulated annuity amount or withdraw that amount as cash without paying any surrender penalty.

Right now we are sticking with our LTC polices from MetLife but if things change, we will be looking at hybrid annuity products also.

If you haven’t spent much time exploring long term care problems and solutions, the Department of Health and Human Services has a very good clearinghouse site for long term care information.

Here is an article on the demise of the Class Act: CLASS is Killed: But How Will We Pay for Long-Term Care Services?

Related posts:

1. Long Term Care National and Local Cost Trends

There are several ways to gamble with your retirement future. Speculating in high risk assets is one.  Another is to fail to take reasonable steps to manage and control foreseeable risks. In the case of this sad story, the retirement planning failure almost made me scream: no homeowners insurance.

This is a guy who thought he had it all planned out – a home with acreage and livestock to provide the owner food and income. The property was paid for. He was all set.

BUT HE DIDN’T INSURE HIS PROPERTY!

You can guess what happened. While he was away due to a forced evacuation, another California brush fire destroyed his home and vehicles and killed most of his animals.

I don’t live in California but I read the news enough to know that brush fires are quite common and devastating in recent years.

Why wouldn’t he have insurance? Did he try to save money to buy more goats? It makes no sense. This is life-planning 101.

You must insure against known risks – casualty loss, liability (car insurance, umbrella insurance), and poor health (disability and long term care, for example).

Anything short of that is gambling your retirement future.

Here is the full article.  Read it and shake your head in disbelief.  Feel sorry for the man. Then consider whether you have done a good job of risk management for your retirement.

No related posts.

This is the question that I asked myself two years ago when we bought long term care insurance.  I looked at the costs again last winter when I heard that our long term care insurer MetLife was exiting the business. I convened a meeting with our broker.  When we compared the cost of switching to a different insurer, we were shocked by the cost differences. It made no sense to switch. I expect that our premiums will increase but we are probably at an optimal situation for now.

Genworth Financial is a long term care insurance provider. It publishes results of annual surveys of long term care costs, both nationally and by individual state and city. The 2011 survey results were interesting, at least to me.

First, home care costs remained flat while institutional care costs continued to rise.  Genworth commented on this trend as follows:

Home care rates have remained flat in part because of increased competition among agencies and the availability of unskilled labor, and by avoiding costs associated with maintaining stand-alone health care facilities.

Genworth’s own data shows that most consumers prefer to receive long term care in their homes. Indeed, two-thirds of Genworth’s initial long-term care insurance claims are for in-home benefits.

The cost of long term care can vary substantially from state to state.  For nursing home care in a semi-private room, the U.S. average median annual rate is $70,445.  The state with the highest median annual rate is Alaska at $222,285.  The state with the lowest median annual rate is Texas at $46,355. (Another reason not to retire in Alaska!)

The national median daily rate for a private room in a nursing home is $213. This is an increase of 5.1% over 2010 and is part of a six-year annual growth rate of 4.35%.

Assisted living facilities come with a national median monthly rate of  $3261, a 2.4% increase over 2010 and part of a six-year aaverage annual growth rate of 5.99%,

It is obvious to me from these trends that for long term care insurance to work, you need to purchase inflation protection for the coverage amount.

To see the data in more detail, including the ability to generate a long term care cost report for your own state and city, here is the link: 2011 Cost of Care: Long Term Care Survey.

I encourage you to read it carefully and plan ahead for your own long term care future.

Related posts:

1. Long-Term Care Options Change Again

Myth No. 1: Medicare covers most everything. Not even close. Medicare doesn’t cover hearing aids, dental care, vision care, or long-term care. It also won’t provide coverage for health care required while you are traveling outside of the U.S.  You will need to purchase additional private insurance for these categories. Some of these are offered as “Medicare Advantage” plans.

Myth No. 2:  Medicare is free. Nothing is free. Everyone will pay a premium for Medicare Part B (doctors visits and outpatient services).  For 2011, that premium is $115.40 each month.  High earners (170k plus for a married couple) will pay even more.  High earners will also pay a premium surcharge for Medicare Part D (prescription drug coverage.)

While Medicare Part A (hospital care) is generally premium-free, there are deductibles for hospital stays, etc. In 2011, that deductible is $1132. Not chicken feed.

There is some good news: Under the new health-care law, Medicare users are entitled to annual wellness check-ups at no charge, including preventive screenings such as colonoscopies and mammograms.

Because of these costs, most Medicare beneficiaries purchase a supplemental insurance plan, known as “Medigap.”

Myth No. 3:  You can sign up for Medicare anytime after you reach age 65.

The decision about Medicare sign-up is usually a factor of whether you are still receiving health insurance through “active employment.”  If you are no longer receiving benefits from your employer (including Cobra or retiree health benefits), you need to sign up for Medicare immediately. If you do not , your Part B premium will be increased 10% for every 12 months you delay. There also may be a waiting period during which you will be uninsured.

If you are 65 or older, still working, and have insurance coverage from your employer, you may want to delay signing up for Medicare to avoid paying premiums for coverage you don’t need. If your employer has 20 or more workers, Medicare will usually be a “secondary payor.”  In that case, you can delay enrollment without incurring a Part B premium penalty.

Where it gets confusing is there is loss of coverage from a job loss, such as when an older spouse has been receiving primary coverage from a younger spouse. If that younger spouse loses his or her job, the older spouse needs to sign up for Medicare promptly to avoid a penalty. If the younger spouse goes on Cobra, that is not considered “active employment” for the older spouse.

There is a lot more for me to learn about Medicare. I expect that more changes will be coming in the next five years as well.

No related posts.

First, I have concluded that there are no rigid rules or formulas to apply in deciding how much long term care insurance to obtain. Every baby boomer is unique in two important respects: (1) The financial assets they would have available to pay for long term care without insurance; and (2) How much risk they are willing to take.

Let’s quickly review the risks.

The first risk is that you or a spouse will require long term care but cannot afford it. In that case, Medicare won’t help much but Medicaid might. But if you need Medicaid benefits for long term care, most of your other financial assets will be used up first. That’s the law.

That brings us to the second risk:  Can you and your spouse survive in retirement (i.e., meet your basic living expenses) if a long term care event exhausts all or most of your retirement nest egg? In other words, if you self-insure or rely on Medicaid to pay for long term care, what will happen to your or your spouse afterward? Will you become part of the retired but poor class? Will you become dependent on your children?

A third risk if you are uninsured (or under-insured) is that your options for long term care will be limited. With insurance, you may have more options for in-home care and/or in-patient care at a facility that is better than a basic-needs nursing home. If you are completely dependent on Medicaid, the bureaucrats will be deciding what you can and cannot afford. You may not be happy with the result.

Perhaps at this point you are thinking that you and your spouse are too healthy to worry about needing long term care. If so, I recommend you read my earlier post on why we bought long term care insurance.

Here is a list of the criteria we considered in deciding how much long term care insurance we should have:

1. The Costs of Long Term Care. Long term care is more expensive than you might think. It can also vary dramatically depending on where you live. For more information, read my earlier post on predicting the costs of long term care. More cost information is available at this government long term care site.

2. Ability to Self-Insure. Many retirement planning experts believe that there are two groups of people for whom deciding whether to purchase long term care insurance is easy: The very wealthy and those with few or no retirement assets. The very wealthy can afford to pay for their own care. Those with little or nothing have nothing to lose before Medicaid steps in. Those in the middle (like us) have to strike a balance.

Let’s assume that a long term care event lasts for three years.  Three years in a nursing home can easily cost $225,000. Can you afford to pay that from your own assets, then live on what remains?

If the long term care event is less severe, perhaps requiring a home health aide three days each week for three years, that can cost $18,000/year for three years = $54,000. That is a much easier financial hit to absorb using personal resources.

3. Income Security. A related factor is the stability of your retirement income if a long term care event depletes your retirement nest egg and/or takes away the ability to work. If you are able to survive on Social Security and/or pension benefits, the need to buy a large amount of long term care insurance is decreased.

4. Cash Flow and Affordability. Unfortunately, for many people the number one factor in deciding whether and how much long term care insurance to buy is the cost. Some of this thinking is short-sighted. If you own a home, you definitely must insure it against loss due to fire. Your mortgage lender will insist on it. Did you know that you are more likely to need long term care than experience a destructive house fire? This suggests that you should make room in your budget for some level of long term care protection. One option for basic coverage is the new public long term care plan that will be available.

5. Availability of Alternative Care Resources. Perhaps you have a lot of family members nearby. Perhaps some of them like you enough to help with your care if you need it. Do you really want to depend on that? Do you really want to burden family members with ling term care – something that you can insure against?

We decided to purchase enough long term care insurance to cover a five year event, with a $150/day benefit. Thus, the lifetime benefit is approximately $275,000. This benefit is inflation-adjusted. If one of us has a significant long-term care need, this probably won’t cover all of the costs but it will be enough that our personal assets can handle the rest. (For more on our policy: Long Term Care Insurance – Key Policy Provisions.)

A decision on whether to purchase long term care insurance and how much coverage to buy should not be procrastinated away. You may decide not buy any coverage but at least it should be an informed decision.

Related posts:

1. Long Term Care National and Local Cost Trends
2. Long-Term Care Options Change Again

Here are some of the key provisions of the new public long term care insurance plan:

1. Effective Dates. The Class Act was part of the health care reform bill passed in March 2010. The law takes effect in January 2011.  However, the Department of Health and Human Services has until October 2012 to create and implement all of the rules. Therefore, most observers do not expect enrollment in this new long term care insurance plan to begin until 2013.

2. Plan Eligibility. The key requirement for eligibility to participate in the long term care plan is that you must be working, either full or part-time. More specifically, plan participants must pay premiums for a five-year vesting period they are eligible to receive benefits. Moreover, they have to continue working for three of those five years. This means that folks who are already retired (and not working part time), non-working spouses, and the unemployed may not participate.

3. Pre-Existing Conditions. Most private long-term care insurance companies will not issue policies to applicants with substantial pre-existing health problems, such as diabetes. Under the Class Act, a pre-existing condition will not disqualify you, as long as you meet the five-year vesting period, with three of those years being working years.

4. What it Will Cover. The long-term care coverage from the Class Act will be provide a daily cash benefit. The dollar amount of the benefit is yet to be determined. The plan drafters and Congressional Budget Office expect the long term benefit will be in the range of $75 a day, with an average minimum benefit of $50/day.

To receive the benefit, a participant will have to require help with two -three activities of daily living, e.g., eating, bathing, dressing, using the bathroom, transferring from bed to chair to wheelchair, and continence care. ) Equivalent cognitive impairment will also be covered.  An important feature of the plan is that after you qualify to receive a long term care benefit, that benefit will continue for as long as you require care.  Furthermore, the benefits will increase with inflation, another key feature.

This benefit amount will not cover all long term care costs but it was not designed that way.  A $75/day benefit can cover as much as 3/4 of the national average cost of an assisted living facility. That could be huge for many middle class baby boomers.

5. What it Will Cost. The cost factor is another present unknown. An expert panel is working on this issue now. The Class Act requires that it be self-supporting from premiums with no tax dollars used. The CBO estimated an average age-adjusted monthly premium of $123. This assumes that just 5 or 6 percent of eligible will workers will join the plan. Some experts think that the participation rate will be higher because Class is an “opt out” program. If a larger percentage join, premiums will be lower.

The issue of concern for baby boomers is timing. If enrollment does not begin until 2013 and vesting takes five years thereafter, the public long term care insurance may not help us much. For example, that would force a 60 year old baby boomer today to work at least until 2016 and not become eligible for benefits until age 68.

My intention is to keep our private long term care policies in force for now but I will definitely be following and taking a close look at the new public long term care insurance plan.

Related posts:

1. Long-Term Care Options Change Again
2. Long Term Care National and Local Cost Trends

How do these combined annuity and long term care products work? Each is different but the general concept is as follows:

A purchaser may be looking for a lifetime retirement income with additional protection if long term care is needed. The purchaser buys this hybrid annuity product with a single premium payment. The product functions exactly like a fixed annuity, providing a lifetime of annuity income. There is also a long term care multiplier built into the policy. In some cases, the long term care rider means the purchase would require medical underwriting, e.g, a health questionnaire and maybe a physical.  A portion of the internal investment return in the contract is used to pay for the long term care benefit. The long term care coverage is calculated based on the amount of coverage selected when the policy is purchased.

The insurance company may offer a payout of two to three times the initial policy value over two or three years after the annuity account value is depleted. For example, a purchaser of a $100,000 annuity who had selected a benefit limit 300% and a two-year long term care benefit factor would have an additional $200,000 available for long term care expenses, even after the initial $100,000 annuity policy value was depleted. The policy owner would spend down the $100,000 annuity value over a two-year period and then receive the additional $200,000 over a four year period or longer. In other words an annuity purchased with $100,000 could potentially payout LTC benefits of $300,000.

One feature that may make on of these hybrid annuity/long term care products attractive is a provision in the Pension Protection Act of 2006 that became effective on January 1, 2010. This provision allows long-term-care benefits to be paid from an annuity tax-free.

There are variable annuity products that also can include a long term care benefit. Generally, these products allow the owner to use the LTC benefit up until the time that the value of the annuity account is annuitized.

I think we will see more products that combine fixed annuity features with long term care benefits. The different products from different companies will probably carry a dizzying array of confusing features. Careful study and consideration of the costs and benefits will be important.

Related posts:

1. Long-Term Care Options Change Again
2. Long Term Care National and Local Cost Trends
3. Vanguard Enters the Guaranteed Lifetime Income Space

Evan from My Journey to Millions is a New York attorney who works as a support staff in a large financial planning firm, has a small Trust and Estates Practice and is the sole owner and author of My Journey to Millions.  His blog discusses estate planning, insurance planning and his personal struggle from a broke law school graduate to his dream of netting millions.  Check out his blog for more information, or better yet just subscribe to his feed.

Using Whole Life Insurance to Create a Pension Income Stream

One of the most common themes that I see among soon to be retirees is the question/concern about a steady stream of income.  It is a very natural concern, and I’d like to present one more way that is often slammed by the mainstream media.  So, in order for you to fully grasp this particular guest post I am going to have to beg you to put down your Suze Orman book or turn off the Dave Ramsey radio show.

Rather then discuss fees, expenses, mortality charges, IRR, etc. I am going to build a real example using a real illustration program from a AAA rated insurance company. I will then compare that option to various returns.

Let’s choose our variables:

• 50 Year old Male;
• Non-Smoker;
• I will use the  2nd highest health rating (not a beacon of health but not standard);
• Like a “real” pension we are going to pay into the system until retirement in this case 65 (Chose a product that stops premiums at 65 automatically);
• We are going to pay into the system $1,000/month; and
• Going to take an income stream from 70 to 85.

All these variables will change the whole model, I just made these up because if I had to venture a guess Mr. GoTo’s demographic is likely to be around these variables.  Why did I choose 70 as a starting age? Well the cash value is growing tax deferred so why not let it grow for as long as possible?

In Year 2011 $12,000 will buy just about $319,000 in death benefit which will grow (non-guaranteed) to over $420,000 of death benefit when the client is 65.

• Then from age 70 to to 85 you will be provided $27,200/year tax  free (through loans and switching at basis)
• At age 85 there will still be a death benefit of a little bit over $130,000

Is this method perfect? No.  There may be tax issues if the policy crashes, but neither is the standard 401(k) as we all learned, both young and old.  Imagine if you were the one trying to retire in 2002, or more recently 2007.  My firm saw an increase in the amount being deposited with the insurance company (above their premium) because it was their only account that increased in value.

Comparing Whole Life Insurance as a Pension Income vs. Investing

This strategy is not going to work if you are getting 12% return, or even 8%…but if you are 63 and are in 100% equities then I am sure Mr. Tough Money Love will have something to say to you.  (Editors Note: Yes I will!) So, lets use a 4% net return (so we can either assume your holding muni’s or netting 4% on your portfolio).

This is all without a death benefit to go along with it.  If I use 6% net (8%+ gross) then I can safely say that the investments will “win.”  This strategy, on the other hand is relying on a AAA rated Company that has been around longer than some states.

Disclaimer: While I am licensed to sell life insurance, I have never sold a single policy nor do I own any whole life insurance since The Wife and I have different priorities right now.  I hope to purchase a policy by the end of the year.

Does anyone have any experience with this strategy?

Mr. GoTo’s comments:

Most personal finance writers not connected with the insurance industry will tell you that term insurance is preferred over whole life insurance as a financial tool to protect dependents in the event of your premature death. I agree with that. Yet I like this post from Evan because it discusses alternative uses of cash value life insurance.

Keeping in mind that most of the money you take out of a cash value insurance policy is a return of your own premiums, it is a way to achieve tax deferred growth, or even “tax free income” if you are willing to periodically borrow from your cash value and not repay it. You have to be careful, however, of the potential tax consequences of dying with policy loans outstanding.

As Evan acknowledges, the net investment returns achievable from cash value life insurance can be inferior to the alternatives. Nevertheless, there are wealthy investors who use cash value life insurance for tax and estate planning when they run out of better options.  If you plan on being this wealthy and need death benefit protection, it can’t hurt to at least consider this “life insurance as pension” strategy now.

No related posts.

As an attorney who formerly worked in the insurance defense field, I observed first hand how insurance can and can’t work in limiting personal financial risk. My professional experience also has caused me to regularly consider whether and how to insure against our own financial risks. These are some of my thoughts on the subject.

1. Risk of Market Loss. If you are truly in the equity and bond markets and fully exposed to all of their ups and downs, there really is no way to insure against the risk of loss. Some will try by using certain guaranteed annuities and indexed annuities, but these products take you out of full participation in market gains. The best you can typically do is control risk with proper asset allocation and use of a retirement emergency fund.

2. Risk of Outliving Your Money. The risk that a retiree will run out of adequate retirement income is related to yet different from the risk of market loss. My personal view is that a retiree should do everything possible to eliminate this risk by making a plan for guaranteed retirement income, even if it means limiting exposure to equity markets. This general area of income risk also includes inflation. The inflation risk must be addressed by combinations of Social Security (which has a cost of living adjustment) and inflation protected securities, such as TIPS and I Bonds. This is like conventional insurance, only better.

3. Health Risk. This is a risk that must be insured against. At age 65, the proper use of Medicare will control much of the financial risk of poor health. The other aspect of this health risk- the cost of long term care – can be controlled by purchasing long-term care insurance.. Equally important for the baby boomer who is still working and saving towards retirement is disability insurance.

4. Casualty Loss Risk. The financial risks associated with casualty losses include: (a) adverse judgments arising from negligent behavior causing injury to others; and (b) casualty loss to an important asset, such as your home being destroyed by fire. The former risk is protected by means of automobile insurance and umbrella policies. The latter risk must be insured against by use of homeowners insurance. Both types of insurance policies must include appropriate coverage limits. Here are some tips for managing the cost of homeowners insurance.

5. Death Risk. You are going to die, so this is not really a financial risk except for how it might affect a surviving spouse. Generally, this is handled by having sufficient retirement assets to provide sustained income even after death. There are life insurance strategies to consider as well, if only to provide post-death liquidity to pay any taxes that might be owed.

My final thoughts: Insurance planning is a proactive step that we can all take to protect our financial future. Using some of our cash flow and assets to protect against known financial risks is logical and necessary. Ignore it at your peril.

Related posts:

1. Gambling with Your Retirement Future

First, consider these statistics regarding the actual need for long term care:

60 percent of Americans  over age 65 will require at least some type of long term care services during their lifetime.

Once you reach age 65, you have a 40 percent chance of entering a nursing home.

Approximately 10 percent of folks who enter nursing homes will be there for five years or more.

68% of Americans have a family member or friend who has received long term care in the past three years.

(Source)

If that doesn’t scare you into considering the purchase of long term care insurance, Northwestern Mutual has introduced a long term cost calculator that may do the trick.

The data used by this calculator was compiled by the  Northwestern Long Term Care Cost of Care Survey in November 2008, through the Long Term Care Group, Inc.

Further assumptions used by the calculator:

• Annual cost of home health aide based on average hourly rate, 8 hours a day, and 365 days a year.
• Annual cost of assisted living based on average monthly rate for 12 months. Annual cost of nursing facility based on average nursing home private daily room rate for 365 days.
• Five (5%) annual inflation rate for long term care costs.

I ran the calculator for myself. If I were to have a long term care event beginning at age 70 and lasting for two years, the estimated care cost in my state of Tennessee is $256,000. My current long term care insurance policy will cover only about 75% of that amount. Thus, I need to have sufficient funds available to cover the difference.

If the government LTC plan is available to us and will coordinate properly with our own coverage, we may buy into that plan as well. Why? Because insuring against financial risks is more predictable right now than most investing options.

Have you considered the costs of long term care? How are you planning to handle a worst case scenario?

Related posts:

1. Long Term Care National and Local Cost Trends
2. Long-Term Care Options Change Again