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Before You Shop for Long Term Care Insurance

As I mentioned in my last Blog, I continue to receive questions from Relaxing Retirement members who have heard the “Don’t let a nursing home take your home and your life savings if you become sick and need care” sales pitch on the radio.

After all, who wouldn’t be a little disturbed hearing that pitch?

“Elder care” attorneys run ads with this message over and over because they know it generates an emotional response.

I want to take the opportunity to bring this to your attention because how you deal with the financial risk of paying for extended stay health care, i.e. nursing home, assisted living, or care in your home is a very, very important issue for you and your family.

The emotional toll of placing a loved one into assisted living or a nursing home is bad enough.  Dealing with the financial toll at the same time makes it even harder.

As we laid out in the last issue, if you don’t need care right now, then you have some significant long-term planning issues to consider.  After experiencing this up close with so many of our members, I strongly recommend giving this a lot of thought.

I recognize that this is not the easiest topic to discuss, especially for those of you who are currently caring for your spouse or your parents.

At the same time, however, I think it’s a good idea to evaluate all of your financial risks on an annual basis so that you can continually make educated financial decisions. 

If you have not purchased long term care insurance yet, but you believe you need to consider it to manage your risk, then there is a very important process that I recommend for you. 

What to Focus on First

Before you jump into the “insurance policy” discussion, you have to understand who you’re dealing with and what their agenda is. 

Insurance companies and their agents are doing a great job out there stirring the pot about long term care insurance.  This is good and bad for you.

I’ve witnessed individuals and couples for years beginning the conversation about long term care at “Point Five” when they really need to take a GIANT step back to “Point One”

One of the reasons why they begin at Point Five is because an insurance agent has rushed right into the bells and whistles of a particular long term care insurance policy before even diagnosing why you should even be thinking about any of this in the first place. 

Or, if you even need to.

Not to pick on insurance agents, but they have an ax to grind.  They don’t receive any compensation until you buy a policy and pay the premium, so there’s some urgency on their part to move the process along at a faster pace than what may be in your best interest.

However, this is too important to rush through, so let’s take a step back for a moment and walk through a real-life case scenario to clarify what you must know first:

  • Ken and Louise are 62 years old,
  • They’re now both retired, so they receive no income from work,
  • They’ve done their homework and created a comprehensive Retirement Blueprint™ which illustrates the following:
  • They receive $3,500 per month from social security and $2,500 per month from pensions for a total income of $6,000 per month
  • On the spending side, they’ve done their homework and calculated that they need $12,000 per month to live exactly the way they want, including paying income taxes, taking vacations, and buying loads of presents for their grandkids
  • Given their social security and pension income, they need an additional $6,000 every month, or $72,000 per year, from somewhere else,
  • They’ve done a nice job saving, and their Retirement Bucket, which includes all of their liquid savings and investments they’ve accumulated over the years, including IRAs, 401(k)s, and non-IRA accounts amount to $2.25 million
  • Their Retirement Resource Forecasters™ illustrate that Ken and Louise have enough money in their Retirement Bucket™ to provide them with that $72,000 per year including annual cost of living increases to keep pace with inflation.
  • They can achieve this without having to hit home runs with their investments.

Now, the scenario I’ve just described to you with Ken and Louise is precisely where I recommend you begin to have the long-term care insurance conversation!

If you don’t know these exact numbers that I just revealed in your own unique situation then you can’t even begin to properly evaluate the financial risk of you getting sick.

In far too many situations, individuals and couples are confronting critical issues that affect them for the rest of their lives without any understanding of how the issues affect them personally. 

They just use some “rule of thumb” that they read in a magazine, or they’re “sold” on one thought or another by a financial advisor who makes their income through sales commissions.

It all has to start with you knowing your own personal numbers first.

Once you’ve done that, then you can make educated decisions that you can feel confident with.

Evaluating a Policy for You

Let’s now assume that you’ve carefully projected out all of your retirement resources into the future and determined your true needs. 

You’ve determined that you’re not comfortable absorbing 100% of this risk and want to begin looking at long term care insurance as an alternative.

Before you approach an insurance agent or broker, become comfortable with the five main components of a long-term care insurance policy.

Five MAIN Components of any Long-Term Care Policy

There are five main components to every long term care insurance policy that you want to pay attention to in order to evaluate and create the most cost-effective plan for you. 

Each of these elements controls the cost of the insurance, so adjusting one or all of them up or down will significantly change the cost.

What I recommend you do is carefully think about each of these components and then have an independent agent present multiple combinations for you to evaluate.

  1. Maximum Daily Benefit: How much will it cost you to receive care where you live?  That depends on where you live and what kind of care you will need and want for yourself. (in a nursing home, assisted living, care in your home by a private nurse, etc.)  This is the amount of coverage the insurance company will pay per day, i.e. $370 per day. The higher the daily benefit you purchase, the higher the premium.
  2. Benefit Period: How long do you want to cover yourself?  Benefit periods range from 2 years to lifetime  The longer the period of time the insurance company pays benefits, the more costly the policy will be.  (Statistics tell us that the average length of a long-term stay is 2.8 years
  3. Elimination Period: How long can you wait and self insure before benefits kick in and begin to be paid by the insurance company?  This is very   Like a deductible for homeowner’s insurance, the longer you can wait, the cheaper the policy will be.  Remember, you’re trying to manage the costly long-term risk.  Chances are great that you can afford to absorb the cost of 3 to 6 months of care.  Absorbing some of the short-term risk saves you money.
  4. Home Health Care: Very few people I meet are lining up to receive care in a nursing home.  Most people want to avoid it like the plague!  So, if you’re able to and would prefer to receive care in your own home, make sure that your policy provides equal coverage for you to receive care in the privacy of your own home if you choose to do so.
  5. Cost of Living Riders: Receiving care today is costly enough.  Imagine how much it will be 10-20 years down the road.  To offset this, there are several cost of living riders you can choose from.  The 2 main options are simple interest and compound interest adjustments.  Each provides inflation protection for you, but at varying levels.  Compound Interest will pay out more benefits in the long run because the inflation protection element compounds with interest.  (Note: this can be as much as 50% of the cost of your premium depending on your age and the option you choose)

There are other options to consider, but these five main components will help you stay focused on what is most important when you purchase coverage. 

Shared care, for example, is one of them.  Under a typical policy for a husband and wife, once benefits are used up by one spouse, no more coverage exists. 

With shared care, if you use up your benefits, you may “tap into” your spouse’s unused benefits thus providing you with more coverage.

I will tell you that it’s easy to get caught up with the intricacies of different policies and lose sight of what you’re trying to accomplish in the first place.

Remember that you’re looking to pass off some or all of the financial risk.  Protect yourself from the risk you can’t afford to assume, i.e. the large, long-term risk of care over an extended period of time. 

As I mentioned above, have a complete handle on your financial situation before you enter the discussion with an agent or broker about which policy to buy. 

When you do this, you remain in complete control and can act in your own best interest and save yourself a lot of time and money.

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How Will You Pay for Your Care?

Don’t let a nursing home take your home and your life savings if you become sick and need care!

Have you heard that line in a radio advertisement lately?  If you have, you’re not alone.

Eldercare attorneys run ads with this message over and over because they know it strikes a chord.  And, as you will discover in a moment, their solution for you is very profitable…for them.

It’s hard to resist the temptation to emotionally react to that message!  Attorneys brilliantly stir up even the most rational thinking among us.

The challenge with these ads is that they present a “magic pill” which does not exist, and there are consequences which are not revealed in the short time frame.

Given this, I wanted to take another opportunity to revisit this financial risk, and clarify a few misconceptions perpetuated in these radio ads.

I strongly recommend taking a few minutes to read this. I recognize that it’s rather long, but it’s very important.

“Don’t Let Them Take Your Home”

Before we get into this very real risk you face, I want to clarify one quick point which is obvious once thought through.  Forgive me if this comes across as silly, but I continue to hear this false notion all the time.

Nursing homes don’t “take” your home, or “take” your lifetime savings.

They are operating businesses like many others all over the world who provide a service.  And, in order to provide that invaluable service, they have to be compensated.

How you choose to pay for that service is up to you and is what this Blog is all about.

What’s Your Financial Risk If You Get Sick and Need Care?

Let’s begin with the risk we’re all confronted with.  If you objectively take a step back for a moment, one of the conclusions you will arrive at is that the downside “financial” risk of you passing away decreases over time, thus decreasing your need for life insurance with each passing year.

However, on the flip side, the “financial” risk of caring for your health increases dramatically with age.

Here are a few facts to ponder again on human longevity and the incredible advances we’ve made since the beginning of the 20th century:

  • The joint-life expectancy of a 62-year-old non-smoking couple is 92! That means that the likelihood of one spouse reaching age 92 is very good.
  • Of those turning age 65, 52% of them will require some form of long-term health care at some point in their lives.
  • The average length of stay for those who enter a nursing home is 5 years, and 14% of people over 65 will need five or more years of care.

Now, if we remove the emotional aspect of the care for a moment and strictly evaluate the financial risk that you face, it becomes a pretty daunting thought.

“Managing” Your Risk

We need to first assess this financial risk, and then determine how we want to “manage” it.  Whenever you’re confronted with a risk, there are three questions that you must ask yourself:

  1. “What’s my potential financial loss?” (Assuming you don’t have insurance already to protect yourself) So, you have to actually put a number on it.
  2. “What’s the probability that I’ll suffer this loss?”
  3. Am I willing to risk absorbing this entire loss myself, or should I pass on some or all of the risk to an insurance company by paying a premium?”

Let’s start with #1: what’s the potential loss?  The cost to receive care in your home or to move into a nursing home in and around the Boston area now exceeds $13,500 per month.

Given that the average length of stay is 2.5 years, that’s a total “potential” average risk of over $400,000 for each spouse.

Now, before we move on to anything else, let’s stop and think about that potential risk you face.

Let’s assume for a moment that your Retirement Resource Forecasters™ look fine given your need to withdraw $8,000 per month from your Retirement Bucket™ to supplement your pension and social security income.

However, if you get sick, and it costs $13,500 per month for care, you now need to withdraw $21,500 per month from your Retirement Bucket™.

$8,000 to support your cash flow needs and $13,500 for your extended health care.

If you continue at that pace for long, your Retirement Bucket™ may not be able to handle it and you would run out of money.

This is financially devastating for your healthy spouse who still needs money to live.

The key is to know just how financially devastating for you personally.  In other words, what does your scenario look like if you need care for three years?

For five years?

For seven years?

You need to define what your personal risk exposure is so that you can make an educated decision for yourself.

Please notice that all of this has to be clarified before you even think about how to “manage” the risk.

How Will You Deal with This Dilemma?

Setting aside the emotional aspects of this dilemma for a moment, there are two ways to approach this problem.  The first is to accept 100% of this risk yourself.

In other words, if you need care, you will assume 100% financial responsibility and deal with the extenuating consequences.

In my opinion, as long as you do this after a complete assessment of the risk, and the costs of passing some or all of that risk on to some other entity, I believe that’s fine.

While it’s not necessarily a good bet, the chances are in your favor that you won’t need the care.

However, if your family’s health history is not great, or if you’ve personally witnessed hundreds of thousands of dollars walk out the door to pay for the care of a family member, you may have second thoughts about assuming 100% of this risk.

If that’s the case, you have two alternatives:

  1. pay for it yourself (personal funds or long-term care insurance), or
  2. have the government pay for it through Medicaid

Qualifying for Medicaid Assistance

To be very clear about this, in order to have the government (taxpayers) pay for your care through Medicaid, you have to qualify financially, similar to qualifying for financial aid for college tuition assistance.

And, that involves relinquishing all control over virtually all of your assets and giving them away to your family (and the government through income taxes).

Or, you have to place your assets into an irrevocable trust (a decision you can’t change after you make it).

If your assets have been out of your ownership and control for five years, you may be able to qualify for help from Medicaid (which is government assistance for the poor).

In order to qualify for Medicaid, you must have virtually no assets left titled in your name.

Overlooked Tax Bill to Pay First

Before you quickly conclude this is the way to go, there is a key distinction most are not aware of when it comes to the use of trusts in order to qualify for Medicaid (government) assistance.

If the majority of your investment assets are in IRAs, they must be withdrawn from your IRAs first, and then placed in the trust.  What this means is you have to pay income taxes on the balance of your IRAs all at once before funds can be placed in the trust.

For a nice round-number example, let’s assume that you and your spouse have $2 million in IRAs.  If your plan was to place your assets in a Medicaid Qualifying Trust, you will have to withdraw the balance of your IRA resulting in federal and state income taxes of over $800,000!

Yes, you read that correctly: over $800,000!

The reason for this is the majority of your IRA would be taxed at the highest marginal tax bracket (35% currently on the federal level plus state taxes).

If you do the math for a moment, that $800,000 that you will have to give up right away could have gone to pay for over 60 months of care (assuming average costs in Massachusetts as noted above).   And, you would have retained control of your assets.

Medicaid Qualified Annuity

As attorneys will outline for you, if you don’t have five years to work with, the alternative to this is to “annuitize” all of your investment assets.  This is a very popular recommendation right now.

In short, this means turning all of your investment holdings over to an insurance company who will then pay you a guaranteed monthly income.

What’s important about this is that once it’s done, it’s done.  It’s irrevocable.  You relinquish all control of your lifetime savings to the insurance company who issues your annuity checks each month.

At your demise or the demise of your spouse if you chose a joint and survivor payout, payments end, and your family receives nothing.

You may very well qualify for Medicaid.  However, the assets you are looking to protect have been turned into a monthly check which ends at your death (or your spouse’s if you chose the lower joint and survivor monthly payout.)

A question you may want to ask an elder law attorney is if they are licensed to sell insurance and annuities.  Or, if someone in their firm is licensed. 

You are likely to hear a yes answer as insurance and annuity commissions are now a huge revenue source for elder care law firms.

I know this sounds like I’m throwing cold water on attorneys who recommend this method.  I’m not.  I’m simply presenting what’s missing from the commercials you hear on the radio.

The methods they propose are appropriate for a folks in certain situations as a last resort.  However, it’s not for everyone.

My Recommended Option If You Have Time

If you still have time to “plan” ahead, and you don’t like the consequences of qualifying for the Medicaid, you can purchase money at a discount to offset your potential extended health care costs, and that’s what long term care insurance is all about.

Although I’m a believer in using insurance as a last resort after you’ve exhausted all of your other options, I’ve yet to find anything that does what long term care insurance does.

Long term care insurance is nothing but a tool to help you “manage” this huge financial risk.

  • It can be used to protect your spouse’s lifestyle in case you get sick and need care,
  • It can protect your assets that you’ve worked so hard to build up over your lifetime for your kids. And, finally
  • It can provide you with options for your care. This is very important! If you rely on the government’s Medicaid program to pay for your care, then you’re at their mercy to determine what care you will receive and where you will receive it.

So, if you’ve reached this point, and you believe you’d like to push some of this substantial financial risk on to another entity like an insurance company, now you can begin to intelligently talk about long term care insurance.

Can you see how absolutely critical it is to go through the thought process we’ve walked through?

If you don’t do that first, and become crystal clear on your own unique situation, you will be at the mercy of any commissioned insurance agent or attorney who comes knocking at your door.  Or, of an elder care attorney whose solution is relinquishing control of your lifetime savings.

And, that’s no position to be in.

You want to be in complete control so that you can custom tailor a plan that covers what’s most important to you personally.

Stay tuned as we will walk through how to determine your specific needs, and evaluate a potential solution.

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Do You Still Need That Life Insurance Policy?

Are you still paying premiums for life insurance?

If so, are you sure you still need to?

That might seem like a funny question if you’ve carried life insurance for a long time.  However, you may very well be paying for insurance you don’t need anymore so it’s a question worth evaluating.

Managing Risk

One of the components of our Relaxing Retirement Coaching Program™ is evaluating and then helping our members manage risk

You can’t avoid all risks completely.  Nor can you insure yourself against any potential loss because you’ll go broke and become “insurance poor.” 

The key to the game is objectively evaluating and then “managing” risk. 

When you were younger and raising a family, the financial risk your family faced if you were no longer here was much more real for you. 

If your paycheck wasn’t there for your family, what would they do?

However, now that your family is grown and out of the house, do you still need to pay those premiums and keep that life insurance policy that you’ve had for years? 

That’s a very important question that is more emotional than rational for most people.

What I’ve always found to be so interesting is trying to illustrate to someone, who has had life insurance for years, that they no longer need to keep it. 

It’s hard to let it go after paying for it for so long.  Those life insurance agents did a great job!

How to Evaluate If You Still Need Your Life Insurance Policy

Keeping an existing life insurance policy or not is really just a math question which you can evaluate by answering three “risk management” questions:  

  1. “What’s the financial loss if I don’t have this insurance?”
  2. “What’s the probability that I’ll suffer this loss during a specified period of time?”
  3. “Am I willing to risk absorbing this entire loss myself, or should I pass on some or all of the risk to an insurance company by paying a premium?”

In this case, stop and think about it for a moment.  What is life insurance? 

It’s money.  Money that is delivered to your heirs upon your death. 

So, the question is, does your spouse and family still need that additional amount of money when you die (over and above everything you’ve saved and accumulated) to support and continue their lifestyle?

Let’s assume for a minute that you’ve taken the steps in The Relaxing Retirement Formula™, and you’ve gone through the all-important process of putting a price tag on your ideal lifestyle.    

You’ve prioritized what you want to have happen while you’re living and when you pass away. 

You’ve tallied up all of your income sources like social security, pensions, and rental real estate (if you have any).  And, you have a crystal-clear handle on where all of your money is and the total value of your Retirement Bucket™.

You’ve run your Retirement Resource Forecasters™ into the future and the results are that you have more than enough money built up to support you and your spouse for as long as you live. 

In other words, you no longer need to work to support yourself.  You have enough built up in your Retirement Bucket™ and you can afford to do what you want, when you want, where you want, and with whom you want because you’ve eliminated your dependence on a paycheck from work!

Answering Question #1

Going back to Question #1 above then, what is the financial loss if you don’t have this insurance?

Take a moment to really think about this. 

By definition, if you have enough money built up to support both of you while you’re both living, shouldn’t there also be enough money to support only one of you if something happens to you? 

If the answer is yes then you don’t need to pay for life insurance anymore!

Your spouse and family don’t need more “money” when you pass away (i.e. life insurance) because you already have enough.

It might be nice to have more money, but by the priorities you’ve laid out in your Retirement Blueprint™, there is no need for more money to satisfy those priorities.

There are (2) exceptions to this where you may still want to carry life insurance:

  1. If you have a monthly pension which ends when you pass away because you have chosen the Single Life pension option. Or,
  2. If you’re purchasing the life insurance inside of an irrevocable life insurance trust to help provide liquidity and pay your inevitable estate taxes (or income taxes due if you have large IRA holdings).

The key point in all of this is to “know your numbers” cold.   

If you’ve done your homework and followed a process like The Relaxing Retirement Formula™, and you know exactly where you stand financially as we discussed above, then it becomes a rational decision based on fact, not emotion. 

Take the time to know your numbers, and objectively evaluate them so you don’t pay for something you don’t need anymore.

It’s highly unlikely that an insurance agent is going to tell you this because they continue to receive commissions as long as you keep the insurance, so you have to do a little homework to keep yourself honest.

The bottom line is that if the risk of “financial” loss is no longer there, you don’t need to pay life insurance premiums anymore.  You are far better off spending those premium dollars to cover a more pressing financial risk like long term care or personal liability from a lawsuit.

Or, if you’ve already taken care of that, take another vacation every year, or go out to dinner one more time every month to a restaurant you wouldn’t have gone to otherwise!

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