Long Term Care Strategies

Posted on August 18th, 2010 in Health Care, Newsletter Articles, Retirement Planning, Risk Management by wayne

In 2011, the leading edge of the “Baby Boomer” generation reaches age 65, while the average American life span continues to rise.  The confluence of these two phenomena will dramatically increase the number of Americans who will ultimately require long term care.  With the national average annual cost of nursing home care exceeding $78,000, many are considering how to fund long term care (LTC).  Let’s look at some strategies for funding potential LTC requirements.

Long Term Care insurance typically pays a maximum daily amount for either in home care or nursing home care, after an elimination (waiting) period of either 90 or 180 days.  LTC insurance policies are a popular method of protecting against catastrophic long term care expenses.  However, depending upon the age at which you initiate the LTC insurance, policies will often have premium costs between $2,000 – $6,000 annually.  Like any insurance policy, these payments could be very worthwhile if LTC is required, but are lost if LTC is never needed.

Beginning in 2010, the 2006 Pension Protection Act provides new methods in which LTC insurance can be funded.  Some “hybrid” whole life insurance policies are combined with LTC coverage.  With these policies, a portion of the death benefit can be paid out before death, to cover the insured’s LTC expenses.  “Hybrid” deferred fixed annuities can also be packaged with LTC benefits.  Starting this year, any LTC benefits that are received from either of these “hybrid” products are tax free, providing considerably higher after tax benefits for most recipients.

A current whole life insurance policy or deferred annuity may also be utilized when purchasing a new “hybrid” policy, through a nontaxable exchange under IRC Section 1035.  If the “hybrid” product insurer provides for a 1035 exchange, you may “convert” a current life insurance or annuity policy to a “hybrid” policy.  The “hybrid” policy will allow for  insurance proceeds, used to pay for long term care, to be received on a tax free basis.

Another way to pay for long term care is to “self insure.”  Insurance products are best when used to protect against financially catastrophic events.  If you have adequate financial resources, you may wish “self insure” for long term care requirements.  Let’s see how self insurance works.

Jane is a single 85 year old, with $300K in retirement funds and other investments.  She also owns a mortgage free home valued at $300K.  To meet her current annual expenses of $45K, she withdraws $25K per year from her investment portfolio.

At the end of 2010, Jane, no longer able to care for herself, enters a nursing home, at a cost of $80K/year. Upon entering nursing home care, Jane’s other annual expenses decrease to $5K.  In 2011, Jane’s annual expenses will be $85K, requiring her to withdraw $65K per year from her investment funds.

Assuming no investment growth, Jane’s funds would be depleted in 2015, when Jane is age 90.  However, Jane (or possibly her children) can use a reverse mortgage or an outright sale of her home to provide more funding for her Long Term Care.  In this scenario, Jane will likely never outlive her financial resources.

When considering “self insurance”, remember that the cost of nursing home care is offset by a significant reduction in current expenses.  It is also important to consider the value of a home and other non-liquid, but salable assets in determining if self insurance is right for you.

Long Term Care requirements will affect many baby boomers.  If you are a member of this generation, now is the time to determine what financial strategies meet your LTC requirements.

Are Finances Controlling Your Life?

Posted on August 18th, 2010 in Financial Abundance, Newsletter Articles by wayne

Do financial concerns ever keep you awake at night?  Are financial issues putting stress on your marriage?  Do you live in fear of financial scarcity?   If any of these apply, your personal finances may be controlling your life.

People often believe that financial abundance means having more money.  I have met many people, with lower incomes, who live from a sense of financial abundance.  I also know wealthy individuals who live from a sense of financial scarcity.  Let’s discover how you can begin living a healthier financial life style by discovering the pathway toward financial abundance.

Living with a sense of financial abundance requires “action” and “faith.”  Using a sports analogy, financial “action” involves preparing a personal (or family) “financial scorecard.”  The “scorecard” helps determine if our financial resources are aligned with our goals and values.  When financial resources are aligned with financial goals, stress levels are reduced, leading to happier interpersonal relationships and a sense of financial serenity.

I recommend including the following on your “financial scorecard”:

  1. Do you have an “Emergency Fund,” which has highly liquid assets that will cover a minimum of six months (ideally one year) of expenses.  If you are ever unemployed or suffer a short term disability, an emergency fund can serve as a life line to help avoid financial disaster
  2. Are savings adequate for your children’s education and retirement?   A minimum of 15% of after tax income should be saved in retirement and taxable accounts.
  3. Are your investments appropriate for your level of risk-tolerance?  If you lie awake at night, worrying about your investment portfolio, investments risk is probably too high.
  4. Is your “debt load” reasonable?  You should be paying no more than 28% of your pre-tax income for your mortgage (Principal and Interest), and no more than 35% of pre-tax income for all debt, including car payments.
  5. Are you paying more in taxes than legally required?  Our tax code is riddled with exceptions and exclusions that are often known only by the wealthy.  Discover every legal method of lowering your taxes, as each dollar in tax reductions provides an additional dollar to be saved, with zero financial pain.
  6. Have the risks associated with a financial catastrophe (death, disability, major health expenses, long term care) been properly addressed, so that your family can survive, should the unthinkable occur?
  7. Are all of your financial obligations paid on a timely basis?  If so, your FICO score should be Excellent (above 750).

If the answer to any of these questions is no, your “financial scorecard” can be improved.  Every action taken to increase your financial health helps reduce financial stress, improves overall well being and leads to a sense of financial abundance.

With our country’s financial turmoil, it is difficult to maintain faith that personal financial resources will be adequate to meet future financial requirements.  However, having faith in your financial actions is critical to finding the path to financial abundance.  Once the changes required for a healthy financial life style are made, the serenity associated with financial abundance can be discovered, if you maintain faith that everything possible has been done.

If you do not have the time, inclination or energy to determine your required financial actions, elicit the help of a fee only Certified Financial Planner®.   A fee only CFP® will have the knowledge and training to help define what financial actions are required.  A CFP® will also have signed a code of ethics, ensuring a fiduciary responsibility.  A fiduciary is required by law to always place their client’s best interests before their own.

My book, Financial Abundance Guide, provides a detailed approach to creating your own financial action plan.  Financial Abundance Guide is available, free of charge, when you visit  www.finabguide.com .

Living life from a position of financial scarcity or financial abundance is a personal choice.  While the path to financial abundance takes commitment, action and faith, you may find that the peace and serenity it can deliver is worth the effort required.