Tag Archives: long term care insurance

Guess How Many Seniors Say Life Is Worse in Retirement

My Comments: After 40 plus years as a financial/retirement planner, I’ve lost count of the number of people who, as they approach retirement, ask whether they’ll have enough money. Or the corollary, when will they run out?

If you expect to have a successful retirement, ie one where you run out of life before you run out of money, you had better have your act together long before you reach retirement age. Here’s something to help you get your arms around this idea. https://goo.gl/b1fG39

Maurie Backman \ Feb 11, 2018

We all like to think of retirement as a carefree, fulfilling period of life. But those expectations may not actually jibe with reality. In fact, 28% of recent retirees say life is worse now that they’re stopped working, according to a new Nationwide survey. And the reasons for that dissatisfaction, not surprisingly, boil down to money — namely, inadequate income in the face of mounting bills.

Clearly, nobody wants a miserable retirement, so if you’re looking to avoid that fate, your best bet is to start ramping up your savings efforts now. Otherwise, you may come to miss your working years more than you’d think.

Retirement: It’s more expensive than we anticipate

Countless workers expect their living costs to shrink in retirement, particularly those who manage to pay off their homes before bringing their careers to a close. But while certain costs, like commuting, will go down or disappear in retirement, most will likely remain stagnant, and several will in fact go up. Take food, for example. We all need to eat, whether we’re working or not, and there’s no reason to think your grocery bills will magically go down just because you no longer have an office to report to. The same holds true for things like cable, cellphone service, and other such luxuries we’ve all come to enjoy.

Then there are those costs that are likely to climb in retirement, like healthcare. It’s estimated that the typical 65-year-old couple today with generally good health will spend $400,000 or more on medical costs in retirement, not including long-term care expenditures. Break that spending down over a 20-year period, and that’s a lot of money to shell out annually. But it also makes sense. Whereas folks with private insurance often get the bulk of their medical expenses covered during their working years, Medicare’s coverage is surprisingly limited. And since we tend to acquire new health issues as we age, it’s no wonder so many seniors wind up spending considerably more than expected on medical care, thus contributing to both their dissatisfaction and stress.

And speaking of aging, let’s not forget that homes age, too. Even if you manage to enter retirement mortgage-free, if you own property, you’ll still be responsible for its associated taxes, insurance, and maintenance, all of which are likely to increase year over year. The latter can be a true budget-buster, because sometimes, all it takes is one major age-related repair to put an undue strain on your limited finances.

All of this means one thing: If you want to be happy in retirement, then you’ll need to go into it with enough money to cover the bills, and then some. And that means saving as aggressively as possible while you have the opportunity.

Save now, enjoy later

The Economic Policy Institute reports that nearly half of U.S. households have no retirement savings to show for. If you’re behind on savings, or have yet to begin setting money aside for the future at all, then now’s the time to make up for it.

Now the good news is that the more working years you have left, the greater your opportunity to amass some wealth before you call it quits — and without putting too much of a strain on your current budget. Here’s the sort of savings level you stand to retire with, for example, if you begin setting aside just $400 a month at various ages:

You can retire with a decent sum of money if you consistently save $400 a month for 25 or 30 years. But if you’re in your 50s already, you’ll need to do better. This might involve maxing out a company 401(k), which, as per today’s limits, means setting aside $24,500 annually in savings. Will that wreak havoc on your present spending habits? Probably. But will it make a huge difference in retirement? Absolutely.

In fact, if you were to save $24,500 a year for just 10 years and invest that money at the aforementioned average annual 8% return, you’d be sitting on $355,000 to fund your golden years. And that, combined with a modest level of Social Security income, is most likely enough to help alleviate much of the financial anxiety and unhappiness so many of today’s seniors face.

Retirement is supposed to be a rewarding time in your life, and you have the power to make it one. The key is to save as much as you can today, and reap the benefits when you’re older.

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New Options in Long-Term Care Insurance

My Comments: Aging gracefully is not easy. When getting up in the morning is a struggle and you can’t remember if you’ve brushed your teeth, there may be a looming bump in the road. Dr. Gloom here again. I suppose there is value in denial. At least I hope so.

Couple that with both the staggering cost of professional care if you become goofy, and the mindset in Congress these days that it’s your fault if you haven’t already died, the looming bump in the road is increasingly difficult to manage. Here are some thoughts to help you overcome your fears.

In addition to what you read below, there are ways to use qualified money to leverage your dollars when it comes to paying for long term care needs.

July 05, 2016

According to the U.S. Department of Health and Human Services, almost 70% of Americans turning 65 today will need some type of long-term care (LTC) as they age. And 20% will likely need care for five or more years. Given that the annual cost of that care can extend into six figures, that’s a daunting prospect for many retirees.

“There’s no way to know for sure whether you’ll need long-term care,” says Carrie Schwab-Pomerantz, CFP®, president of Charles Schwab Foundation. “But if you do, it could jeopardize your retirement savings if you’re not prepared.”

For decades, purchasing a long-term care insurance policy has been a common solution. But many insurers—facing lower interest rates and higher claims payouts—have raised their premiums or stopped offering the policies.

Fortunately, the long-term care industry has developed a variety of new options that may provide more appealing coverage, given your needs and overall financial plan.

A new era of long-term care insurance

Traditional LTC policies (in addition to their increasing expense) are typically “use it or lose it” products, similar to homeowner’s insurance. You might pay premiums for years without ever needing coverage—and never get your cash back.

There are newer LTC policies, however, that are different. They’re often combination products that provide either a life insurance or annuity component and may allow premium returns. Here are three common types of newer long-term care policies, with some advantages and drawbacks.

1) Hybrid long-term care policies merge traditional long-term care insurance with life insurance, while offering a return of the premium.
The advantage of a hybrid policy is that it offers a benefit whether you need long-term care, pass away, or discontinue the policy and want your premiums back. That said, this type of policy also comes with drawbacks, including how the premiums are paid, as well as a higher bar to qualify for the coverage.

Hybrid plan premiums are typically paid in a lump sum, or spread out over a short period of time (10 years, for example). And because you’re paying for life insurance as well as LTC coverage, plus the return-of-premium feature, the cost can be prohibitive. Also, because this option bundles two products in one, you’ll need to qualify for both coverage types in order to get a policy.

2) Permanent life insurance policies with long-term care riders enable a percentage of the death benefit to be used for long-term care costs.
These policies can offer some payment flexibility—allowing lump sum premiums or annual payments over a lifetime. And their costs tend to be lower than other types of combined coverage.

The drawbacks? The policies don’t offer the return-of-premium option and the terms of reimbursement can be stringent. For example, with these policies a doctor must attest that your inability to perform basic activities is permanent—which could seriously limit the benefits you receive. For a traditional or hybrid LTC claim to be paid, on the other hand, you typically only need a doctor’s validation that you cannot perform certain activities of daily living (or that you’re cognitively impaired).

Similar to the hybrid policies above, applicants must also qualify for both life insurance and the LTC rider.

3) Annuities with long-term care riders have terms that are similar to those of fixed annuities. You typically purchase the annuity with a lump sum and receive a monthly benefit. In some cases, no extra cost is incurred for the long-term care component because it’s funded by the annuity premium.

For example, you can buy a deferred long-term care annuity with a lump sum premium. The annuity creates two funds: one for long-term care expenses, the other for whatever you choose. That said, the terms of the annuity dictate how much you can withdraw from each fund, and the tax implications can be complicated.

Given the complex terms of some annuity products, you may want the advice of a tax professional when exploring this option.

What to know, what to ask about LTC coverage

Buying LTC insurance can be an exacting process, but one that’s well worth it.

“Long-term care insurance can be staggeringly expensive, but so is the cost of care itself,” Carrie notes. In addition to examining the payment and coverage features, be sure to evaluate the insurer’s reputation and financial strength.

And when comparing options, make sure to ask the following questions:
• What sort of inflation protection does the policy offer?
• Are there limitations on preexisting conditions?
• Is Alzheimer’s disease covered?
• What is the lag time until the benefits kick in, and how long will they last?
• How often has the insurer raised rates?

What you can do next
With the cost of long-term care rising, now is a good time to explore how you can integrate LTC insurance into your financial plan

What’s Killing The Long-Term Care Insurance Industry?

My Comments: This was written almost five years ago. During these years, every reader today is almost five years older and while the world has changed dramatically, the demographics are still with us.

Among the existential risks we all face is what is known as a Long-Term Care, or LTC event. Before we all die, about 70% of us are going to be directly affected. At some point, family and friends can no longer adequately care for someone, and an outside caregiver enters the picture.

It’s not a cheap solution. But I’ve yet to find anyone who says just drop me in the woods somewhere and leave me to the critters. It doesn’t happen that way. My solution of choice is one that requires assets be re-positioned to gain leverage, and provide an escape clause if an LTC event never happens. This article will help you better understand the context in which the solution of choice becomes the answer.

by Howard Gleckman | August 29, 2012

The long-term care insurance industry is in big trouble. Consumers aren’t buying. Carriers are dropping out of the market. And those that are staying are raising premiums, cutting discounts, and eliminating products–all of which are discouraging even more consumers from buying.

What’s gone wrong? The industry has two fundamental problems. A long-standing one–buyers are dropping coverage less often than the industry predicted. And a more serious new one–historically low interest rates are sucking the profit out of the business.

As a result, just about every LTC insurance company has raised premiums in recent years for both old policies and new ones. And now many have begun trimming their product lines and eliminating or reducing discounts.

For instance, Genworth, which dominates the LTC market, announced on Aug. 1 that it plans to raise premiums on pre-2003 policies by 50 percent over the next five years, and on newer policies by 25 percent over the period. It will tighten underwriting for new products, requiring, for the first time, blood tests for applicants. It will also stop selling lifetime benefit policies, reduce spousal discounts from 40 percent to 20 percent, end preferred health discounts, and stop selling products that allow consumers to pay premiums up-front rather than over their lifetimes.

Another big player, Transamerica, has announced similar cut-backs.

Finally, some household names are simply dropping LTC insurance entirely. In February, Unum stopped selling group policies (a product once thought to be the industry savior). In March, Prudential stopped selling individual coverage and on Aug. 1, it abandoned the group market as well.

For years, carriers underestimated how many consumers would let their insurance drop before they went to claim. The companies assumed that as premiums increased and buyers’ disposable income shrank, a certain percentage would drop coverage. The phenomenon, known as the lapse rate, increased returns to insurers and allowed them to keep premiums under control.

But as it turned out, lapse rates have consistently been much lower than the companies figured (typically about 1 percent, compared to 5 percent for other insurance products). That squeezed their profits and forced them to raise rates which, in turn, made insurance less attractive to new potential buyers.

In recent years, the industry has adjusted its estimate for those drop-outs, and newer policies–with higher premiums– are more profitable than older ones. But carriers have had much more trouble adjusting to the newer problem: How to survive in a nearly zero interest rate environment.

To oversimplify a bit, insurance companies earn revenue by collecting premiums and then investing that income. Because long-term care insurance companies typically do not pay claims for many years, they hold premium income for a long time and, thus, investment income is a very important part of their business model.

Those investments are limited by state insurance regulators to ultra-safe bonds. But ten-year Treasury bonds are returning just 1.6 percent. Five-year notes are paying a paltry 0.7 percent. That is far lower than overall inflation and significantly lower than the annual increase in long-term care costs, which is roughly 5 percent.

The math is brutal: No insurance company can pay claims and make a profit when its costs are rising by 5 percent but its investment returns are in the neighborhood of 1 percent.

Keep in mind that long-term care insurers are almost all subsidiaries of much larger life insurance companies. And their parent firms, anxious to manage risk in what was already a very risky business, are not at all troubled by the decline in LTC sales. In fact, slashing sales may be exactly what they have in mind.

Until a few years ago, carriers that stopped selling LTC insurance would sell their existing policies to other firms. But, today, in a reflection of the state of the industry, there are no buyers. In most cases, the large carriers will continue to cover their current customers, though policy-holders should not be surprised to see ongoing rate increases.

Overall, though, the decline of the private LTC market is a huge problem, especially since it is coming just as Washington is seeking ways to reduce Medicaid, the most important payer of long-term care costs. It is yet one more reason why it will be critical to find a workable solution to the problem of long-term care financing.

Income Inequality Is Off The Charts

My Comments: The greatest economic threats to the health and welfare of the world I will leave to my grandchildren will arise from the disparity between the haves and the have-nots.

One side of this argument arises from the contempt that was pervasive across the planet toward a political movement driven by what came to be known as communism. This arose in Russia and the Soviet Union as a philosophy and embraced the notion of ‘to each according to his needs’. It was a rejection of free enterprise and the notion that every individual member of society have the ability to rise above the others and receive ‘more than what he needs’.

We’ve long established that any system that denies individuals the opportunity to win or lose the economic game of life is going to fail. Without the ability to dream of success, people simply fail if there is no motivation to excel.

The other side of this argument hinges on the unfettered ability to succeed with total disregard to the aspirations and dreams of others playing the same economic game. Any barrier imposed by society is deemed contemptible and must be removed. And yet we live with barriers and have done for millenia and survived. And survived well. How many of us argue against the notion that you should drive your car on just one side of the street, and not whichever side you choose on any given day?

These and similar rules are imposed by society on it’s members and we’ve long since become comfortable with them and don’t see them as a barrier to be railed against. But suggest that bankers and stock-brokers be required to act in the best interest of their clients, with rules and regulations and penalties if you don’t and before you know it, the wailing starts.

It’s known as the DOL Fiduciary Standard rule. It goes into effect on April 1, 2017. I believe there are valid and rational reasons why society should impose this rule on those of us who act in a professional capacity to help others grow their money. Right now the rule is coming from the Department of Labor and is directed toward anyone who acts in an advisory capacity with respect to money being accumulated for retirement. Naturally, there are exceptions which no one is talking about.

I think this rule should be expanded. Yes, it will be disruptive and will no doubt have unintended consequences. But I see income inequality as the canary in the coal mine. If we don’t take steps to correct it, the coal mine will fill with noxious gas and everyone who enters will die.

With Trump in the White House, there’s going to be shouting all up and down Wall Street to get rid of this rule. NO. Amend it here and there, phase in the penalties if you will, but it’s a very necessary step, among many, that are necessary to diminish the growing economic disparity between members of our society. It’s not about denying some the opportunity to succeed any more than it’s about making sure none of us ‘has more than we need’. It’s about doing the right thing without resorting to stealing to make sure I succeed and you don’t. We all have the right to be successful, and society has an obligation to keep us playing on a level playground.

Theo Anderson | December 29, 2016

The income gap between the classes is growing at a startling rate in the United States. In 1980, the top 1 percent earned on average 27 times more than workers in the bottom 50 percent. Today, they earn 81 times more.

The widening gap is “due to a boom in capital income,” according to research by French economist Thomas Piketty. That means the rich are living off of their wealth rather than investing it in businesses that create jobs, as Republican, supply-side economics predicts they would do.

Piketty played a pivotal role in pushing income inequality to the center of public discussions in 2013 with his book, “Capital in the Twenty-First Century.” In a new working paper, he and his co-authors report that the average national income per adult grew by 61 percent in the United States between 1980 and 2014. But only the highest earners benefited from that growth.

For those in the top 1 percent, income rose 205 percent. Meanwhile, the average pre-tax income of the bottom 50 percent of workers was basically unchanged, stagnating “at about $16,000 per adult after adjusting for inflation,” the paper reads.

It notes that this trend has important political consequences: “An economy that fails to deliver growth for half of its people for an entire generation is bound to generate discontent with the status quo and a rejection of establishment politics.”

But the authors also note that the trend is not inevitable or irreversible. In France, for example, the bottom 50 percent of pre-tax income grew by about the same rate — 32 percent — as the overall national income per adult from 1980 to 2014.

The difference? In the United States, “the stagnation of bottom 50 percent of incomes and the upsurge in the top 1 percent coincided with drastically reduced progressive taxation, widespread deregulation of industries and services, particularly the financial services industry, weakened unions and an eroding minimum wage,” the paper reads.

Piketty and Portland

President-elect Donald Trump’s administration promises at least four years of policies that will expand the gap in earnings. But a few glimmers of hope are emerging at the local level.

The city council of Portland, Oregon, for example, recently approved a tax on public companies that pay executives more than 100 times the median pay of workers. The surtax will increase corporate income tax by 10 percent if executive pay is less than 250 times the median pay for workers, and by 25 percent if it’s 250 and over. The tax could potentially affect more than 500 companies and raise between $2.5 million and $3.5 million per year.

The council cited Piketty’s “Capital in the Twenty-First Century” in the ordinance creating the tax. Steve Novick, the city commissioner behind it, recently wrote that “the dramatic growth of inequality has been fueled by very high compensation of a few managers at big corporations, as illustrated by the fact that 60 to 70 percent of people in the top 0.1 percent of income in the United States are highly paid executives at large firms.”

Novick said that he liked the idea when he first heard about it because it’s “the closest thing I’d seen to a tax on inequality itself.” He also said that “extreme economic inequality is — next to global warming — the biggest problem we have in our society.”

Investing in children

There is also hopeful news in the educational realm. James Heckman, a Nobel Laureate in economics at the University of Chicago who has spent much of his career studying inequality and early childhood education, recently published a paper that lays out the results of a long-term study.

In “The Life-cycle Benefits of an Influential Early Childhood Program,” Heckman and others report that high-quality programs for children from birth to age 5 have long-term positive effects across a range of metrics, including health, IQ, participation in crime, quality of life and labor income.

Predictably, perhaps, the effects of the programs weren’t limited to children. High-quality early childhood education also allowed mothers “to enter the workforce and increase earnings while their children gained the foundational skills to make them more productive in the future workforce,” a summary of the paper reads.

“While the costs of comprehensive early childhood education are high, the rate of return of [high-quality programs] imply that these costs are good investments. Every dollar spent on high quality, birth-to-five programs for disadvantaged children delivers a 13 percent per annum return on investment.”

The research is important because early childhood education has bipartisan support. Over the summer, the Learning Policy Institute released a report that highlighted best practices from four states that have successful early childhood education programs. Two of them — Michigan and North Carolina — are swing states in national politics. The others are Washington and a solidly red state, West Virginia.

Although it isn’t a substitute for other policy tools to address inequality, like progressive taxes, early childhood education has strong bipartisan support because it produces measurable payoffs for both children and the economy. One study found, for example, that the economic benefit of closing the educational achievement gaps between children of different classes would be $70 billion each year.

Early childhood education fosters an “increasingly productive workforce that will boost economic growth, provide budgetary savings at the state and federal levels, and lead to reductions in future generations’ involvement with the criminal justice system,” the Economic Policy Institute recently noted. “These benefits will, of course, materialize only in coming decades when today’s children have grown up. But the research is clear that they will materialize — and when they do, they are permanent.”

The Face of Retirement is Changing

retirement_roadMy Comments: 30 years ago, my vision of retirement was as vague as what you see if you stand outside on a clear dark night and look upward. A vast empty space with millions of tiny points of light, far away and mysterious.

Today, not so much. I tried it a few years ago and began to suffer from terminal boredom. Plus having more money helps. It’s just the joints and muscles won’t cooperate like they did 30 years ago.

Steve Savant on October 12, 2016

Many of the rock icons and Hollywood stars of the baby boomer generation are in sixties. The flower children of the sixties are now in their sixties. This is the changing face of retirement. 10,000 baby boomers turning age 65 everyday.

In the last generation, most retirees have a pension and Social Security. But today many employers have migrated from pensions to defined contribution plans.

From 1985 to 2000, the rate of participation in pensions by full-time employees of medium and large private firms dropped from 80 percent to 36 percent. A 2013 survey by the Bureau of Labor Statistics found only 26 percent of civilian workers in the U.S. participated in defined benefit pension plans. The boomer generation is often referred to as the “sandwich generation,” because they are paying for their parents’ elder care as well as the tuition of their children. When you add the funding of their retirement plan, there’s not much money left to pay off a mortgage.

Presidential candidates have promised Social Security will not be altered for baby boomers, but Congress has changed things over the years. With the most recent changes coming with the passing of the Bipartisan Budget Act of 2015, most baby boomers lost income from the elimination of the “file and suspend” provision and age tested restrictive application benefits. But perhaps the biggest change and the greatest risk in retirement isn’t legislation, but living longer.

Today, the average life expectancy for men is 86.6 years and for women 88.8. The impact of longevity on retirement modeling has created an environment fear among of among seniors of outliving their money. One answer to longevity problem maybe annuities. Annuities can be structured to pay guaranteed lifetime income with annual increases. Today, more retirement plans are using guaranteed lifetime annuity income to pay for household living and travel expenses. The structured payout can cover two lives and provide income for the survivor.

Two years ago, Qualified Longevity Annuity Contracts or QLACs, were introduced. The key part of the legislation was to offer the option to defer required minimum distributions or RMDs at age 70½ to age 85 from qualified plans like 401(k)s. The rules of engagement allow deferring 25 percent of qualified plan monies not to exceed $125,000 per participant to age 85. QLACs use deferred income annuities that can guarantee income for life. Controlling RMDs with QLACs can have a significant impact on retirement taxation and may insulate a portion of Social Security income from taxation as well. Annuities are not insured by the FDIC or any government agency. So it’s important to have your financial advisor review the balance sheet and ratings of the insurance company before you purchase an annuity.

Solar Power Capacity Tops Coal for the First Time Ever

My Comments: Yes, this is only in China. But I grew up when coal was virtually 100% (in England). While China is newly industrialized compared to our status in the world, this headline has huge implications.

Also, keep in mind as a Florida voter, to vote NO on Amendment 1. This was promoted by the oil and gas industry to limit flexibility with respect to solar energy. And while you’re at it, don’t automatically re-elect the three judges on the Florida Supreme Court that allowed Amendment 1 to appear on the ballot. They are Charles Canady, Jorge LaBarga and Ricky Polston.

by Geoffrey Smith | October 25, 2016

China alone installed two wind turbines per hour and 500,000 solar panels a day last year.

Solar power now accounts for more installed capacity than any other form of electricity generation, according to new data out Tuesday.

“About half a million solar panels were installed every day around the world last year,” the Paris-based International Energy Agency said in a new report on the renewables sector, as emerging markets in particular bet heavily on green power. China also installed the equivalent of two wind turbines every hour last year.

In total, over half the new power capacity installed last year—153,000 megawatts, or 153 gigawatts—was renewable-sourced. That’s a 15% increase from the previous year, and three-quarters of it came in the shape of wind (66 GW) or solar photo-voltaic (49 GW).

Capacity is what a plant can theoretically produce. Actual generation remains much lower, due to the basic unpredictability of resources such as sunlight and wind. But even on levels of actual generation, the IEA said renewables would close the gap rapidly going forward.

“We are witnessing a transformation of global power markets led by renewables and, as is the case with other fields, the center of gravity for renewable growth is moving to emerging markets,” said Dr. Fatih Birol, the IEA’s executive director.

The IEA said the share of renewables in the generation mix would rise to 28% within six years, from 23% at the end of last year. It raised its forecast for green power output in that timeframe by 13% “due mostly to stronger policy backing in the U.S., China, India and Mexico.”

Another factor expected to help is a continued fall in costs: the IEA reckons the cost of solar PV will fall by a quarter, and the cost of onshore wind will fall by 15%. Lower capital costs mean that an installation can break even with lower load rates.

While climate change policy plays a large role in countries’ policy choices, especially in the wake of the Paris summit last year, the IEA pointed out that cutting air pollution and diversifying energy supplies are just as important some some countries. In China, in particular, renewables are helped by the fact that overall energy demand is growing rapidly, and renewables are the only option for meeting demand in places where pollution is already a hard constraint.

In China and India, where the fastest growth in green power is expected, it will still cover less than half of the overall increase in electricity demand. By contrast, in developed economies, renewables will grow faster than overall generation.

Options for Funding Long-Term Care Expenses

retired personMy Comments: When you reach retirement age, the elephant in the room becomes Long Term Care. This is when someone in the household becomes unable to perform two of what are called Actitivies of Daily Living, or ADLs.

A healthy spouse will simply take on more and more to help the affected person manage and get by from day to day. But it takes a huge toll, and if there are enough resources or insurance in place, there may be money to find someone to help.

Only two of the four ways to finance a solution are referenced in this blog post. If you want more information on the other two, call or email me.

This begins to explore ways to pay for those LTC expenses.

January 12, 2016 by Wade Pfau

Four general ways to finance long-term care expenses include:
1. Self funding with personal assets
2. Medicaid
3. Traditional long-term care insurance
4. Long-term care insurance combined with life insurance or annuity

I will discuss the first two of these today and go into the others in subsequent posts.

The overall cost of long-term care can be defined as:

LTC Cost = LTC Expenses + LTC Insurance Premiums – LTC Insurance Benefits

This equation highlights that the overall cost of funding long-term care is comprised of the actual expenses for care plus any premiums paid for long-term care insurance, less any benefits received (including death benefits or other auxiliary benefits, when applicable) from the insurance policies. For this formula, one may consider Medicaid benefits as a type of insurance benefit.

Before we go any further, notice that Medicare and health insurance are not on the above list. The misperception that Medicare provides long-term care support is common. Medicare provides support only in limited situations when an individual is confined to home, requires intermittent or part-time support from a Medicare-certified home health agency as prescribed by a doctor, and is expecting a full recovery. Full benefits last 20 days and partial support ends after 100 days.

Selecting between the four options listed above includes a number of considerations: age, health, ability to receive help from family or friends without overburdening them, wealth levels and how they may relate to Medicaid qualifications, legacy objectives, risk tolerance with regard to the financial impact of unknown long-term care events, and costs and benefits of different types of insurance.

As far as funding is concerned, developing a written plan and sharing it with family members can help avoid misunderstanding when the time comes. You should also ensure family members know about any funds set aside or any insurance policies designed to support care when the time comes. A qualified elder care law attorney can help with issues surrounding the transition to using Medicaid for long-term care expenses.

Self Funding
Self funding means any long-term care expenses will be funded through distributions from financial assets. This strategy keeps the full risk for the amount of long-term care spending on the household and results in the widest range of potential spending outcomes. Of course, if no long-term care event occurs, the cost of self funding is zero dollars. But without any risk-sharing, the threat of potential costs that could exceed one million dollars hangs overhead.

If you are more risk-averse, you may prefer to pay a premium to better protect your wealth in the event of an expensive long-term care event, even if it carries a relatively small loss should no long-term care event arise. Risks of self funding include potential high costs, investment risks for the underlying portfolio, and difficulties with managing investment assets after a long-term care need begins.

For self funding, ask yourself if you have sufficient financial resources to cover an expensive long-term care shock and still meet the remaining financial goals for retirement. Which specific resources could be used for long-term care expenses? How will they be invested? What impact would these expenditures have on the standard of living for remaining household members and potential beneficiaries? Is this a risk that can be accepted, or could insurance provide a positive impact by helping pool this risk?

Clearly, the self funding option is only possible for those with sufficient discretionary assets to meet potential expenses. With sufficient assets, those with high risk tolerance may prefer the increasing variability in net care expenses by self funding to insurance. Others with a lower risk tolerance might choose to pool some of the risks through an insurance company.

Another risk tolerance consideration: What kind of investment returns could the assets earn if no protection is purchased? The more conservatively these assets earmarked for long-term care are invested, the less potential upside growth they would lose. Those with greater risk tolerance who invest more aggressively may find self funding fits their circumstances, while those who would otherwise invest the assets more conservatively – in cash or CDs, perhaps – may benefit more from an insurance solution.

The self-funding route may also be more attractive to individuals with a family history free of health problems that result in the need for long-term care such as dementia. Also, those with the potential to receive care from family or friends may feel self funding is a safe bet as it could greatly reduce the cost of care.

Self funding could force an individual to rely more greatly on family care, which introduces a number of potential opportunity costs not included in formal cost calculations. Caregivers often experience increased stress and health problems, and they could be forced to make sacrifices in their careers that could result in substantially reduced lifetime earnings. The health problems created by providing long-term care could potentially result in the caregiver needing long-term care for themselves as well.

Medicaid
Medicaid is the most commonly used funding option for long-term care in the United States. It generally serves as a last-resort option once assets and income have fallen to sufficiently low levels. The qualifications for Medicaid – assets, income, and medical need – vary widely by state, which makes it hard to generalize about the process. Some states require relative impoverishment to qualify for Medicaid, while others allow money set aside for a surviving spouse to be exempted from consideration to pay for long-term care.

Medicaid is the main option for those entering retirement with little savings. It is also the go-to for continuing care after available resources have been depleted.

Still others reposition their assets with the aid of an attorney to work around Medicaid limitations and gain access – a somewhat controversial strategic process known as “Medicaid planning.” Some view it as unethical, while others say they are entitled to the welfare benefits through their lifetime tax payments.

Either way, Medicaid is making such planning increasingly difficult by limiting the transfer of assets to avoid using them to pay for long-term care. Also, efforts to recover Medicaid benefits from the estates of beneficiaries have grown more and more complex as states work harder to reduce overall Medicaid expenditures.

Nevertheless, Medicaid planning may be helpful for those with limited resources and health problems preventing them from qualifying for long-term care insurance. Available resources may still need to be spent on long-term care needs in the end, and qualification for Medicaid could occur if long-term care needs persist.

Because Medicaid reimbursement to long-term care facilities is generally lower than the true cost, self-funding patients may receive priority admission – and potentially better quality care – over Medicaid patients. Yet, as an increasing number of people require long-term care, making it difficult for everyone to receive high quality long-term care, those who would otherwise have the ability to self-fund may come to regret using Medicaid planning techniques if they could have funded better quality care themselves.

Wade Pfau: Professor at The American College and Principal at McLean Asset Management. His website: http://www.RetirementResearcher.com