LTC Bullet: Don’t Buy LTCI?!

Friday, January 12, 2018

Seattle—

LTC Comment: Bad advice by the unknowing spread by the unwitting refuted by understanding after the ***news.***

***RIP, Josh Wiener: I’m forwarding with permission this announcement from the Long-Term Care Discussion Group of Joshua Wiener’s passing. Josh was a superlative and indefatigable researcher and author on long-term care services and financing. He was also a friend I’ll miss. Rest in peace.

“The Long Term Care Discussion Group is saddened to share the news with our members of the passing of our dear friend and colleague Joshua Wiener. Many of you may have heard the news. But friends and family have asked us to pass along information about the funeral and Shiva observance to be held to honor and remember Josh. He has been an important thought leader and innovator contributing so richly to our knowledge and understanding in the long term care field. He will be truly missed as a friend, colleague and as a scholar. The funeral will be Sunday January 14th at 10 am at Temple Sinai, 3100 Military Road NW, Washington DC, 202-363, 6394. Shiva will follow on Sunday, Monday and Tuesday evenings at the home Josh shared with his wife Susan Klinger at 5419 41st St, NW, Washington DC, 20015. When we know more about the family's wishes for memorial contributions or charities we will post it on the Calendar page of www.ltcdiscussiongroup.org.” ***

*** ILTCI EARLY-BIRD REGISTRATION deadline extended: When Inter-Company Long-Term Care Insurance Conference organizers announced the end of special early-bird registration fees effective January 11, we asked for an extension so that LTC Bullet readers could have one more chance to get in at the lower charge. They agreed. You can register here at the extended reduced rate through Sunday, January 14. Grab it. There is no better way to stay abreast of the LTCI business, meet its movers and shakers, and refresh your commitment to improving long-term care financing than to attend this annual industry convocation. ***

 

LTC BULLET: DON’T BUY LTCI?!

LTC Comment: Two of the long-term care experts I admire most brought the subject of today’s LTC Bullet to my attention this week. Both nationally syndicated columnist Terry Savage and Senior Care Investor Editor Steve Monroe forwarded the article “Long-Term Care Insurance Is a Poor Buy, CFP Says.” My first reaction was that this poorly reasoned diatribe against LTCI was unworthy of serious rebuttal. But evidently the purveyor, Henry Stimpson of Stimpson Communications, sent this item to a wide mailing list of financial advisors. So . . .

Start by reading the whole article below “The Fold.” Then come back to here, where I’ll address and correct several of the more egregious errors in the piece.

CFP Says: “Long-term care is a big financial risk, but unfortunately, it’s not one that lends itself to insurance.”

LTC Comment: Nonsense. The purpose of insurance is to replace the small risk of a catastrophic loss with the certainty of an affordable premium. Although most people will experience some need for long-term care during their lifetimes, relatively few require expensive care for an extended period of time. That’s why most real experts agree long-term care is an insurable risk. This fact has not been seriously in doubt since Mark Meiners’ path-breaking research in the 1980s.

CFP Says: “Long-term care insurance is an investment that doesn’t make sense,” she says. “It’s better to plan for long-term care on your own by saving and investing, and in some cases, using a trust.”

LTC Comment: Long-term care insurance is not an investment. It is a contract that permits an insured to transfer a risk to an insurer legally bound to compensate the insured if and only if the insured event occurs. The value of insurance is the financial leverage it provides against an unpredictable, unlikely, but possible calamity. Neither saving nor investing provide such protection. Even a high net worth can be wiped out quickly by long-term care for an individual or a couple.

CFP Says: “What about giving your assets to your adult children so you’ll be eligible for Medicaid? It can work for some people, but Kibler says there are a lot of drawbacks to that strategy.”

LTC Comment: Well, now we’re getting to the nub of the matter. So this is why she recommends “using a trust.” What exactly are the “drawbacks” of self-impoverishing to qualify for Medicaid?

CFP Says: “One big problem is that there’s a look-back period of five years on assets you gave away. If you apply for Medicaid within 60 months of transferring your assets, you’ll pay a prorated penalty based on the average monthly cost of care in your area, she says.”

LTC Comment: This is the “Medicaid trap.” You can avoid the transfer of assets problem by putting your wealth in a trust five years before you need care. But the problem with Medicaid is not that it is hard to get. Most people who require expensive long-term care get it paid for by Medicaid whether they’re poor or not. See my “How to Fix Long-Term Care Financing” for the evidence and the preferred solution. The problem with Medicaid is that it is a means-tested public assistance program, welfare, and has a dismal reputation for problems of access, quality, reimbursement, discrimination and institutional bias. The most important reason people need long-term care insurance is not to protect assets, but to ensure access to quality care at the most appropriate level if and when they need it. For that, they need to be able to pay privately.

CFP Says: “If your goal is to leave money to your heirs, consider buying a life insurance policy, she says. Term life policies are inexpensive for middle-aged buyers, but they’re costly for people above 65, who are usually better off with a whole life policy.”

LTC Comment: Life insurance, term or whole, gives no leverage against the small probability of an unlikely, but large long-term care expense, unless it’s combined with a LTC benefit. Such combination or hybrid products are a good choice for people concerned about possible future premium increases on traditional long-term care insurance. Most experts familiar with long-term care insurance doubt, however, that the traditional product is as vulnerable to premium increases in the future as in the past. Why is that? The Federal Reserve caused most of the problem with premium increases by forcing interest rates to near zero thus compelling LTC insurance carriers to make up for their handicapped reserves by raising premiums so they’ll be able to pay future claims. Now, finally, interest rates are headed back up so the pressure on premiums will abate.

Closing LTC Comment: Investment, even with historically high returns that are unlikely to continue indefinitely, is no substitute for the financial leverage against risk that insurance delivers. Implying that consumers can evade the dire financial consequences of a catastrophic long-term care episode by purchasing life insurance or putting money in a trust to facilitate Medicaid eligibility is inaccurate and irresponsible. Hopefully, readers will convey this message to Mr. Stimpson and CFP Kibler, thoughtfully and respectfully, but firmly and authoritatively.

-------------------------------------------------- The Fold --------------------------------------------------

From: Henry Stimpson [mailto:henry@stimpsoncommunications.com]
Sent: Wednesday, January 10, 2018 4:17 PM
Subject: Long-Term Care Insurance Is a Poor Buy, CFP Says

Long-Term Care Insurance Is a Poor Buy, CFP Says
Better solutions: saving and investing, life insurance, and perhaps a trust

“Don’t buy long-term care insurance.”

That’s certified financial planner Melinda Kibler’s surprising advice.

Long-term care is a big financial risk, but unfortunately, it’s not one that lends itself to insurance. LTCI can increase rather than reduce risk in retirement, says Kibler, with Palisades Hudson Financial Group in Ft. Lauderdale.

“Long-term care insurance is an investment that doesn’t make sense,” she says. “It’s better to plan for long-term care on your own by saving and investing, and in some cases, using a trust.”

Mathematics works against LTCI because most people will need long-term care eventually. For insurance to make economic sense, the risk must be spread across a pool of participants, Kibler says. With other types of insurance, only a portion of the population collects, while the others continue to pay their premiums, covering expenses paid out and keeping premiums manageable.

Since the bulk of buyers will eventually collect, LTCI insurers will have to raise premiums. This, in turn, will cause the healthier portion of the population to opt out, leaving a pool of less-healthy participants who all believe they will need to collect on this insurance sooner than later.

“Instead of paying into a policy with rising premiums that may empty your retirement savings, it is better to plan for long-term care by saving and investing,” Kibler says.

The conundrum of long-term care is that people with few assets can “afford” it best. They’ll burn through their assets quickly and then Medicaid will pay for their care, she says. If one spouse needs care and the other doesn’t, Medicaid rules provide for a reasonable level of assets and income for the healthy spouse.

On the other hand, wealthy people don’t need the product because they have the money to pay for care.

It’s the bulk of people in the middle who are most vulnerable to long-term care costs, Kibler says. And for them, there are no magic solutions.

“The best solution is to save up for care using a balanced approach, investing in a comfortable mix of U.S. and foreign stock funds and bonds,” she says.

A certified financial planner can run various scenarios and stress test them to show if you’re ready for retirement and can afford long-term care eventually. Kibler regularly runs such cash flow projections for her clients.

What about giving your assets to your adult children so you’ll be eligible for Medicaid? It can work for some people, but Kibler says there are a lot of drawbacks to that strategy.

One big problem is that there’s a look-back period of five years on assets you gave away. If you apply for Medicaid within 60 months of transferring your assets, you’ll pay a prorated penalty based on the average monthly cost of care in your area, she says.

Because of that disadvantage and the fact that you lose control of the assets you give up, Kibler doesn’t usually recommend giving away your money.

But if you do decide to, set up an irrevocable trust.  Without a trust, your former assets could be lost if your child is hit with a costly divorce settlement, or has big debts he or she can’t pay, or is sued.

“A lifetime of savings could be lost quickly,” she says.

Have a lawyer who specializes in elder law and estate planning draw up the trust so it won’t jeopardize Medicaid eligibility, Kibler points out. Find a reputable lawyer, not one who’s engaged in fearmongering.

If your goal is to leave money to your heirs, consider buying a life insurance policy, she says. Term life policies are inexpensive for middle-aged buyers, but they’re costly for people above 65, who are usually better off with a whole life policy.

“Life insurance is a good way to leave assets to survivors,” she says. “It’s more predictable and has more reasonable costs than LTCI.”

In addition, you can set up an irrevocable life insurance trust (ILIT) to purchase a life insurance policy. As the beneficiary of the policy, the trust can protect the proceeds.

Palisades Hudson Financial Group is a fee-only financial planning firm and investment manager based Fort Lauderdale, Florida, with more than $1.4 billion under management. It offers financial planning, wealth management, and tax services. Its Entertainment and Sports Team serves entertainers and professional athletes. Branch offices are in Stamford, Connecticut; Atlanta, Georgia; Portland, Oregon; and Austin, Texas.

The firm’s monthly newsletter covering financial planning, taxes and investing is online at www.palisadeshudson.com/insights/sentinel. Social media: Twitter; LinkedIn; Facebook; Instagram.

Contact: Henry Stimpson, Stimpson Communications, 508-647-0705, Henry@StimpsonCommunications.com

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