Insuring Your Home: A Focus on Mortgage Insurance for Boomers

On a recent episode of Financial Impact Factor Radio, we discussed the topic of insurance. If you have never tuned into this show, I think you will find it interesting and topical. We have a wide range of guests and often discuss the very questions that concern Baby Boomers, their children and their parents. Because being a Boomer is more than just being a certain age. All of our shows on Financial Impact Factor Radio can be found here.

As a Boomer, I am always intrigued by the offers that begin showing up in my inbox/mailbox. Although they don't on the surface seem to be age related, one can't help but read between the lines. Are they talking to me? Are they worried about whether I will make it to the end? That "end" involves satisfying the largest debt any of us will ever own: our mortgage.

Last week I received a letter in the mail from the bank that holds my mortgage that would make most mortgage holders think twice. It was the offer of life insurance. My bank might think there are good reasons for offering this product that is different that many of the other types of insurance offered with these types of loans. For instance, PMI is private mortgage insurance the bank makes you buy if you are putting less than 20% down on a mortgage. The sole beneficiary in this instance is the lender, who knows that if you are going to default, this riskier loan covers their interest in the transaction. Known as PMI, its cost has begun to weigh on borrowers who find their loans underwater. Once you pass 78% mark because the value of your house compared to the amount of your initial downpayment, you can cancel the policy.

There is also mortgage insurance which for some borrowers seems like a good option as well. Essentially the lure of this product is to pay-off the mortgage in the event of your death. The insurer doesn’t pay you directly instead writing a check directly to the mortgage company or lender.

The letter I received offered a term policy that would last until I turned 80 years old, which is about 26 years from now. Like all insurance policies it plays on your fears and comes at a time when the typical term policy is about to expire if you bought insurance in your thirties, which is typically the time when most folks consider coverage. But it isn’t cheap. In fact, this sort of policy has a seven year flat rate, just a few medical questions without an exam and of course the tug-on-your-heart-strings assurance that your loved ones will be taken care of.

So today I thought we’d talk about late in life insurance coverage and whether we should consider it.

Listen to Financial Impact Factor Radio with your hosts:
Paul Petillo of Target2025.com/BlueCollarDollar.com and Dave Kittredge and Dave Ng of FinancialFootprint.com

ReBuilding Wealth in a Paycheck-to-Paycheck World

I just published my fifth book - this time with Smashwords! And a special offer to readers of this blog, ReBuilding Wealth in a Paycheck-to-Paycheck World by Paul Petillo is available for a limited time (until 10.29.11) you can use this coupon code to get the ebook for half price or $1.50. The code for the coupon is UJ76Q This ebook is available across all platforms including iPad and iPhone, Amazon and Sony.

The Overlooked Insurance

Is this the insurance Boomers and pre-Boomers overlook the most? Quite possibly. Last week, we talked about the idea of disability policies in your personal finance framework. This week, we're going to take a look at some of the add-ons that you might consider when buying a policy.

Shoppers know what a value is. Except when it comes to buying cars and insurance. Then, we often lose sight of what value is by adding stuff to the purchase which can increase the cost. Want the spoiler on the car? It’ll cost more. The upgraded sound system? More. Leather, sunroof, alloy wheels? More, more and more money out of pocket. And most shoppers know they can add these extra items on after the purchase. But few seldom leave the show room with the stripped down version of the car, the basic model, with the intentions of adding on the features we think we need.

Our conversation about disability insurance also has the same sort of stripped down version – the basic coverage that replaces some, not all of your income should you not be able to work. Now, we're going to take a look at the seriously upgraded policy that most of us find not only enticing, but worthwhile. These add-ons are referred to in insurance jargon as riders. Are they worth it or can we do it alone with less?
Let’s discuss what you can add-on to these basic policies and what they may cost you for this peace of mind.

The first of these add-ons is often the Cost of Living Adjustment or COLA. We know how our money can erode over time with inflation. So it can be suggested that if you have agreed to a set benefit, that benefit, the longer it is in place will be worth less with each passing year. The COLA rider is intended to protect you from this risk and usually kicks in after first full year the policy is play or even after the first year of your disability. They offer an enticing increase, sometimes as high as 6% every year that you are disabled and receiving benefits.  Sounds good but could cost you about 40% more than the basic coverage.

Most people who use a disability policy do so because they can’t work. But when an agent offers you what is called a residual disability rider, they are suggesting that even though you are hurt, you might be able to return to work in a limited fashion and because of that, this policy makes up some, not all of the difference in your pay.  It typically provides a partial benefit when your earnings are reduced by at least 15-25% as a result of an injury or illness. But it will cost about 20-25% more if your policy doesn’t have it already built-in.

Think you might need more insurance at some point down the road? While most of us either fall into one of two categories: over insured or under insured, this rider called a future increase offers a sort of Goldilocks add-on. It suggests that if at some point in the future, you might like to increase your monthly benefit, because the benefit you have “just isn’t quite right”, you can do so without re-applying and submitting to additional medical examinations.

All you need do is pay for the rider (sometimes 10% more in premiums) and should you decide to exercise it, simply prove that you make more now by providing the right financial documentation. To do so without the rider means you will need to get another medical exam.



The catastrophic disability rider sometimes called the 2 of 6 rider (meaning you are unable because of your disability to perform 2 of the 6 basic morning duties: getting out of bed, going to the bathroom, showering, getting breakfast, brushing teeth, getting dressed) allows you to purchase an additional benefit amount that will be paid if you are catastrophically disabled. Catastrophically disabled means you have a complete and irrecoverable loss of sight in both eyes, hearing in both ears, speech; or the use of both feet, both hands, or one foot and one hand. Alzheimer's Disease or other irrecoverable forms of dementia or senility are also considered. Keep in mind that this is not a Long Term Care policy. Some policies include this; others don’t. That’s the best way to compare the true cost of this benefit against a separate LTC policy.

The automatic increase benefit is available with most carriers at no additional cost. The AIB rider will increase your monthly benefit amount by 5% of the original benefit at each policy anniversary, for the first 5 anniversaries. Your premium will be increased based on attained age at each anniversary. If you have this rider and chose not to accept the annual increase, you can do so by submitting a written request to the insurer.

The own-occupation rider allows certain occupation classes to upgrade the definition of disability to a “true own-occupation” definition. If this rider is added to your contract it will replace the standard definition of disability offered, to one that states “You will be considered totally disabled if due to injury or sickness you are unable to perform the material and substantial duties of your regular occupation”. Good luck finding this but if you do, it can be worth the cost, which is about 10% more in premiums. If you are in a relatively hazardous job, this sort of rider can also retrain you after a period to do another job.

By having a refund of premium or as it is sometimes referred to as the good health benefit rider on your policy, the insurance company will refund a percentage of the premium paid over a defined period of time that you remain healthy and not on disability claim, until age 65. This costs a lot and if you do have a claim, it will be all for naught.

This one is quite possibly the best rider available in part because it actually lowers your premium in many cases as opposed to increasing it. Called the Social Security rider It is actually a bet with the insurer that suggest that, if you should be come disabled, and Social Security coverage kicks in, the insurer is off the hook for a percentage of the benefit owed. I actually have this and should I become so disabled that Social Security kicks in, the insurer is only obligated to pay 20% or what they may have owed me. But as Social Security suggested, the next step in life if you qualify for Social Security is death.

Like all insurance policies, shop around, be sure that your employer doesn’t already cover you in some way and be careful you don’t buy coverage that might be better suited as a stand alone policy.

And one last note: the more you have saved in an emergency account, the less you have to worry about some of these riders. While all insurance is designed to never be used, an emergency account can make it easier to forego exercising the policy or adding on expensive riders you may never need.

Without a Clue about Money, Retirement and Investing

By now, most of my regular readers know what I do not like in the world of financial products. The annuity galls me (a mix of insurance and mutual funds that doesn’t do either well), the ETF (which mimics the indexed mutual fund but allows you to trade it just like a stock and pay for the privilege of trading just like a stock) and any tool that gives you the impression that you can set it and forget it.  There are others, but at the top of that list is the target-date fund.

The products are all hyped and re-hyped by the those that sell them as the easiest way to wealth.  The belief that sales people from the world of finance care about your well-being or what is known as fiduciary responsibility, may be the biggest mistake the vast majority of us make.  And the folks who make these mistakes are often wary of every other type of sales approach in every other facit of their lives.

So why, when it comes to target date funds do they simply believe the following: pick a date in the future and our mutual fund manager will adjust and readjust the underlying holdings of the account to protect your hard earned money, so, that when you retire, you will have a conservative allocation of funds that will serve you well into the future?

Click here to read more about target date funds from Paul Petillo, managing editor Target2025.com

Retirement Planning and Fidelity's Long-Term Care Insurance Estimates

Recently, Fidelity, the mutual fund giant began surveying insurance providers asking how much long-term care insurance you might need to calculate into a retirement strategy, often referred to as a plan. In truth though, it is only a strategy that if followed over the course of a great many years, develops into what looks to be a well thought-out plan. Plans seem so inflexible. (I travel deeply into this jungle in the tenth chapter of the book Retirement Planning for the Utterly Confused.)

Mark Meiners, director of the Center for Health Policy, Research and Ethics in the College of Nursing and Health Science at George Mason University says “Unfortunately, many Americans falsely believe that their long-term care costs will be covered by Medicaid, but this is true only after they’ve spent themselves into impoverishment.”
As I write in the book, “I can tell you two things for sure. Social Security and Medicare will not pay for your long-term care.

“Most insurance companies use a fairly straightforward criterion when making the decision to pay the insured for their claim. The insurer will require a certified and licensed health provider do a determination of “chronically ill”.
“What is chronically ill you ask? Generally this refers to someone who is incapable of performing at least two daily activities of living such as feeding themselves, bathing and toiletry activities or someone who requires substantial supervision. This is often referred to as an ADL or Activity of Daily Living.
“Sounds simple enough but insurance companies rarely have fixed guidelines when it comes to triggering the policy. Policies can be written to cover a variety of care situations and you must determine this at the time of policy execution. Problem is how do you know what you will need. Will your policy need to cover a nursing home stay, of which a portion of the total is reimbursed over a preset time period?”

That said, I think everyone considering this kind of a policy read the book, I will take what Fidelity has suggested and see if it passes muster.

Fidelity recommends that folks considering a long-term care policy narrow the search to six categories, each with its own characteristics.

1) A policy premium that fits comfortably within a family’s financial means.

At first glance this sounds like a relatively easy target but the main problem with retirement and the saving for it, those premiums can eat up a good deal of potential retirement cash. Finding the right balance between saving and tossing the cash to an insurance policy, that is cheaper the earlier you buy it, can be so difficult to determine that most folks who may need it will pass on the chance.

Fidelity writes that, “Investors should carefully forecast their ability to pay the premiums year after year.” I think is both bold and wrongheaded by a mutual fund company to refer to insurance as investment. Insurance is not a liquid asset.

Bottom line: Figure about $200 a month if you are fifty years old, in good health and have prioritized all of your other insurance products based on risk. A 65-year-old might pay as much as $350.


2) Backing by a carrier with a strong track record of paying claims.

I have argued this topic over the past months with numerous people in the field. Fidelity offers this piece of advice: “The ability to receive policy benefits depends on the integrity of the company and its history of financial strength.” This is huge unknown since so few are actually in the position to pay out on claims. Once the baby Boomers retire en masse, it will be difficult to switch policies if your insurer turns out to be financially unable to handle a sudden increase in claimants. Like all insurance products, the gamble is on both ends, with the insurer and the policyholder.

3) Comprehensive coverage that covers in-home as well as facilities-based care.

Fidelity found that families want “flexibility in terms of the services they opt for when facing a long term care challenge.” Remember, this kind of flexibility will cost you extra. Few folks calculate in the inflation factor and/or whether the facility will keep you. Most folks would rather stay at home.

4) A benefit period of at least 2, but no more than 4 years, for each person.

Most people split the difference.

The numbers Fidelity analyzed are not so bad in terms of how they were gathered. But consider this. Most disability policies run for five years. The data they collected “on over 6 million long-term care insurance policies sold between 1984 and 2004, found that 75 percent of all individuals would not have exhausted benefits lasting 2 years. A 4-year benefit period would have been adequate 90 percent of the time.”

Sometimes, companies will separate the policy into nursing home or in-home care coverage but the lifetime benefit is easily calculated by multiplying the benefit times the policy coverage period.

Like many policies that have a wide swath of unknown territory to deal with, such as LTC policies, there is generally a waiting period before the policy kicks in. Because Medicare covers the first one hundred days, many LTC policies do not begin before 90 days. You can request a shorter waiting period but the monthly premium is often prohibitively higher.

5) Five percent guaranteed annual benefit increase except for buyers older than age 75.

Fidelity seems to have little faith in the Federal Reserve’s ability to use monetary policy to keep inflation in check. The 5% mark is well about what the nation’s top bankers deem suitable. Inflation protection usually comes via a rider on the policy. Three percent is usually the norm with the costs of this add-on rising with each percentage point in protection.


6) For joint policies, a “shared coverage” provision that enables each insured person to tap the other’s benefits if necessary.

This may be one extra cost too many.

Now consider the following. You put $180 away in a portfolio with a modest long-term return of 9% and save it for 20 years, taxed at 10% and with inflation calculated at 3%, you would have amassed $56,447. The policy paying $300 would cover only $129,600 in total lifetime cost, which, if you suspect you will be in relatively good health, will leave paying for a policy that may have been just as well been paid for in cash.

If you need cold hard facts... You will need $100,000 in savings at retirement for both you and your spouse to cover health care and insurance. From that point, you should calculate your retirement savings.

I would pass on the LTC if you were planning on leaving nothing to your heirs (but you still need to save much than you are now unless you want to spend those golden years with your kids). But if your heirs are concerned about you spending down their inheritance, ask them to chip in on an LTC policy and then it might be worth the costs.

H is for Honesty - Retirement Planning

We all want honesty, except when it comes to our finances. We desperately want to be told what we want to hear about our retirement plans rather than what we need to hear. And the honesty we look for - or better yet, the lies we would like to be told are as follows:

1. We will have enough money to retire.
I would love to believe that you or any one has this calculated correctly. It seems that each day the free market has the opportunity to do what it does best, the number we have assumed is best case scenario, needs to be recalculated.

2. We will be able to get debt free.
Debt free is a nice goal but debt management is a more honest approach to what your future holds. We use credit at the pumps, in restaurants or any time - and this is just good advice - we lose sight of our credit cards during a purchase. So each month, we need to manage that debt.

3. We will be able to estimate the cost of insurance.
Most of can't do that now. Do you assume that it will be easier on a fixed income? think again. Fidelity suggests that a nest egg of just over a million dollars might be enough to cover your future health insurance costs.

4. Our kids and in some case, our parents will not have an effect on our retirement plans.
If you believe this to be true, you never had kids and/or your parents have since been deceased. otherwise, these two groups will cost you more than you think. A recent New York Times article suggested that inheritances that may have been expected by many near-to-retirement adults can no longer be assumed. For those of us with parents who have no inheritance to spend down, you may be the only salvation for their financial well-being. And your kids...

5. Your investments are not as honest as you once assumed they were.
Look at oil. Look at the stock market. Look at bonds. Look at your tax bill. Need I say more?

Being financially honest with yourself is step one in considering how far you need to go to get to some semblance of retirement.

A is for Asset Allocation

B is for Balance

C is for Continuity

D is for Diversity

E is for (Tracking) Errors

F is for Free-Float

G is for Gross Income

Retirement Planning at 60-years-old

Now is the time to ask the serious questions.

Are you considering what your after-work sources of income will be? Can you live on them now? Take your Social Security payments, any pensions you might receive, and any other source of income from savings or retirement plans, add them together and create a household budget around them. Does this support your idea of retirement?

Can you afford taxes, insurance and upkeep on your home? Is it too big? Will it need major repairs to last until you are eighty, or ninety? Do you still have a mortgage? Have you created equity? Do you have debt?

It is the classic observation that George Foreman made: “The question isn't at what age I want to retire, it's at what income.”

There is an excellent chance that you will still be working when you celebrate your sixtieth birthday. The ability to remain viable and contribute something to the workplace should be worn as a badge of honor. Unless you are working for the wrong reasons.

If you are working because you failed to save enough for the retirement you envisioned, then now is the time to lower those expectations just a little bit. Many of us harbor outsized visions of what we want retirement to be. By age sixty, we will either be disappointed or overjoyed.

Perhaps you have been blessed when better than average health. If so, working beyond what many consider normal retirement age is creating wealth that will make your post-work years more comfortable.

But far too many adults are entering this time of life with less-than-perfect health and worse, the inability to pay for health insurance to cover it – if they have insurance at all.

Debt, and not just mortgage debt, has become a problem among this age group, weighing on their mental well-being and forcing many to work because they have to rather than because they want to.

It is possible that you have more than you think. If you have lived in the same house and built up a good deal of equity – the difference between what you owe and what the house is worth, this might be a solution to your problem. You could downsize, selling the property, satisfying your debts and even creating a small, but much needed nest egg to help with your retirement years.

If you do, you should consider places where the amenities meet your needs. Do you want to be close to your family? For many people thinking about retirement, this is a serious consideration. They want to be near their families, help with their grandchildren and even be closer to their own children.

If you intend to move, ask yourself if there a viable and mixed population present? Recent studies have proven that communities that cater exclusively to seniors do not fulfill many of the social needs of people entering retirement. They like the neighborhoods they live in to have a good mix of people already living there. Businesses often look for the same types of neighborhoods and in doing so, increase the livability of the area.

If you are considering working until you are seventy, you can delay taking your Social Security withdrawals until later. Any retirement savings in 401(k) plans or IRAs will need to begin distributing funds by age 70 ½. Until then, you can continue to make contributions.

Additional reading

• Investment news
  
• Retirement Planning
  
• Personal Finance

Retirement Planning and Your Personal Finance Skills, Part Three

Personal Financial Literacy Quiz:

(Answers and explanations by me are at the bottom of the page)

21. Matt has a good job on the production line of a factory in his home town. During the past year or two, the state in which Matt lives has been raising taxes on its businesses to the point where they are much higher than in neighboring states. What effect is this likely to have on Matt's job?

a.) Higher business taxes will cause more businesses to move into Matt's state, raising wages.

b.) Higher business taxes can't have any effect on Matt's job.

c.) Matt's company may consider moving to a lower-tax state, threatening Matt's job.

d.) He is likely to get a large raise to offset the effect of higher taxes.

22. If you have caused an accident, which type of automobile insurance would cover damage to your own car?

a.) Comprehensive.

b.) Liability.

c.) Term.

d.) Collision.

23. Scott and Eric are young men. Each has a good credit history. They work at the same company and make approximately the same salary. Scott has borrowed $6,000 to take a foreign vacation. Eric has borrowed $6,000 to buy a car. Who is likely to pay the lowest finance charge?

a.) Eric will pay less because the car is collateral for the loan.

b.) They will both pay the same because the rate is set by law.

c.) Scott will pay less because people who travel overseas are better risks.

d.) They will both pay the same because they have almost identical financial backgrounds.

24. If you went to college and earned a four-year degree, how much more money could you expect to earn than if you only had a high school diploma?

a.) About 10 times as much.

b.) No more; I would make about the same either way.


c.) A little more; about 20% more.

d.) A lot more; about 70% more.

25. Many savings programs are protected by the Federal government against loss. Which of the following is not?

a.) A U.S. Savings Bond.

b.) A certificate of deposit at the bank.

c.) A bond issued by one of the 50 States.

d.) A U. S. Treasury Bond.

26. If each of the following persons had the same amount of take home pay, who would need the greatest amount of life insurance?

a.) An elderly retired man, with a wife who is also retired.

b.) A young married man without children.

c.) A young single woman with two young children.

d.) A young single woman without children.

27. Which of the following instruments is NOT typically associated with spending?

a.) Debit card.

b.) Certificate of deposit.

c.) Cash.

d.) Credit card.

28. Which of the following credit card users is likely to pay the GREATEST dollar amount in finance charges per year, if they all charge the same amount per year on their cards?

a.) Jessica, who pays at least the minimum amount each month and more, when she has the money.

b.) Vera, who generally pays off her credit card in full but, occasionally, will pay the minimum when she is short of cash

c.) Megan, who always pays off her credit card bill in full shortly after she receives it

d.) Erin, who only pays the minimum amount each month.

29. Which of the following statements is true?

a.) Banks and other lenders share the credit history of their borrowers with each other and are likely to know of any loan payments that you have missed.

b.) People have so many loans it is very unlikely that one bank will know your history with another bank

c.) Your bad loan payment record with one bank will not be considered if you apply to another bank for a loan.

d.) If you missed a payment more than 2 years ago, it cannot be considered in a loan decision.

30. Dan must borrow $12,000 to complete his college education. Which of the following would NOT be likely to reduce the finance charge rate?

a.) If he went to a state college rather than a private college.

b.) If his parents cosigned the loan.

c.) If his parents took out an additional mortgage on their house for the loan.

d.) If the loan was insured by the Federal Government.

31. If you had a savings account at a bank, which of the following would be correct concerning the interest that you would earn on this account?

a.) Earnings from savings account interest may not be taxed.

b.) Income tax may be charged on the interest if your income is high enough.


c.) Sales tax may be charged on the interest that you earn.

d.) You cannot earn interest until you pass your 18th birthday.

ANSWERS: 21) c; 22) d; 23)a; 24)d; 25)c 26) c; 27) b; 28) d; 29) a; 30) a; 31) b

Part One

Part Two

Retirement Planning and Long Term Care: Eighteen Questions

As we continue to look at the possibility that retirement may not be what we envision, the conversation takes a turn to caring for that unforeseen need. Over the next three posted offerings, we will look at some important question to ask your potential insurer before you sign yourself or a loved one up for a long-term care policy of LTC.

Please note that I do discuss, at length in the book, what Medicare and Medicaid will and will not pay for and what kind of assets (or lack thereof) those programs will allow. That said, Short-term care as spelled out by Medicare requires that the following conditions must be met:

You must have been in a hospital for at least three days immediately prior to entering the nursing facility. Because the onset of most Alzheimer's and Parkinson's cases takes time to manifest themselves and generally are done without the involvement of a hospital stay, they are excluded from Medicare coverage.

You must go into the facility for the same condition for which you were previously hospitalized, and it must be within thirty days of discharge.
You must be getting better each day. Once you level off, Medicare stops paying.

The search for LTC policies can be long and confusing. I’ve put together a small checklist of things to ask your potential agent or the one you already have. LTC policies should be compared against each other with a minimum of three side-by-side evaluations.

Here are the first of eighteen questions on the subject of Long-Term care Insurance. Additional information can be found in the book and at BlueCollarDollar.com

1. Does your policy cover the following:
* Nursing home care
* Home health care
* Adult day care
* Alternate care
* Respite care
* Other




2. Each policy differs on a pay per day basis that can make it difficult to choose. Primarily we are concerning ourselves with nursing home care. There may be other opportunities to finance some aspects of in-home care that we have yet to discuss or have only briefly touched upon (HSAs).

The policy should clearly state how much each item is paid for and whether these numbers are indexed for inflation. For the inflation number, a modest percentage of inflationary risk would be 3% year-over-year. That is however not guaranteed so, in a worst-case scenario, expect inflation to be higher, not lower twenty-years or more from now.

How much does you potential insurer pay for the following services:
For nursing home care? $ _________
For home health care? $ _________
For adult day care? $ _________
For alternate care? $ _________
For respite care? $ _________
Other? $ _________

3. How long the benefits last is an important question indeed. Medicare, as we discussed earlier, does not pay for long-term care expenses. It does cover some limited convalescent skilled nursing care and some limited home health care under restrictive, short-term conditions (see the previous chapter). One hundred days is considered the limit for this social insurance program.

The Long Term Care Insurance industry breaks down the level of care into three distinct categories. So in fact, does Medicare.

It covers only skilled nursing care. This leaves those in need of coverage for intermediate or custodial care at risk to pay out-of-pocket. This is also the most financially draining aspect of recovery for the family members, many of whom must take time off from work to take care of the recuperative patient who may not be able to complete many daily activities or ADLs.



Although there is no limit to the amount of one hundred day stays you may have at a skilled nursing facility, you must meet the criteria set forth by the Health Care and Financial Administration or HCFA, now known by its fuzzier name, The Centers for Medicare and Medicaid Services or CMS. In the fine print, you will find the exclusion of Alzheimer's or Parkinson's and the fact that Medicare, HMO's, Major Medical and Medigap insurance policies do not pay for long-term nursing home care stays.

Generally, these LTC policies last for three years. Keep in mind the “look back” period and see if your policy offering jived with the new rules of five years.