FIFRadio: A conversation about annuities and long-term care insurance

On Monday, we had Steve Cooperstein on the Financial Impact Factor Radio show with Paul Petillo, managing editor of BlueCollarDollar.com/Target2025.com and Dave Kittredge and Dave Ng of FinancialFootprint.com. Steve's recent book was the topic for today's show: “Implications of the Perceptions of Post Retirement Risk for the Life Insurance Industry: Inside Track Marketing Opportunity, But Requiring Focused Retooling”.

It may have been written for advisors and academics and the insurance industry, but in doing so it offers us some interesting insights into how these folks think about us: the end user. Did I mention that Steve is an actuary?

 We talked to him about annuities and Long Term Care Insurance, the impact both of these products have on all age groups, what is wrong with them and how they can be improved. We solved a great deal in the hour we had together!



   

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Paul Petillo of Target2025.com/BlueCollarDollar.com

and Dave Kittredge and Dave Ng

of FinancialFootprint.com

on

The Financial Impact Factor

at Blog Talk Radio

The High Cost of Good Health in Retirement

The High Cost of Good Health in Retirement
The oddest item of all, being healthy in retirement, while less painful and more convenient than the being unhealthy, is more costly in the long run. This may have been something you have already considered had you run the numbers the way Boston College did in a recent report for the Center for Retirement Research. You may have said that health care is going to cost something and if you were typical, you went with the averages of about $220,000 per couple over the remaining years in retirement.

But good health could point to longevity. And longevity means additional years of costs and the real probability that during those added years, you will get something you hadn’t bargained on getting.

Now the knee jerk reaction would be to ask yourself: “why bother?” And this would be reasonable. If you can’t come close to estimating this cost (it is tough enough trying to figure out tax liabilities, inflation’s impact and the future of the investments you hold in your retirement accounts), what should you do?

Can You Invest Enough to Cover those Costs
You could try to add to your investments and hope that you have added enough. The problem with trying to offset insurance costs is you may never know whether you need it. But if you don’t have it, the costs can be very difficult to absorb and doubly so if you are in the fixed income world of retirement.

More here.

Happy Mother's Day: Do You Know Where Your Retirement Plan Is?

We all have mothers in common. And on this day, besides remembering her with flowers, candy or breakfast in bed, there is no better time to begin planning for her future. I mention in my book "Retirement Planning for the Utterly Confused" that women often play a very diverse role throughout their working career. The roles they play, the numerous hats they don, are often the reason Mom doesn't have the financial strength when her working years are done.

She often leaves work to have children (not always and if your are a stay-at-home Dad, you would be wise to pay attention as well) and this is first instance of retirement interruptus. Her efforts at saving for the future, at a time when every financial advice giver agrees, are the best years for saving for that far off distant future, are put on hold. That one move can have long-term damaging effects.

She may hit other bumps in the road as well. Later in life, statistics show that it is often the woman who leaves work to take care of a parent in their golden years. This creates a cycle of disaster as the lack of preparation of the parent leads to a continuance of the problem that must be avoided. Adding another work stoppage seems to make the previous break for children even worse.

There is also the issue of being single. They may wait longer to get married, but no one problem for s secure financial future looms larger than the possibility they they will face their retirement years without a spouse. While this independence might seem attractive at first glance, your Mom may be under severe financial stress, shortening her lifespan in the process.

Sons and Daughters need to unite. Today (and the next day and the next) are the best times to take all of this into account.

Sons should not only be looking at their own mothers and mothers-in-law but their wives and daughters as well. In many instances, these women default to your experience with money. In many instances this is a grave mistake. Men, as it has been shown, are more emotional about money, willing to take bigger risks, and are often not focused on the big picture.

Sons, you need to begin the conversation. Is your wife saving as much as you are? Is she adequately insured for potential disability or even long-term care? Is she assuming enough risk to make her retirement investment grow?

Is your mother's finances in the best place to ensure it will not outlast her time with you? Are you financially prepared to deal with a health problem (has she named an executor, made a will, or otherwise let her intentions be known) or a loss of property? Have you made a plan to determine all of the possible scenarios that might play out, as difficult as something like that might be to do?

Is your wife (and daughters, if they are at least twelve years old) involved in how your financial house is structured? Are you guilty of financial infidelity, an act of risky behavior that you hide from the family's finances and fail to admit? Have you saved enough for a rainy day?

These are all tough problems to deal with. But ignoring only puts off until tomorrow what you should have planned for today.

Today is the day that Sons need to help your mother, your wife and your daughters have a better future. Daughters: Today is the day you need to get involved, open the conversation and make a plan for your future.

Oh, and Happy Mother's Day!

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.

Retirement Planning, Long-Term Care Insurance and Lying

Carl Sagan once said: “One of the saddest lessons of history is this: If we've been bamboozled long enough, we tend to reject any evidence of the bamboozle. The bamboozle has captured us. Once you give a charlatan power over you, you almost never get it back.”

The lie. As we continued our discussion about insurance and retirement planning, we are faced with falsehood. In all fairness, insurance companies are not necessarily liars but without a good indication of what the truth is, you have little hope in distinguishing whether or not what you are being told is true.

Oddly, the insurance industry feels just as strongly about you. Long-term care insurance, a policy that is bought well in advance of actual use, and sometimes by folks who trust that the policy they purchase is the right one for them, are often denied the claims they make and for reasons that seem to the average eye, simply minutiae.

“Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true.” Demosthenes




In the book I wanted to emphasize the possibility that LTC insurance sales people were not as truthful about the product they are selling. I wrote “Back in 1965, noted psychologist/anthropologist Paul Ekman believed that human facial expressions were individual and not the result of some sort of evolutionary step that made the message we portray on our faces somehow universal.



Darwin published his work “The Expression of Emotion in Man and Animals” in 1872. The work suggested that particular emotions are attached to particular expressions in humans and in principle, to animals. What Darwin failed to understand was the nature of the falsehood. In fact, Darwin gave but one reference to the subtle art of deception when he wrote: “They [the movements of expression] reveal the thoughts and intentions of others more truly than do words, which may be falsified”.



Margaret Mead disagreed with Darwin suggesting that expressions were a result of culture not some universally inherited trait. This led Mr. Ekman on a worldwide journey to find the truth about what would later be a blueprint for falsehood. He showed pictures of faces experiencing a variety of emotions to a wide variety of people around the world and recorded their reactions.

But the experiment, he realized after a time was flawed. The people he had hoped would show some sort of innate reaction, one that was universal had been tainted by their contact with the outside world. Because, even in 1965, the world had shrunk considerably, many of his test subjects had seen Charlie Chaplin or John Wayne and understood what those faces meant. He needed to find subjects who were untouched by outside influences, a peoples who were technologically remote. He found just such a group in Papua, New Guinea.

Mr. Ekman found that there was a certain universality to how we express ourselves, confirming what Darwin suggested. From his study this remote tribe, he found that anger, disgust, fear, joy, sadness and surprise were universal expressions developed without outside influences. The ultimate goal: how to find out if someone was lying. He never, at least to my knowledge, applied his study of those 43 facial muscles, the ones that offer telltale glimpses into truth and lies to that of the insurance industry.


“Falsehood is easy, truth so difficult.” George Eliot

The reason you should be as skeptical as I am of this particular corner of the insurance industry has less to do with its relative newness as a product but rather with its aggressive selling by the industry. When a product comes to market, it is always promoted to the widest audience available. It is not different with insurance.



Trouble is, we only come face-to-face with an agent who represents a company and a product and that product is something we might not need in the near future. Long-term Care insurance is bought on good faith, research and soul-searching” and because of the time an effort most of us put into the purchase, we expect it perform flawlessly.

A large number of the claims the companies denied were due to paperwork not filled out properly or the right forms were not submitted. They also cited denial of claims were a result of the facilities the clients chose for care were not appropriate or acceptable for nursing care – although all of the people who had filed complaints had used state licensed facilities.

This is cause for concern among current and future policyholders. If Congress can offer incentives such as tax breaks to the industry to encourage people to buy the product, federal oversight may be necessary. This would take the industry’s current overseer, the state, out of the regulation game.

Even as states begin their own market investigations into the practice of long-term care, it adds another layer of concern about whether this industry is too young to be an important part of your retirement planning.

“Always tell the truth. That way, you don't have to remember what you said.” Mark Twain