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Monday Money Report

| August 10, 2020

The market continued to rebound over the last week as companies reported quarterly earnings. While earnings, or the profit or loss per share of stock, are certainly down from last year, over 80% of companies beat their consensus estimates.  That, plus better-than-expected jobs data, led much of the gains last week.

And as you build your nest egg, how do you plan for not just retirement, but old age, and the care you may need? Since I wasn’t eaten by a bear last weekend, we will continue the long-term care discussion we started a couple of weeks ago.

You can pay for long term care in several ways: out of pocket, Medicaid, moving into a Continuing Care Retirement Community, or CCRC, or with long term care insurance.

The average stay in a facility is somewhere around 3 years, depending on the study you look at. At a conservative $8,000 per month, that’s $288,000.  Plus your medical expenses and miscellaneous spending such as snacks and haircuts.  Now, if it’s just you and you’re spending down assets, you would typically sell your house and use that equity to help finance the almost $300,000 bill.  If you have a spouse at home, this becomes a bigger problem. You’re paying to maintain your home, your spouse’s lifestyle, and long-term care.  And if you are in the facility longer than average, thanks to a stroke or dementia, for example, what then?

We discussed before that, when you run out of assets, the government will step in with Medicaid.  The quality of care may decline somewhat from private pay, such as no longer having a private room.

Some people look to move into CCRCs.  Examples in the local area include Bay Woods and Ginger Cove.  The idea is that you move in when you’re healthy, into independent living.  As you age, you can move into assisted living and then skilled nursing care.  These communities typically require a large up-front payment, to buy your unit. Then there are monthly fees cover to meals and activities.  Those fees may increase depending on the level of care you need.  Depending on your contract, when you pass away or move out, you or your estate may receive a portion of your initial deposit back.

The other option is long-term care insurance. When these policies first came onto the market, the actuaries designing them relied on some assumptions that apply to the purchase and retention of life insurance policies but really weren’t valid for long-term care. For example, on average 6-12% of life insurance policies lapse in the first year.  Long term care policies tend to stay in force. Which means the policies were seriously underpriced, and folks who have been paying premiums on these policies are seeing significant increases.

All long-term care insurance creates a bucket of money with a spigot on the bottom.  Your policy is usually for a certain number of months at a certain benefit level.  For example, you may purchase 48 months of coverage of $4,000 a month, creating a bucket of $192,000.  If you don’t need the full $4,000 each month, the money will last longer than 48 months.  Maybe you stay at home and just need someone to come in a few days a week, or you have a pension that covers more of the monthly cost.  If you’re spending less, the money lasts longer.  But the spigot will only open as far as the monthly benefit amount.  In our example, if you need $5,000 a month, you can only take out $4,000.

The downside to traditional long-term care is that premiums are generally not locked in place, so they can increase.  Most do have inflation riders, so the benefits can keep up with the increasing cost of care.  Another issue is the use-it-or-lose-it worry.  If you don’t need care, all the money you have spent in premiums is gone. 

Most insurance carriers no longer offer traditional policies.  Instead, the industry has shifted to hybrid policies.  These policies are built on a universal life chassis.  Universal life is a type of permanent life insurance. The idea is that the policy provides liquidity, legacy and leverage. Most offer a full return-of-premium.  Meaning, if you haven’t used the policy and want your money back, you can request that the carrier cancel the policy and refund your full premium paid. The money you put in is fully liquid.  Because it is build on a life insurance platform, if you pass away and haven’t used all the benefits, there is a legacy component, a life insurance payout to your heirs.  And finally, the policies offer leverage.  Depending on your age and the coverage you want, the policy provides some multiple of the premium you pay in long-term care benefits.

Be careful that you are actually purchasing a hybrid policy, and not just a life insurance policy that allows you to take a benefit advance if you need care.  Those riders on a traditional life insurance policy are not always straightforward.  They usually reduce your death benefit by more than the advance you receive.  For example, you may have a $500,000 policy, and take out $100,000 to pay for long-term care. Your death benefit is reduced based on your updated expected mortality, not just by the $100,000 you took out. There are also often limits on the number of withdrawals, and fees associated with them. 

If you are considering long-term care insurance, it is important to consider how much coverage you really need.  A good financial planner can help you understand cash flow in retirement and make projections about paying for care, especially if you have a spouse who is still in the family home.

If you want to learn more about how you can stay in your own home longer without going to a facility, join us for Women, Wine & Wisdom next week as we discuss aging in place.  You can register on our website at, or check out our Facebook page to learn more.  

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, consult with your attorney, accountant, and financial advisor or tax advisor prior to investing.

And if you don’t have a financial advisor, come talk to us. This is Ann Alsina with CovingtonAlsina.