Financial Planning Long-Term Care

Linked Benefit Plans Offer Attractive Alternative to Long Term Care Insurance

Linked benefit plans, otherwise known as hybrid long term care (LTC) insurance, are quickly growing in popularity as an attractive alternative to standalone LTC policies. Sales of standalone policies plummeted 70% in the last five years while hybrid annuity premiums exceeded standalones in each of those years.

Sales of long term care insurance policies, which grew rapidly in the mid- to late 1980s and 1990s, began declining in response to sizable premium increases for new and existing policies. This was directly attributable to LTC carriers experiencing claims for longer periods and higher policy retention rates than originally projected. The change from unisex to gender-based pricing in 2013 resulted in skyrocketing premiums for new policies for women.

Linked Benefit Plans to the Rescue

Linked benefit plans combine long-term care insurance with either a fixed annuity or permanent life insurance. Universal or whole life is generally used for the life insurance component.

There are six advantages of linked benefit plans compared to standalone LTC insurance policies that are responsible for their growing popularity:

  • Fixed number of premium payments
  • No premium increases
  • Return of premium
  • Potential death benefit
  • Easier underwriting
  • Inadvertent policy lapse minimized

Fixed Number of Premium Payments

In order to keep a LTC insurance policy in place, you must continue to pay premiums for the rest of your life unless you go on claim at which time premiums are typically suspended. Most hybrid plans are funded with either a single premium or payments for a fixed number of years. The number of years varies from 2 to 20 depending upon the particular product.

No Premium Increases

There are no premium increases if you choose to make payments over multiple years with hybrid plans. There are two reasons for this.

First, insurance companies that sell hybrid plans receive their money sooner than with standalone LTC policies. Premiums are paid as either a single lump sum or over a limited number of years vs. being spread out over one’s lifetime as is the case with traditional standalone policies.

Second, LTC premiums are subsidized by lower surrender values or death benefits than a standalone fixed annuity or permanent life insurance policy, respectively, assuming the same premiums.

As an example, the projected surrender value of one of the fixed annuity LTC plans for a 62-year old woman with a one-time premium payment of $100,000 who doesn’t use her LTC benefits is $78,000 to $87,000 throughout the life of the policy. The value of a standalone fixed annuity with the same premium would be a minimum of $100,000 and would increase with interest crediting.

Return of Premium

While some traditional LTC policies have an option that provides for a return of a portion or all premiums if you never go on claim, it isn’t very popular due to the additional premium required for this option.

Most hybrid plans include a return of premium feature with the amount and timing dependent upon whether the plan is fixed annuity- or life insurance-based as well as the particular product. Several life insurance products provide for a return of 80% to 100% of premiums which can be exercised after five years. Annuity products use a declining surrender charge schedule to calculate the return of premium amount.

Potential Death Benefit

Beneficiaries of hybrid plans will be paid a surrender value for fixed annuity plans or a death benefit for life insurance plans to the extent that withdrawals haven’t been taken or long term care benefits have been paid.

Easier Underwriting

Individuals who would be declined for traditional long term care insurance for health reasons are often able to receive approval for hybrid plans. The latter, especially those that are annuity-based, have more liberal underwriting guidelines than standalone LTC insurance plans.

Annuity-based plans are the easiest to qualify for since they generally don’t require medical records or a paramed examination. Health issues are more problematic when applying for life insurance hybrid plans since benefits can be reduced using a table rating assuming coverage is approved. Your insurance agent should prequalify you before submitting an application to determine which carrier and product is best for you.

Inadvertent Policy Lapse Minimized

A standalone long-term care insurance policy will lapse, or be cancelled, if premiums aren’t paid in a timely manner, including any grace period, which is generally 31 days after the premium due date. An inadvertent lapse can occur if a decline in the insured’s cognitive abilities causes the insured to miss a premium due date.

Given the fact that hybrid LTC policy premiums are often paid in one lump sum or for a fixed number of years, which is 2 to 10 in most cases and no longer than 20, the opportunity for inadvertent policy lapse is minimized.

Commitment to Keep Policy in Force is Essential

Whether you’re considering the purchase of a standalone or a hybrid long term care insurance policy, commitment to keep your policy in force is essential to receiving benefits. For a standalone policy, this requires payment of premiums for the rest of your life unless you go on claim at which time premiums are typically suspended.

Although linked benefit plans generally have a predefined number of premium payments without any potential increases, premiums are greater since the number of payment years is limited to 1 to 20 depending on the particular product. Like standalone plans, all required premiums must be paid to keep the policy in force.

Linked benefit plans have a second hurdle to overcome in order to receive full LTC benefits. You must not exercise the return of premium feature. While it’s comforting to know that you can request a return of 80% to 100% of your premiums after a specified period of time, this should only be done as an absolute last resort.

The amount of potential forfeited LTC benefits are typically significantly greater than the amount of premium that would be returned. As an example, a 62-year old woman who pays a one-time premium of $100,000 with a return of premium of $80,000 that she exercises would forfeit $600,000 to $1.5 million of potential LTC benefits assuming that she qualifies for them beginning sometime between age 72 and 92 with one of the available fixed annuity LTC plans.

Attractive Alternative

Uninsured medical expenses, including extended care, are the top financial worry among men and women age 55 and older. Studies have shown that people are five times more worried about being a burden to their family than dying. Failing to plan for extended care can be detrimental to the achievement of retirement income goals.

Linked benefit plans offer an attractive alternative to standalone LTC insurance assuming that a commitment is made to pay the required premiums and not exercise the return of premium feature. Easier underwriting makes these plans especially appealing to individuals who don’t qualify for traditional LTC insurance.

Financial Planning Retirement Asset Planning Retirement Income Planning

I Paid for My Dad’s Funeral

When we make financial decisions, we often don’t think about the long-term effects – good and bad – they will have on other people. Their impact can shape the lives of immediate family members as well as generations to come long after we’re gone.

You may be wondering, what does this have to do with retirement income planning? In my case, everything. When clients ask what motivated me to become a financial planner, I tell them that observing, and paying for, the consequences of my parents’ (may they rest in peace) lack of planning was the driving factor.

My dad, who served in World War II and had a college degree, initially struggled to support our family, which included two sisters and me in addition to my mom. Despite this rough start, we enjoyed a fairly comfortable middle class life. After moving from a small house when I was ten, we lived in a nice house in a typical middle class town. My sisters and I graduated from college, with one of my sisters completing her last two years at a private out-of-state university.

While my parents generally lived within their means, they didn’t do any retirement planning to speak of, formal or otherwise. A couple of years after my dad retired from his auto insurance and income tax preparation business in the Bronx, New York, my parents sold the family house they owned for 26 years in New Jersey and moved to Las Vegas in 1991.

My parents used the proceeds from the sale of their house to make a sizeable down payment on a condo, buy some new furniture, and deposit the balance, which wasn’t a huge sum, in a savings account. Although Las Vegas was a relatively inexpensive place for them to retire, my parents’ Social Security benefits and the earnings from their savings account only went so far.

When my dad died in early 2000 without any life insurance, my parents’ savings account had dwindled to several thousand dollars. To provide comfort and security for my mom, I paid for my dad’s funeral, and shortly thereafter sat down with my mom to put together a budget.

Not only was my dad’s monthly Social Security benefit which my mom inherited insufficient for supporting my parents, it fell short of enabling my mom to make mortgage payments and pay for basic living expenses, let alone those of a discretionary nature.

Knowing that my mom’s wishes were to remain in her condo, I put together a plan, in consultation with my sisters, for me to purchase my mom’s condo from her. Using a purchase price that was greater than the value of her condo at the time, I paid off her mortgage using proceeds from refinancing my wife and my house, and structured a ten-year note with my mom for the equity in her condo.

To make a long story short, my monthly mortgage payments to my mom enabled her to meet all of her financial obligations, including for an additional two years after the term of our mortgage ended. When she died in 2012, there were not only sufficient funds to pay for her funeral, my sisters split a small inheritance.

Although my parents never did any retirement planning together and unfortunately experienced the consequences of their lack of planning first-hand, I’m proud of the fact that I was able to assist my mom with her planning so that she could enjoy the final 12 years of her life without worrying about where, or how, she was going to live. Needless to say, my wife and my son will benefit from my experience, including my decision to specialize in retirement income planning.

Financial Planning Retirement Income Planning

Personal Financial Management Systems Have Come a Long Way

While retirement income planning is extremely complicated and isn’t for do-it-yourselfers (How many of you have heard me say this before?), the ability to organize and maintain personal financial records has never been easier. In particular, the bill paying process has evolved to the point where manual checkbooks and paper invoices are no longer necessary and will soon be a thing of the past for many people.

Quicken – Pioneering Personal Financial Management Software

How did this happen and when did it start? Back in the early 80’s, while computers were becoming widely used and commonplace in the business world, the idea of a home computer was a foreign concept since there were very few applications that had been developed for home use.

Thanks to an accidental meeting in front of the Stanford University library in 1983 between Scott Cook, a former marketing manager at Proctor & Gamble, and Tom Proulx, a computer science major, Intuit, the company, and Quicken were born. Differentiating their software from 46 other personal finance products on the market at the time by designing the program to look just like a checkbook, Quicken became the number-one selling consumer software product in September, 1988.

Speaking from personal experience, after I stumbled upon Quicken in 1986, I proposed to my wife at the time that we purchase a home computer. Her response was, “What are we going to use that for?” I told her that we were going to have an electronic checkbook and organize our finances on the computer. With one application in mind – Quicken – I purchased my first computer that was made by NEC and ran programs on a DOS operating system.

Evolution of Automated Personal Financial Management Systems

To appreciate how far we’ve come since that historic meeting 30 years ago between the founders of Quicken, let’s take a brief look at an overview of the evolution of automated personal financial management systems. Automation of check writing, recording, and bank account reconciliations, which had been performed manually in one form or another since the first millennium, was a major breakthrough and timesaver with the release of Quicken in the mid 80’s.

Quicken quickly advanced, adding the ability to set up and post checking, and later credit card, transactions, to individual categories that could be used to produce financial reports. The ability to print checks, together with automatic recording to a check register and posting to custom categories was the next step. Automated downloading of checking and credit card transactions from financial institution websites, together with associated posting to specified categories, soon followed.

Although bills continued to arrive in the mail, online bill paying was the next major advance in personal financial management. It replaced check printing, check mailing, and eliminated postage for bill paying in the process. Instead of filing bills in paper folders, Quicken added the ability to scan and save bills linked directly to recorded transactions. This enabled bill shredding, elimination of paper folders, and storage of same, preferably with the use an automated back-up system.

In recent years, we gained the ability to choose whether or not we wanted to continue receiving hard copies of bills or simply view them online at each vendor’s website. More and more vendors are also allowing us to choose electronic instead of paper credit card receipts.

The most recent development in electronic billing is the elimination of the need to visit individual vendor’s websites to view one’s bills. Electronic bill aggregators, or digital postal mail solutions, enable electronic delivery of bills to one secure website from where they can be viewed, stored, and downloaded. One popular service that I have recently introduced, and have begun making available, to my clients through their secure online Retirement Income System is Digital Postal Mailbox from Zumbox.

As you can see, personal financial management systems have come a long way in less than 30 years. In addition to their increased efficiency and time-savings, they have significantly reduced the drudgery of manual bill paying, and have even made it fun (OK, I think it’s fun!) to pay bills. It has certainly enabled me to provide more accurate and better advice to clients who record and categorize their financial transactions in Quicken.

Disclosure: I have never, nor do I currently receive, any compensation from Intuit or Zumbox.

Financial Planning Retirement Asset Planning Retirement Income Planning

Budget Now or Budget Later – It’s Your Choice

No one likes the word, “budget,” let alone doing it. While it should be basic to personal financial planning, budgeting is often a reluctant response to a negative financial experience. A common example of this situation is after an inordinate amount of credit card debt has been accumulated.

Setting up, modifying, and sticking to a budget requires discipline. Planning, organizing, and monitoring personal finances needs to be done on an ongoing basis. It may mean sacrificing things you would otherwise do and buy without this essential financial tool.

The ostensible, traditional purpose of budgeting is defensive in nature — making sure that you live within your means. To many people, this implies spending all of the income you receive without going in the hole. Never mind setting aside funds for an extraordinary unexpected expense, let alone saving for a future life-changing financial event like retirement.

For those of us who want to control our financial destiny, budgeting is instead a proactive financial strategy that’s used to achieve various financial goals. The overriding theme of this strategy is “Pay yourself first.” Before you allocate income toward paying for nondiscretionary expenses like your mortgage, utilities, food, etc., set aside a defined amount of income in an account that’s earmarked for a specific financial goal.

A common way this is often done is with employee 401(k) plan contributions. Before a participant’s paycheck hits his/her checking account, a specified percentage of each paycheck is automatically withdrawn and deposited into a retirement savings account. As an added bonus, the participant receives a tax deduction for the contributions and the funds grow tax-deferred until they’re withdrawn.

Does making a 401(k) plan contribution seem like budgeting? It should if you’re doing it with the goal of paying yourself first to save for retirement. It’s more difficult to adopt this mindset, however, if you don’t have a mechanism in place to automatically transfer funds from your paycheck to an investment that’s earmarked for a particular financial goal. This is a major reason why people aren’t successful in achieving financial goals, especially saving sufficient funds for retirement.

Once realistic goals are established, the core of any type of financial planning approach is a proactive budgeting “pay-yourself-first” strategy. To the extent that you don’t adopt this mindset during your working years and earmark funds for retirement, you will be forced into traditional defensive budgeting when you retire, i.e., making sure that you live within your means. Your means will be much less than what they would otherwise be had you chosen to employ a disciplined approach with your finances during your working years. Budget now or budget later – it’s your choice.

Financial Planning

Yet Another “Don’t Try to Time the Market” Lesson

Close of Market – Friday, July 1, 2011: Dow Jones Industrial Average up 648.19, or 5.4%, for the week to finish at 12,582.77. Best five days’ percentage increase since July 2009 and largest five days’ points increase since November 2008.

Rewind one week: Wall Street Journal Friday, June 24th story excerpts:

“The U.S. and 27 other countries agreed to release 60 million barrels of oil from strategic reserves, temporarily driving down oil prices to a four-month low in a controversial bid to prop up the global economy. The surprise move caught investors off guard and upended financial markets. U.S. stocks dropped in volatile trading…”

“European regulators will require banks to take greater account of the possibility that their government-debt holdings may lose value.”

“New jobless claims stayed above the key 400,000 level for the week ended June 18, the latest sign that the U.S. labor market is sputtering.”

After reading the above three story excerpts last Friday, June 24th and seeing the DJIA at 11,934.58, would your Monday morning, June 27th investing strategy be: (a) Sell the market, (b) Stay put, or (c) Buy, buy, buy? Chances are, many of us would have chosen “a” and very few would have opted for “c.”

This past week was yet another example of the importance of staying the course and not trying to time the market. Historically, the largest stock market increases have come in spurts over a handful of days, often when least expected. To the extent that you’re either out of the market or not fully invested when this occurs, your overall returns will be diminished accordingly.

Given the fact that no one can consistently predict with a high degree of accuracy when these short-lived market surges will occur, and knowing that your investment returns will be negatively impacted if you’re sitting on the sidelines when they happen, doesn’t it make sense to stay invested? Assuming that you follow this strategy, while you will ride the stock market roller coaster and will experience numerous market downturns, you will also have the opportunity to participate In the key moments in time that have historically been responsible for the lion’s share of positive market returns.

Financial Planning Roth IRA

Remember Your IRA Basis Scorecard When Planning Roth IRA Conversions

Most people who sell assets are familiar with the income tax concept of “basis.” Basis, in its simplest form, is essentially what you pay for something. When you sell an asset, you’re not taxed on the sales proceeds. Instead, you pay tax on the difference between your net sales proceeds and your cost basis. Net sales proceeds is equal to gross sales proceeds reduced by any selling expenses. Cost basis is equal to purchase price plus increases to the purchase price less accumulated depreciation or amortization. Basis, therefore, reduces the amount of otherwise taxable gain.

The concept of “basis” also applies to traditional IRA’s. When you make a contribution to a traditional IRA, your contribution is either deductible, partially deductible, or nondeductible depending upon (1) whether you’re an active participant in a qualified retirement plan, (2) the amount of your modified adjusted gross income, and (3) your tax filing status. To the extent that any portion of your IRA contributions are deductible, they aren’t credited with any basis. Nondeductible IRA contributions, on the other hand, are counted as, and increase, traditional IRA basis.

So what’s so important about basis when it comes to traditional IRA’s? As stated above, basis reduces the amount of otherwise taxable gain. When might you have taxable gain with IRA’s? Unlike assets which can result in a taxable gain when you sell them, traditional IRA’s can result in taxable gains when you take distributions from them. As we’ve learned from previous blog posts, a Roth IRA conversion is, in essence, an IRA distribution.

Similar to assets whereby you’re taxed on the difference between your net sales proceeds and your cost basis, with traditional IRA’s, you’re taxed on the difference between the value of your distribution and your basis in the distribution. How do you know what your basis is in your IRA? Keeping in mind that IRA basis originates from nondeductible IRA contributions, you need a way to keep track of your nondeductible IRA contributions. IRS has provided us with this ability with Form 8606 – Nondeductible IRAs. Form 8606 is your scorecard for keeping track of your traditional IRA basis.

Form 8606 is required to be filed with your tax return in any year that you make nondeductible contributions to a traditional IRA. In addition to reporting the amount of your current year’s nondeductible traditional IRA contributions on line 1, you are required to report your total basis in traditional IRAs on line 2. Total basis in traditional IRA’s represents your cumulative nondeductible IRA contributions reduced by any previously used basis.

Since Form 8606 isn’t required to be filed every year, it’s easy to forget about basis when calculating the amount of taxable IRA distributions, especially if it’s been a while since you’ve made nondeductible contributions to your traditional IRA and you haven’t retained copies of all of your tax returns. This can be especially problematic if you haven’t used a professional income tax preparer to prepare your income tax returns in all of the years that you’ve made nondeductible traditional IRA contributions or if you’ve changed tax preparers over the years. Tracking IRA basis can be further complicated to the extent that the basis in your traditional IRA is different for federal vs. state income tax purposes as a result of state vs. federal deductible IRA calculation differences such as has been the case in California.

If you’re considering doing a Roth IRA conversion, don’t forget about Form 8606 – your traditional IRA basis scorecard. It will reduce the amount of your taxable Roth IRA conversions and, in turn, will reduce the amount of income tax you will otherwise pay.

Financial Planning Retirement Asset Planning Retirement Income Planning

Is Your Retirement Plan At Risk?

Before I write about the specific risks associated with retirement asset planning and the strategies that retirement income planners use to address, and, in many cases, mitigate, these risks, let’s take a look at risks that are common to all retirement planning. While many of these are uncertain and/or uncontrollable, each of them needs to be addressed in a retirement plan.

The risks that will be discussed are as follows, with the first three common to all types of financial planning, and each one intended to be a brief introduction vs. a comprehensive discussion:

  1. Inflation
  2. Investment
  3. Income tax
  4. Longevity
  5. Health
  6. Social Security benefits reduction


Although it is unpredictable as to amount and fluctuation as it pertains to individual and overall variable expenses, a key risk that must be considered in the design and funding stages of all retirement plans is inflation. Unlike most types of financial planning where it is a factor only in the accumulation phase, inflation is equally, if not more important, during the withdrawal stage of retirement planning. The longer the time period, the more magnified are the differences between projected vs. actual inflation rates insofar as their potential influence on the ultimate success of a particular retirement plan.


Unless you are living solely off of Social Security or some other government benefit program, you are directly or indirectly exposed to investment risk. Even if you are receiving a fixed monthly benefit from a former employer, although it isn’t likely, your benefit could potentially be reduced depending upon the investment performance of your former employer’s retirement plan assets and underlying plan guarantees. Whenever possible, investment risk should be maintained at a level in your portfolio that is projected to sustain your assets over your lifetime while achieving your retirement planning goals, assuming that your goals are realistic.

Income Tax

Even if income tax rates don’t change significantly as has been the case in recent years, income tax can consume a sizeable portion of one’s income without proper planning. With the exception of seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) that have no personal income tax and two states (New Hampshire and Tennessee) that tax only interest and dividend income), the rest of us need to be concerned about, and plan for, state, as well as, federal income tax. In addition, if you have a sizeable income, it is likely that income tax legislation will be enacted that will adversely affect your retirement plan on at least one occasion during your retirement years.


Unlike other types of financial planning, the time period of retirement planning is uncertain. Although life expectancies are often used as a guide to project the duration of a retirement plan, no one knows how long someone will live. The risk associated with the possibility of outliving one’s assets is referred to as longevity risk. In addition, life expectancies, themselves, are changing from time to time. The August 19, 2009 edition of National Vital Statistic Reports announced a new high of nearly 78 years for Americans. Planning is further complicated for married individuals since you are planning for multiple lives.


An extremely important risk that is sometimes overlooked or not given enough consideration in the design of retirement plans is health. Under-, or uninsured, long-term care events as well as premature death in the case of a married couple, can deal a devastating blow to an otherwise well-designed retirement plan. It is not unusual for a prolonged long-term care situation, such as Alzheimer’s, if not properly planned for, to consume all of one’s retirement capital and other assets. Inadequate life insurance to cover the needs of a surviving spouse can result in dramatic lifestyle changes upon the first spouse’s death.

Social Security Benefits Reduction

Once considered to be unshakable, the security of the Social Security system, including the potential amount of one’s benefits, is questionable. In addition, it was announced in May that for the first time in more than three decades Social Security recipients will not receive a cost of living adjustment, or COLA, increase in their benefits next year. While beneficiaries have received an automatic increase every year since 1975, including an increase of 5.8% in 2009 and a 14.3% increase in 1980, this will not be the case in 2010.

Each of the foregoing six risks needs to be considered, and appropriate strategies developed, in the design and implementation of every retirement plan to improve the chances of success of the plan.