Tag: long-term care insurance

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Long-Term Care

Want to Protect Your Family? Make LTCI a Priority

In a 1997 speech, Rosalynn Carter, the wife of Jimmy Carter, the former President of the United States, made a statement, “There are only four kinds of people in this world”:

  • Those who have been caregivers,
  • Those who currently are caregivers,
  • Those who will be caregivers, and
  • Those who will need caregivers.

Long-Term Care’s Profound Effect on a Family

When a loved one requires long-term care, it can have a profound effect on a family. Studies have shown that providing care to people who are chronically ill can have a detrimental effect on caregivers. This is especially true when the caregiver is the individual’s spouse or other family member.

In addition to the physical and emotional toll it takes on the caregiver, sibling relationships are often challenged when a parent requires long-term care and a family member provides the care. This is true even in the best situations where the family all live in the same area and have previously enjoyed a good working relationship with one another.

This is a huge and growing problem given the following five facts:

  • 10 – 12 million people in the U.S. currently need long-term care services.
  • 70 percent of people who reach age 65 will need some type of long-term care.
  • The number of people over age 65 is projected to increase from 42 million in 2010 to 84 million in 2050.
  • Longevity continues to increase with individuals reaching age 65 having an average life expectancy of 83.2 years.
  • Over 70 percent of all long-term care is provided by family members.

The problem is exacerbated by the fact that 60 percent of family caregivers are employed and the average length of family provided long-term care is 20 hours per week. Alzheimer’s/dementia cases, which currently comprise approximately 20 percent of all long-term care claims, present unique challenges for professional caregivers, let alone family members.

In a best-case scenario, assuming that the family caregiver lives in the area and isn’t working, his/her (most likely her since approximately two-thirds of family caregivers are women) previous day-to-day routine will be a thing of the past. The family caregiver’s emotional and physical well-being will inevitably be compromised as a result of this radical lifestyle change.

Long-Term Care Insurance to the Rescue

Assuming that you understand that (a) long-term care isn’t an isolated situation and (b) there will be a physical and emotional toll on family caregivers and the extended family of individuals requiring long-term care services for an extended period of time, it makes sense to plan for this situation long before it ever becomes reality.

While it generally isn’t inexpensive due to the high cost of benefits and requires a long-term commitment, long-term care insurance, or “LTCI,” is the best solution in many cases. While you’re technically the “insured” when you purchase a LTCI policy for yourself, you’re actually insuring your family.

The fact that long-term care insurance relieves family members of caregiving responsibilities and all of the associated problems that go with it is worth its weight in gold. If ever needed, the cumulative premiums paid for long-term care insurance will generally pale in comparison to the benefits provided, not to mention lost income experienced by family caregivers.

What about the peace of mind knowing that a long-term care plan will preserve the emotional, physical, and financial well-being of those you love and care about? How do you place a price tag on this?

Do you want to protect your family? Make LTCI a priority.

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Celebration

Retirement Income Visions Celebrates 4-Year Anniversary!

Thanks to my clients, subscribers, and other readers, Retirement Income Visions™ is celebrating its four-year anniversary. Retirement Income Visions™ published a weekly post each Monday morning beginning four years ago through and including the March 11, 2013 post.

Beginning with the March 25, 2013 post, Retirement Income Visions™ changed to a biweekly publication schedule. This was in response to my acceptance of another retirement income planning writing gig as a Wall Street Journal MarketWatch RetireMentors contributor. I continue to do all my writing on Saturday mornings, enabling me to fulfill my primary goal of providing outstanding, timely service to my clients.

Even with its reduced publication schedule, Retirement Income Visions™ continues to boast a fair number of followers. It has had over 72,000 pageviews in its four years of publication, including over 4,000 in the last 30 days.

In addition to becoming a RetireMentors contributor, I further distinguished myself as a retirement income planning expert when I became one of the first recipients of the Retirement Income Certified Professional® (RICP®) designation from The American College on July 1st. The RICP® educational curricula is the most complete and comprehensive program available to professional financial advisors looking to help their clients create sustainable retirement income.

This past year, Retirement Income Visions™ deviated from its themed approach whereby it historically featured a long stretch of weekly posts focusing on a single retirement income planning strategy. After completing a lengthy series of weekly posts about fixed index and deferred income annuities from August 20, 2012 through November 5, 2012, I began mixing it up with a variety of educational topics.

The November 12, 2012 post, The Smooth COLA, straightened out some misconceptions about Social Security retirement benefit cost of living adjustments. The November 19, 2012 post, Black Friday – Think Roth IRA Conversion, proved to be a very timely post for those who did Roth IRA conversions at that time since they have benefited from a 23% increase in stock prices as of Friday, combined with a significant tax increase that went into effect on January 1st for higher income taxpayers.

The November 26, 2012 through December 17, 2012 posts featured two two-part miniseries about two important Social Security topics, Social Security as a deferred income annuity and considerations when choosing a Social Security starting age.

The January 7, 2013 post, The 2013 Tax Law Schizophrenic Definition of Income – Part 1, was timely, as it was quoted extensively and linked in Robert Powell’s MarketWatch January 11, 2013 Now is the Time for Tax-Efficient Investments article. The January 7th post and the January 14th, 21st, and February 4th posts, which included Part 2 of the January 7th post and a two-part miniseries, New Tax Law – Don’t Let the Tax Tail Wag the Dog, provided readers with a comprehensive understanding of the new tax laws that went into effect on January 1st.

The next four posts, beginning with the February 11, 2013 post, The Almost Irrevocable Retirement Income Planning Decision, through the March 4, 2013 post, Insure Your Longevity Risk with Social Security, featured a series of four timely Social Security topics.

Retirement Income Visions™ really began mixing it up, beginning with the March 11, 2013 post, Consider the Future Purchase Option When Buying Long-Term Care Insurance, through the July 29, 2013 post, Immediate Annuities – Where’s the Planning? The eleven posts in this stretch presented a number of different topics, including long-term care insurance, retirement income planning considerations and strategies, fixed index and immediate annuities, Medicare, longevity insurance, budgeting, and personal financial management systems.

As I’ve traditionally done in previous “anniversary” posts, I would like to conclude this post by thanking all of my readers for taking the time to read Retirement Income Visions™. Once again, a special thanks to my clients and non-clients, alike, who continue to give me tremendous and much-appreciated feedback and inspiration. Last, but not least, a big thank you to Nira, my incredible wife, for her enduring support of my blog and MarketWatch RetireMentors writing and other professional activities.

Categories
Retirement Income Planning

Ladder Your Retirement Income

“Don’t put all of your eggs in one basket.” This is a saying that’s often tossed around when it comes to retirement income planning. Usually it’s brought into the conversation to address different types of investments one should consider to generate retirement income.

While diversification is a fundamental principle when it comes to both pre- and post-retirement investment planning, income timing is just as important in retirement. The first thing that needs to be recognized is that retirement isn’t a single financial event. It’s a process that includes multiple stages, each with its own financial demands.

There are unique types of expenses associated with each stage. For example, there may be an emphasis on travel in the initial stage of retirement, potentially requiring a large initial budget for this item that may decline, and ultimately be eliminated, in later stages. Another example may be a mortgage that gets paid off during retirement. Finally, health and long-term care expenses tend to dominate the final stage. Nonrecurring, or infrequently recurring, expenses, such as car purchases and home improvements, need to also be considered.

Given the fact that income needs to cover expenses and there will be various types and amounts of expenses with different durations associated with each of the various stages, different streams, or ladders, of income need to be planned for to match one’s needs. Several types of income need to be analyzed to determine which ones will be best suited to match the projected expense needs of each stage.

When considering income types, it must always be kept in mind that after-tax income is used to pay for expenses. If the income source to be used to pay for a particular expense is a retirement account such as a 401(k) plan, a larger distribution will generally need to be taken from the plan than would be required from a nonretirement money market fund or from a Roth IRA account. Income tax planning is essential when it comes to income ladder design.

Complicating the income ladder design process is the decision regarding when to begin receiving Social Security. While Social Security can provide a solid base, or floor, to meet income needs for the duration of retirement, the amount of income that you will receive is dependent upon the age when you begin to receive your income. Given the fact that the amount will increase by 8% per year plus cost of living adjustments between full retirement age and age 70, it may make sense to defer the start date depending upon one’s retirement age, marital status, health condition, and other potential sources of income. The types, timing, and amounts of income ladders are directly affected by the Social Security start date decision.

Keeping in mind that successful retirement income planning includes planning, managing, and protecting income, an analysis of one’s income protection plan is also essential to the income ladder design process. As an example, to the extent that long-term care insurance has been purchased, a large income stream won’t be needed to pay for long-term care expenses. Funds will generally be needed, however, to pay for long-term care insurance premiums throughout retirement unless a claim arises.

As you can see, retirement isn’t a smooth ride whereby you can plan for the same amount of expenses each year increased by an inflation factor. Given this fact, an analysis of different types of projected expenses, including amounts and timing of each, is critical, followed by the design of an after-tax income ladder plan to match your expense needs.

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Long-Term Care Medicare

Are You Depending on Medicare for Long-Term Care Coverage?

I’ve wanted to write this post for a long time, however, I just haven’t gotten around to it. Over the years, clients and others I’ve talked to have been reluctant in initial conversations about long-term care planning to consider the purchase of long-term care insurance (LTCI) because they thought that Medicare will take care of them.

Let’s put it this way, if you’re part of this school of thought, you experience a long-term care event, and you don’t have LTCI, you’re in for a big surprise. A large part of the problem is that most people don’t know what constitutes a “long-term care event,” let alone how this compares to what Medicare will cover.

Long-Term Care Event

In order to qualify for benefits under a tax qualified LTCI policy, which represents 95% of policies sold today, you’re required to be certified by a qualified health professional as having a chronic illness that will last for at least 90 days whereby the illness must result in you:

The six ADL’s include bathing, dressing, eating, continence, toileting, and transferring.

Will Medicare provide benefits for either of these two situations? It’s not likely, and, if there’s coverage, it will be limited as far as number of days, dollar amount, and type of coverage.

Custodial Care

The majority of long-term care expenses are for custodial, or personal, care, none of which is covered by Medicare. Custodial care is designed to assist a person who has limited ability to perform daily activities due to deficiencies in physical and/or cognitive functions. It’s provided to help someone with his or her ADL’s or instrumental activities of daily living (“IADL’s”). IADL’s are the cognitive functions pertaining to comprehension, judgment, memory, and reasoning. Activities include shopping for personal items, managing money, using the telephone, preparing meals, managing medication, and doing housework.

Medicare Event

Medicare wasn’t designed to handle significant long-term care expenses. Medicare only covers medically necessary care with the focus on medical acute care, such as doctor visits, drugs, and hospital stays. There are three qualifications that you must meet in order to receive Medicare benefits:

  • Have had a recent prior hospital stay of at least three days
  • Admitted to a Medicare-certified nursing facility within 30 days of your prior hospital stay
  • Need skilled care, such as skilled nursing services, physical therapy, or other types of therapy

Medicare Benefit Period and Benefit Amount

If you meet these strict requirements, none of which are necessary to qualify for LTCI benefits, Medicare will pay for some of your costs for up to 100 days. Medicare will pay for 100% of your costs for the first 20 days, with the cost being shared for the next 80 days. In 2013, you’re required to pay the first $140 per day and Medicare pays any balance for days 21 – 100.

Home and Other Care Services

In addition to skilled nursing facility services, Medicare will pay for various services when your doctor says they are medically necessary to treat an illness or injury. If you’re unable to perform ADL’s and/or IADL’s that’s unrelated to the treatment of an illness or injury, Medicare won’t provide any coverage for home and other care services.

The home and other care services that Medicare covers, some of which are for a limited number of days, include part-time or intermittent skilled nursing care, physical and occupational therapy, speech-language pathology, medical social services, and medical supplies and durable medical equipment. Once again, custodial services aren’t covered.

Are you depending on Medicare to be your long-term care plan? If so, you may want to revisit your plan.

Categories
Long-Term Care

Consider the Future Purchase Option When Buying Long-Term Care Insurance

Long-term care planning, and, in particular, long-term care insurance (LTCI) is getting a lot of attention recently with gender-based pricing just around the corner. If you haven’t heard by now, Genworth, the leader in the LTCI industry, will be changing the rules of the game beginning in April when it charges higher premiums for single women on new policies.

Window of Opportunity

This development, together with Genworth’s announcement last Wednesday that it’s suspending sales of LTCI in California effective March 21st, has the industry abuzz and the public scrambling to find and implement solutions to quickly meet their needs. Genworth’s latest announcement came in response to the company’s introduction of a new product with higher premiums and reduced benefits.

When Genworth’s new product is approved in California, which could take several months, consumers in the state will see premiums on new policies jump substantially compared to what’s available today. It’s anticipated that the increases will be in the range of 20% – 40% or higher in some cases. This will apply to men and women, although single women will be hit the hardest as a result of gender-based pricing.

Potential Alternative to Inflation Protection

The purchase of LTCI, unlike life insurance which is generally straight forward, is complicated by the a la carte approach that’s prevalent in the industry. The details of this approach, which are beyond the scope of this post, allow you to pick and choose a combination of variables, including, but not limited to, benefit amount and length of coverage, in order to customize a policy to meet projected needs. One of the important options is inflation protection, with 3% or 5% simple or compound and cost of living being common choices.

Inflation protection, especially 5% compound, significantly increases the cost of LTCI. If you’re 50 years old today applying for a policy with a daily benefit of $150 and 5% compound inflation and you experience a qualifying long-term care event when you’re 80, your insurance company is on the hook for a daily benefit of $650 after you satisfy the policy’s elimination period, or deductible. An alternative to this approach to reduce your premium is to increase the amount of your daily or monthly benefit and include a future purchase option (FPO) when you apply for LTCI.

What is a Future Purchase Option?

A future purchase option gives you the right to purchase additional coverage without evidence of insurability at specified intervals in the future at an additional cost based on your attained age. The amount of coverage is typically calculated using a compound inflation factor based on your original benefit amount. The number of available options, date of availability to exercise your first option, and number of years between exercise dates are dependent upon the terms of each policy.

A FPO, like many things, has its pluses and minuses. On the positive side, it allows you to start out with lower premiums compared to a comparable policy with built-in inflation and grow into a richer benefit with higher premiums later. Offsetting this are three disadvantages:

  1. Due to the limitation on number of available options and the fact that they’re generally front-loaded in the early years of a policy, you generally won’t be able to match the benefit that you would receive with built-in inflation many years down the road when coverage is more likely to be needed.
  2. If you could match the coverage of a policy with inflation coverage, the cumulative premiums that you will pay will be significantly greater than a comparable inflation-based policy without a FPO.
  3. Assuming that you purchase a LTCI policy with a FPO when you’re in your 40’s – 60’s and won’t need the coverage until you’re in your later 70’s or 80’s, you will need to purchase one or more additional policies in the future when you may not be insurable and the premiums will be more expensive or plan to potentially pay a sizeable amount of out-of-pocket expenses compared to a policy that includes inflation protection.

The inclusion of a future purchase option vs. inflation protection in a LTCI policy is in most cases a short-term cost decision. While benefits will generally be much less when claim time rolls around, so will one’s annual premium. It allows individuals who otherwise wouldn’t purchase LTCI to get some basic coverage and, as such, can be a reasonable practical alternative. Buyers beware – you get what you pay for.

Categories
Annuities Deferred Income Annuities Fixed Index Annuities

Invest in DIA to Fund LTCI Premiums When Retired – Part 4 of 4

The first three posts in this series discussed five differences between fixed index annuities (“FIA’s”) with income riders and deferred income annuities (“DIA’s”) that will influence which retirement income planning strategy is preferable for funding long-term care insurance (“LTCI”) premiums in a given situation. If you haven’t done so already, I would recommend that you read each of these posts.

This week’s post presents a sample case to illustrate the use of a FIA with an income rider vs. a DIA to fund LTCI premiums during retirement.

Assumptions

As with all financial illustrations, assumptions are key. A change in any single assumption will affect the results. The following is a list of assumptions used in the sample case:

  1. 55-year old, single individual
  2. Planned retirement start age of 68
  3. Life expectancy to age 90
  4. Current annual LTCI premium of $4,000 payable for life
  5. Need to plan for infrequent, although potentially double-digit percentage increases in LTCI premium at unknown points in time
  6. Given assumptions #4 and #5, plan for annual pre-tax income withdrawals of approximately $6,000 beginning at retirement age
  7. Solve for single lump sum investment at age 55 that will provide needed income
  8. Investment will come from a nonqualified, i.e., nonretirement, investment account
  9. One investment option is a fixed index annuity (“FIA”) with an income rider with lifetime income withdrawals beginning at age 68.
  10. Second investment option is a deferred income annuity (“DIA”) with no death benefit and lifetime income payout beginning at age 68.
  11. FIA premium bonus of 10%
  12. FIA annual return of 3%
  13. FIA income rider charge of 0.95% of income rider value otherwise known as the guaranteed minimum withdrawal benefit (“GMWB”)
  14. No withdrawals are taken from the FIA other than the income withdrawals.
  15. All investments are purchased from highly-rated life insurance companies known for providing innovative and competitive retirement income planning solutions.

Investment Amount

The first thing that needs to be solved for is the amount of investment that must be made at the individual’s age 55 in order to produce lifetime annual income of approximately $6,000 beginning at age 68. The goal is to minimize the amount of funds needed for the investment while choosing a strategy from a highly-rated insurance company that’s known for providing innovative and competitive retirement income planning solutions.

It turns out that an investment of $50,000 to $65,000 is needed to produce lifetime annual income of approximately $6,000 beginning at age 68. Given the fact that my goal as a retirement income planner is to use the smallest amount of investment for a fixed income annuity to produce a targeted income stream in order to preserve the remainder of a client’s investment portfolio for my client’s other financial goals, the amount of the investment needed is $50,000.

Results

There are three items we will examine to compare the results between investing $50,000 in a FIA with an income rider vs. a DIA to fund LTCI premiums during retirement. They are as follows:

  • Annual gross income
  • Annual taxable income
  • Value/death benefit

Annual Gross Income

Per the Exhibit, the annual payout, or gross income, from the FIA is $5,764, or $236 less than the annual gross income of $6,000 from the DIA. This equates to a total of $5,428 for the 23 years of payouts from age 68 through age 90.

Annual Taxable Income

If the investment was made in a retirement account like a traditional IRA and assuming there have been no nondeductible contributions made to the IRA, 100% of the income would be taxable. This would be the case for both the FIA or DIA.

As stated in assumption #8, the investment will come from a nonqualified, i.e., nonretirement, investment account. Per Part 2 of this series, this makes a difference when it comes to taxation of the withdrawals. Per the Exhibit, 100% of the annual FIA income of $5,764 is fully taxable vs. $3,066 of the DIA income. This is because the DIA, unlike the FIA, is being annuitized and approximately 50% of each income payment is nontaxable as a return of principal. Over the course of 23 years of payouts, this results in $62,054 of additional taxable income for the FIA vs. the DIA.

The amount of income tax liability resulting from the additional taxable income from the FIA will be dependent upon several factors that will vary each year, including (a) types, and amounts, of other income, (b) amount of Social Security income, (c) potential losses, (d) adjusted gross income, (e) itemized deductions, (f) marginal tax bracket, and (g) applicable state income tax law.

Value/Death Benefit

While the present value of the future income stream of a DIA represents an asset, you generally won’t receive an annual statement from the life insurance company showing you the value of your investment. In addition, while some DIA’s will pay a death benefit in the event that the annuitant dies prior to receiving income, per assumption #10, this isn’t the case in this situation. Consequently, the DIA column of the “Value/Death Benefit” section of the Exhibit is $0 for each year of the analysis.

On the other hand, there’s a projected value for the FIA from age 55 through age 79. This value is also the amount that would be paid to the FIA’s beneficiaries in the event of death. There’s a projected increase in value each year during the accumulation stage between age 55 and 67 equal to the net difference between the assumed annual return of 3% and the income rider charge of 0.95% of the income rider value.

Per the Exhibit, the projected value/death benefit increases from $56,278 at age 55 to $68,510 at age 67. Although the assumed premium bonus of 10% is on the high side these days, this is reasonable given the fact that FIA values never decrease as a result of negative performance of underlying indexes, the assumed rate of return of 3% is reasonable in today’s low index cap rate environment, and the assumed income rider charge of 0.95% of the income rider value is on the upper end of what’s prevalent in the industry. The projected value/death benefit decreases each year from age 68 to age 79 until it reaches $0 beginning at age 80 as a result of the annual income withdrawals of $5,764.

Conclusion

As discussed in Parts 1 – 3 of this series, there are five important differences between FIA’s with income riders and DIA’s that will influence which retirement income planning strategy is preferable for funding LTCI premiums during retirement in a given situation. Two of the differences, income start date flexibility and income increase provision, haven’t been addressed in this post.

In addition to the five differences, the amount of the investment required to produce a targeted lifetime annual income amount to pay LTCI premiums, including potential increases, will differ depending upon the particular FIA or DIA strategy used. In the illustrated case, which isn’t uncommon today, an investment of $50,000 resulted in an almost identical lifetime income payout whether a FIA with an income rider or a DIA is used.

As illustrated, the taxable income associated with a DIA in a nonqualified environment is much less compared to a FIA. As previously discussed, the amount of tax savings resulting from the reduced taxable income will depend upon an analysis of several factors and will vary each year. Ignoring the potential income tax savings resulting from the tax-favored DIA payouts, the FIA with income rider would be the preferred investment choice for many individuals in this case given the presence, duration, and projected amount of, the investment value/death benefit.

The FIA edge is reinforced by the fact that, unlike most traditional DIA’s, the income start date and associated annual lifetime income payout amount for FIA’s is flexible. This would be an important consideration in the event that the year of retirement changes. Furthermore, this is quite possible given the fact that the individual is 13 years away from her projected retirement year.

As emphasized throughout this series, the purchase of LTCI needs to be a lifetime commitment. Planning for the potential purchase of a LTCI policy should be included as part of the retirement income planning process to determine the sources of income that will be used to pay for LTCI throughout retirement. Whether it’s a FIA with an income rider, a DIA, or some other planning strategy that’s used for this purpose will depend on the particular situation.

Categories
Annuities Deferred Income Annuities Fixed Index Annuities

Invest in DIA to Fund LTCI Premiums When Retired – Part 3 of 4

Last week’s post discussed the first three of five differences between fixed index annuities (“FIA’s”) with income riders and deferred income annuities (“DIA’s”) that will influence which retirement income planning strategy is preferable for funding long-term care insurance (“LTCI”) premiums in a given situation. Once again, the differences are as follows:

  1. Income start state flexibility
  2. Income increase provision
  3. Income tax consequences
  4. Investment value
  5. Death benefit

This post will discuss the fourth and fifth differences. Part four will present a sample case to illustrate the use of a DIA vs. a FIA with an income rider to fund LTCI premiums during retirement.

Investment Value

Although guaranteed lifetime income is the primary purpose when using a FIA with income rider or DIA strategy for funding LTCI premiums during retirement, the presence of an investment value may be important for many people.

With traditional DIA’s, you purchase from a life insurance company the promise to pay a periodic income stream for either a term certain or lifetime, with or without inflation, beginning at a defined future date at least 13 months from the date of purchase. Although the present value of your future income stream represents an asset, you generally won’t receive an annual statement from the life insurance company showing you the value of your investment.

A FIA, on the other hand, has an “accumulation value” in addition to the right to receive income withdrawals when you purchase an optional income rider. The accumulation value is increased by initial and ongoing investments, premium bonuses if applicable, and periodic interest crediting. It’s reduced by income and other withdrawals, income rider charges, and surrender charges.

Death Benefit

There may or may not be a death benefit with both FIA’s with income riders and DIA’s. In the case of DIA’s, it’s a contractual issue vs. a function of the accumulation value in the case of a FIA.

Some DIA’s will pay a death benefit in the event that the annuitant dies prior to receiving income. If this is the case, the income payment will often be less than what it would be if there’s no death benefit.

With FIA’s, the death benefit will be equal to the greater of the minimum guaranteed value or the accumulation value. As previously stated, the accumulation value is a moving target that increases and decreases as a result of various transactions. Depending upon the amount of cumulative income and other withdrawals as well as income rider and surrender charges, there may eventually be no minimum guaranteed value or accumulation value remaining.

Categories
Annuities Deferred Income Annuities Fixed Index Annuities Longevity Insurance

Invest in DIA to Fund LTCI Premiums When Retired – Part 2 of 4

Last week’s post discussed the use of a deferred income annuity (“DIA”), commonly referred to as longevity insurance, to fund long-term care insurance (“LTCI”) premiums during retirement. Similar to a fixed index annuity (“FIA”) with an income rider, in exchange for an initial investment, or premium, you’re entitled to receive a lifetime income beginning at least a year from the date of purchase.

As noted in last week’s post, there are five important differences between FIA’s with income riders and DIA’s that will influence which retirement income planning strategy is preferable for funding LTCI premiums in a given situation. These differences are as follows:

  1. Income start date flexibility
  2. Income increase provision
  3. Income tax consequences
  4. Investment value
  5. Death benefit

The first three distinctions are explained below. Part three will discuss the fourth and fifth differences. Part four will present a sample case to illustrate the use of a DIA vs. a FIA with an income rider to fund LTCI premiums during retirement.

Income Start Date Flexibility

FIA’s with income riders are known for their flexibility when it comes to their income start date. Income can typically be withdrawn beginning one year from the initial issue date with no time limit after that. The lifetime income payout will generally increase the longer you wait to begin your withdrawals as a result of potential increases in the income base and withdrawal percentages.

Unlike FIA’s, DIA’s generally aren’t flexible when it comes to the income start date. With most DIA’s, you’re tied to a specified payout at a specified start date at the time of investment.

Income Increase Provision

Although DIA’s generally have a fixed income start date, an annual inflation factor can be applied to the income payout to result in increasing annual payments. A greater premium, or investment, is required for this feature.

While the annual lifetime income payout will generally increase the longer you wait to begin your withdrawals with a FIA, the income amount generally won’t change once you turn on your income. In other words, there’s inflation protection built into FIA income riders only up until the time that you begin taking income withdrawals.

Income Tax Consequences

If retirement plans such as 401(k)’s or traditional IRA’s are the source of premium payments, then 100% of withdrawals from DIA’s and FIA’s will generally be taxable as ordinary income. Consequently, it doesn’t matter if the source of funds for LTCI premium payments is a FIA with an income rider or a DIA since taxation will be identical.

Whenever possible, nonretirement funds should be used to pay LTCI premiums. Here’s where DIA’s have the edge, especially during the early years. DIA payouts are considered to be an annuitization of the investment. Part of each payment through one’s life expectancy is deemed to be principal and interest. Any payments received thereafter are fully taxable.

Since only the interest portion is taxable and a large part of each payment is often classified as principal over the course of one’s life expectancy, DIA distributions receive tax-favored treatment.

When you take income withdrawals from FIA’s, on the other hand, you aren’t annuitizing your investment. Instead, “last-in first-out,” or “LIFO,” taxation is applied to your withdrawals. This means that 100% of your initial withdrawals will be taxed until all interest is recovered with subsequent withdrawals received tax-free as a return of principal.

Categories
Annuities Deferred Income Annuities Fixed Index Annuities Long-Term Care Longevity Insurance

Invest in DIA to Fund LTCI Premiums When Retired – Part 1 of 4

As explained in the last two weeks’ posts, Invest in FIA to Fund LTCI Premiums When Retired – Parts 1 and 2, the purchase of long-term care insurance (“LTCI”) needs to be a lifetime commitment. It isn’t enough to plan for how you will pay for your LTCI premiums during your working years. Planning for the potential purchase of a LTCI policy should be included as part of the retirement income planning process to determine the sources of income that will be used to pay for LTCI throughout retirement.

One potential source of income that can be used to fund LTCI premiums during retirement is a fixed index annuity (“FIA”) with an income rider. As explained and illustrated in the last two weeks’ posts, with a FIA, you can determine the initial and ongoing investment amounts required to produce a targeted amount of income to match your LTCI premiums, including projected increases in same.

Another strategy that can be used for this purpose is to purchase a deferred income annuity (“DIA”), commonly referred to as longevity insurance. Similar to a FIA with an income rider, in exchange for an initial investment, or premium, you’re entitled to receive a lifetime income beginning at least a year from the date of purchase. You can invest a specified amount in a DIA that will result in the amount of lifetime income beginning at retirement that will be sufficient to pay your LTCI premiums.

There are several important differences between FIA’s with income riders and DIA’s that will influence which retirement income planning strategy is preferable for funding LTCI premiums in a given situation. There are five key distinctions that need to be considered as follows:

  1. Income start date flexibility
  2. Income increase provision
  3. Income tax consequences
  4. Investment value
  5. Death benefit

The first three distinctions will be explained in next week’s post. Part three will discuss the fourth and fifth differences. Part four will present a sample case to illustrate the use of a DIA vs. a FIA with an income rider to fund LTCI premiums during retirement.

Categories
Annuities Fixed Index Annuities Long-Term Care

Invest in FIA to Fund LTCI Premiums When Retired – Part 2 of 2

Part 1 of this post alluded to a perfect storm awaiting many long-term care insurance (“LTCI”) policy owners when they retire, an analysis of which should be included as part of the planning process when the potential purchase of a LTCI policy is being considered. The perfect storm is as follows:

  • Due to potential sizeable ongoing benefits, LTCI premiums aren’t inexpensive.
  • Depending upon when a policy is purchased, LTCI premiums may need to be paid for 30 to 50 years.
  • While historically infrequent, LTCI premium increases can be significant.
  • Although it may be needed in one’s 50’s, long-term care is more often required in one’s 70’s, 80’s, or 90’s.
  • Premiums may be affordable when employed; however, this may not be the case when retired.

The last item in the list is critical. Given all of the foregoing items, when you purchase a LTCI policy, it needs to be a lifetime commitment. As part of this commitment, you need to have a plan in place for how you will pay for your LTCI premiums not only during your working years, but for the rest of your life.

Per last week’s post, one way to plan to pay for LTCI premiums during retirement is to purchase a fixed index annuity (“FIA”) with an income rider. Given the fact that the amount of lifetime income that you will receive beginning at various ages from a FIA with an income rider can be calculated at the time of purchase, this can be a good strategy to use for future LTCI premium funding. Specifically, you can determine the initial and ongoing investment amounts required to produce a targeted amount of income to match your LTCI premiums, including projected increases in same.

Let’s look at an example. Let’s assume that Ms. Nice, age 55 and single, is planning on retiring at age 68. Let’s further assume that she is currently, and is projected to be throughout retirement, in a 20% income tax bracket. Ms. Nice is considering the purchase of a LTCI policy with an annual premium of $4,000. This amount can comfortably be paid out of her current and projected employment earnings, however, this isn’t projected to be the case in retirement, especially with potential premium increases.

Ms. Nice’s retirement income planner, who specializes in planning, managing, and protecting retirement income, projects that she will need annual pre-tax income of $6,000 in retirement to pay for her LTCI premiums. This amount is projected to cover income tax liability on income allocated for LTCI premium payments plus modest premium increases.

One of the options that Ms. Nice’s retirement income planner proposes to her for providing her with the income she needs to pay her LTCI premiums throughout retirement is a FIA with an income rider. For the recommended FIA and income rider, by investing either (a) $54,000 today, or (b) $40,000 today plus $1,750 per year for the next 12 years, Ms. Nice will receive lifetime annual income of $6,000 beginning at age 68.

Given the fact that the purchase of LTCI needs to be a lifetime commitment and LTCI premiums increase with age, planning for the potential purchase of a LTCI policy should be included as part of the retirement income planning process. By taking this approach, you will increase the likelihood that your LTCI policy will be in force when you need it.

Categories
Annuities Fixed Index Annuities Long-Term Care

Invest in FIA to Fund LTCI Premiums When Retired – Part 1 of 2

The need for long-term care is created by one or both of the following conditions/impairments:

  • A chronic medical condition that compromises the individual’s ability to get through the most basic of daily routines
  • A cognitive impairment that compromises one’s ability to safely interact with his/her environment

Long-term care is costly. According to Genworth’s 2012 Cost of Care Survey, national median hourly rates for licensed homemaker and home health aide services are $18 and $19 per hour, respectively, adult day health care is $61 per day, assisted living facilities are $3,300 per month, and semi-private and private rooms in nursing homes are $200 and $222 per day, respectively. These are median costs. Actual costs in specific areas of the country may be much greater.

Fortunately, there’s a planning opportunity that’s available to fund a portion, or perhaps most, of these costs and remove the physical and emotional burden of caregiving from family members. It’s called long-term care insurance, or “LTCI.” Guess what? Given the fact that (a) long-term care is costly, (b) the cost of providing care continues to escalate, (c) people can live for many years with cognitive impairments, and (d) the possibility of requiring long-term care services is very real, LTCI isn’t cheap. Furthermore, insurance premiums for new applicants continue to increase as carriers increase their claims experience.

Complicating matters, while individuals in their 50’s and younger may require long-term care, it’s more often an experience that plays out in one’s 70’s, 80’s, or 90’s. Unless you have a limited-pay policy where, for example, you pay front-loaded premiums for a fixed period of time, e.g., ten years, you generally need to make premium payments for a long period of time to realize the benefits from your LTCI policy.

While LTCI premiums may be affordable when employed, it may be another story once you retire. In addition, as we have seen in recent years, LTCI premiums can increase. While increases generally are infrequent with most carriers, when they do occur, it’s not unusual for them to be in the range of 15% or more. When you purchase a LTCI policy, it needs to be a lifetime commitment. You need to have a plan for paying premiums throughout your working and retirement years, including potential increases.

One way to plan to pay for LTCI premiums during retirement is to purchase a fixed index annuity (“FIA”) with an income rider. Given the fact that the amount of lifetime income that you will receive beginning at various ages from a FIA with an income rider can be calculated at the time of purchase, this can be a good strategy to use for future LTCI premium funding. Specifically, you can determine the initial and ongoing investment amounts required to produce a targeted amount of income to match your LTCI premiums, including projected increases in same.

Stay tuned to next week’s post to see an example of how a FIA with an income rider can be used as a planning strategy for funding LTCI premiums in retirement.

Categories
Retirement Asset Planning Retirement Income Planning

The Sequence of Returns – The Roulette Wheel of Retirement

Retirement Income Center

So here you are, crossing the threshold from earning a living to going into retirement. You worked hard for many years. You built a sizeable, diversified investment portfolio. You hedged your bet by purchasing life insurance and long-term care insurance. Your will and other estate planning documents have been updated to reflect your current goals and financial situation. Everything’s in place, or so you think.

Welcome to the roulette wheel of retirement, otherwise known as the “sequence of returns.” If you haven’t planned for this financial phenomenon, your retirement could be quite different than you envisioned. To illustrate this important concept, let’s take a look at three hypothetical scenarios. In each one we’ll use the following five assumptions:

1. Retirement age: 65
2. Portfolio value: $500,000
3. Annual withdrawals: $25,000, or 5% of the initial portfolio value,
increasing by 3% each year
4. Life expectancy: 25 years, or until age 90
5. Average rate of return: 7%

The last assumption is the most critical one and can wreak havoc on your portfolio if you only rely on a retirement asset planning strategy during your retirement years.

Let’s start with Scenario #1 – 7% Return Each Year. While this scenario never occurs in real life, it’s often used for illustration purposes. Once you review Scenario #1 – 7% Return Each Year, you will see that even after taking out withdrawals that begin at $25,000 and more than double to $52,000 at age 90, your portfolio value increases from $500,000 at age 65 to $576,000 at age 78 and then gradually declines in value to $462,000 at age 90. You’ve taken distributions totaling $964,000 and your portfolio has earned $926,000 over 25 years. Nice result!

Scenario #2 – Good Early Years assumes that you are fortunate enough to retire at the beginning of a bull market where your investment returns exceed your inflation-adjusted withdrawal rate of 5% for several years, you experience a couple of years of negative rates of return, and a bear market kicks in your final three years, resulting in negative rates of return each year. Per Scenario #2 – Good Early Years, although it doesn’t occur in a straight line, your portfolio increases from $500,000 at age 65 to a peak of almost $1.5 million at age 87, with a final value of $921,000, or double the value of Scenario #1, at age 90. Like Scenario #1, you’ve taken distributions totaling $964,000 and your portfolio has earned $1.385 million over 25 years. Life is great!

So far, so good. To illustrate Scenario #3 – Bad Early Years, let’s simply reverse the order of investment rates of return that we assumed in Scenario #2. As in Scenario #1 and Scenario #2, over 25 years, we’re going to end up with the same average rate of return of 7%, however, the first three years are going to be bumpy, to say the least. Unlike Scenario #2, where your portfolio value increases by $208,000 the first five years, going from $500,000 at age 65 to $708,000 at age 70, per Scenario #3 – Bad Early Years, it decreases by $224,000, going from $500,000 at age 65 to $276,000 at age 70, or a swing of $432,000 during the same period.

Your portfolio continues to decrease in value each year until it is depleted at age 81. Instead of taking distributions totaling $964,000 as you did in Scenarios #1 and #2, your total distributions over 25 years are only $541,000. Furthermore, instead of realizing portfolio income totaling $926,000 in Scenario #1 and $1.385 million in Scenario #2 over 25 years, your total portfolio income is a measly $41,000. Yikes!

In both Scenario #2 and Scenario #3, there are negative rates of return in only five, or 20%, of the total of 25 years of retirement. Two years of negative rates of return out of ten years, on the average, is fairly typical for long-term historical rates of return for a diversified equity-based portfolio. As you can see, in Scenario #3, it doesn’t matter that 80% of the returns were positive, nor is it relevant that there was an average rate of return of 7%. As a result of the portfolio being depleted at age 81, the hypothetical individual in this situation wasn’t able to experience the 11.4% average rate of return during the final nine years.

The most important factor in Scenario #3, and the #1 risk to any retirement asset plan, is the sequence of returns. While you have no control over this investment phenomenon, you don’t need to play roulette with your retirement assets.