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Long Term Care Deposit Products vs. Traditional Long Term Care

Traditional LTC

Long Term Care insurance provides needed Protection against the costs of home health care, Skilled Nursing care and institutional care. While there are a number of reasons to purchase a Long Term Care Policy, one of the most important is to protect hard earned assets. If some form of care is needed, the LTC policy will help to cover the additional expense associates with that care and alleviate the need to spend assets in order to cover the cost.

While it is a needed benefit for many, LTC does have drawbacks. The first is the prohibitive cost of the policy. LTC premiums can represent a substantial investment over time and is increasingly expensive for those who purchase it later in life. A second drawback is the risk of carrying the policy for years to ultimately never use the benefits. There are some LTC plans that provide a return of premiums feature but they are restrictive and full of exceptions.

LTC deposit Strategy

An LTC deposit strategy will also protect assets against the cost of Long Term Care and offers major advantages over a traditional LTC policy. The deposit program uses a portion of the investable assets as leverage in the event future Long Term Health Care expenses are incurred.

The money is deposited in a non interest bearing account. In the event that Long Term Care is needed, the money is leveraged by a multiple to cover the cost of care. If Long Term Care is never needed, the account will pay out as a leveraged death benefit. Finally, if the money is needed for some other purpose, it can be withdrawn from the account any time without penalty.

We will use a 65 year old female as an example of how the strategy works

•65 Year old female has $100,000 in a CD or other investment. She has no long term care or has long term care and is paying a high premium for it.

•She can deposit $100,000 into the account which will leverage to provide $435,666 of long term care protection if it is needed. This leveraging starts from the first day the money goes into the account.

•In the event she passes on some day without the need for Long Term Care, the money would be paid as a non taxable death benefit of $233,128.00.

•The $100,000 could be returned to her at any time without penalty in the event her priorities or situation changed causing a need to utilize the money in a different capacity.

Traditional LTC

If she purchased a traditional Long Term Care policy, the annual premium would cost approximately $5,000 a year. She would need to earn 5% on her $100,000 in order to provide the premium payment. In today’s rate environment, it would not be possible to secure a fixed rate at 5%. She would also most likely give up flexibility with the lump sum in an attempt to generate the revenue to pay the LTC premium. Lastly, there would not be leverage provided in the event of early death and a portion of the non qualified account would most likely be taxable.

The final flaw with a traditional LTC policy is the money she may spend on premiums without ever needing long term care. If she lives to her actuarial life expectancy and then passes on without ever needing Long Term Care, she will be paying a large sum of money needlessly. Annual premium multiplied by the number of year s in her life expectancy ($5,000 x 21) would add up to $105,000.00 of premiums paid without any benefit.

In Conclusion

The deposit strategy cannot be utilized by everyone since there needs to be accumulated assets that can be dedicated to the account. For those that have the funds available, this strategy will result in premium savings and added flexibility over Traditional LTC plans.

Bank CD rates are averaging 1% to 1.8% on a 5 year fixed basis nationally. Rate offerings have not been this low in many decades. With the current inflation rate nearing 3%, a fixed CD at less than 2% will not even keep pace. Given this dynamic, it makes sense to look for alternatives.

Insurance companies offer interest rates for a fixed period of years similar to CD rates. Like a CD, once the fixed term expires, you are able to either roll over the account to another fixed period or take your money and go elsewhere with it. Historically, insurance companies have offered rates that are competitive with CD rates. Currently they are offering rates that are often 50% higher than the equivalent CD rate.

Insurance company offerings are not FDIC insured by they are backed by the Guarantee Association in each state. The amount covered by the Guarantee Association varies from $200,000 to $500,000 depending on the state the application is signed in. (For example: Connecticut is $500,000)

There are currently 2 insurance companies offering a 5 year fixed rate at 3.6%. Another is offering a rate of 3.15% and they offer it with a 100% return of premium feature that can be used at any time. Given the low nature of the rate environment, a return of premium feature may be useful. Both companies are A rated and owned by larger A rated parent companies.

The insurance company offerings provide a higher return on a fixed basis and should be considered as an alternative to CD’s due to their more competitive yields.

It is important for most retirees to create additional income streams in addition to social security in retirement. Many will rely on minimum distributions from qualified accounts (IRA’s, 401K rollovers, SEP plans, etc) and non qualified retirement plans to create additional income.

Retired couples will often only have one person receiving additional income. This strategy works well as long as the primary person drawing income is alive but an unplanned death can leave the surviving spouse short on income.

If the deceased spouse had substantial amounts of life insurance or other investments, the surviving spouse can use the proceeds to create their own income stream. Unfortunately, the odds are that the deceased spouse would not have an adequate amount of life insurance to allow for a new income stream to be created.
Using a joint income option is a great way to protect both members of the couple in the event the other passes away.

There are now a number of companies that provide very strong payout options. Most will offer guaranteed income numbers that will increase in the deferral phase prior to turning income on. The payment will not expire until the death of both members.

A number of companies offer joint payouts and the highest paying company changes often. The current leader in this type of contract is Security Benefit. They currently offer the highest single and joint payout in the field.

We will use a 61 year old male and his 61 year old wife as an example. Assume they have saved up $200,000 to supplement retirement. If they defer the money for 5 years, Security Benefit will pay them a Joint lifetime income of $16.186.00 a year guaranteed. This represents over an 8% joint payout percentage. If the defer for 7 years, the income would go up to $20,000 a year putting the payout at 10%.All payouts are projected on a guaranteed basis making it easy to plan for future income needs.

There is no doubt that a new company will counter with a higher payout at some point but for now, Security Benefit is the clear leader.

The average 5 year CD rate is 1.16% nationally and 1.34% in Connecticut. An A rate insurance carrier is currently offering a 6 year fixed rate at 3.15% for deposits under $100,000 and 3.25% for $100,000 and above. The plan comes with a 100% return of premium feature at any time, even if surrendered during the first year.

The company has stated that they will be offering this rate until March 15, 2012. The rate is subject to change after that date. 3.15% is certainly a strong rate compared to current CD offerings but it is bolstered even further by the return of premium feature.

It is always advisable to have reserve or emergency money to guard against financial crisis.   Those who are fortunate enough to have reserve money set aside usually keep it in a savings account or money market.   The idea is to keep the money in an easily accessible account and to limit any fluctuation in value.  In other words, it is not a good idea to have risk in an account that you may need to draw money out of for an emergency.

Money markets and savings accounts keep money liquid and safe from fluctuation but they do not provide much of a return either.   The average savings account yields less than half a percent of interest per year.  The cost of sacrificed return can add up over time.   For example, consider a 54 year old that keeps 50,000 in a savings account of some type of money market for 10 years.  Assuming they are getting a .25% return at the end of 10 years they will have $51,264.00 in their account.   The money certainly was accessible the entire time but the client only made $1,264.00 over the 10 year period.

As an alternative,  a return of premium fixed indexed annuity with an income rider could be considered.  The plan has 100% return of premium at any time. This provides quick (3 day turnaround) access to the initial investment at any time without any risk.  If $50,000 is put into the account, it can always be surrendered for a minimum of $50,000.  Accounts of this type will gain anywhere from 0% to 5% interest a year for an average of 2.5% to 3% which can offer greater growth potential than a savings account or money market. 

 The bigger benefit is the  account will also grow as a guaranteed income stream over time.  One of the more competitive companies currently offers a guaranteed growth of 10% simple interest per year.   If the same 54 year old put $50,000 into this account and did not ever need to access it, they would have a benefit base of $100,000 that they could draw 5.4% out of per year guaranteed.  This would generate $540 a month on a guaranteed basis for life.  They would not be forced to use this option but could do so if the need for extra income arose in the future.

Many return of premium annuities also offer a death benefit option  with the account.   If the account holder was to pass away at any time during the 10 year period, the account would pay out the income rider value as a death benefit. To stay with our example, if the 54 year old died in year 6, the account would pay out $80,000 as a death benefit to the current beneficiary.

A return of premium annuity offers a number of advantages over the traditional safe money strategies. The account holder can still maintain  liquidity while having the  additional earning potential and the ability to use the money for income purposes down the road.

One of the biggest points of confusion for seniors seems to be making a decision between a Medicare Advantage Plan and Medicare Supplement Plan. I receive phone calls on a daily basis from people either turning 65, moving from an employer plan to Medicare or just trying to decide what to do for the Medicare Annual Election period. Often they are confused and feel overwhelmed by the amount of information and plan choices available.

The reality is that it is actually very easy to learn enough to make an educated decision. This article is going to point out the basic differences between the plans and point out the strengths and weaknesses of each. With this info, anyone will be on their way to having enough information to make a confident decision on the best plan for them. (This Article is for people in Connecticut and NY- I will write one for other states in the next few days)

First, we need to break down the differences between the two types of plans and also dispel some myths about both.

Medicare supplement plans-

-They are secondary to your Medicare A and B (In other words, providers bill Medicare first and then your supplement covers some or all of the remaining costs depending on the plan you choose.

-They are for Medical only. You buy Rx coverage separately

-There is not a network. You can go to any doctor that accepts Medicare

-There are plans A-N available but only a few are popular. They Plan F, Plan N and High deductible F

-The plans are standardized in both Ct and NY. If a company offers a plan N, the benefits are identical regardless of the company offering it. Price is the only difference. Once companies plan N is not better than other companies. Just go by the price.

-There is no medical underwriting for them and in Connecticut and New York you can change them the first of any month at any time during the year.

Supplements are a good choice for people that do not want to have any network constraints. They also work well if you have doctors that do not take managed care plans (Medicare Advantage Plans) or if you travel to other states often.

Some clients like the fact that some of the supplements basically cover all of their costs for medical care. (Plan F and Plan C, Plan J for those whom still have it)

Finally, supplements work well for people that are very sick and receiving a high volume of care such as multiple injections at an outpatient facility or in the doctor’s office or people going to a number of physical therapy visits on a weekly basis. If you are on a plan F, you will not be billed for the services

I hear a tremendous amount of incorrect information being given out on a daily basis when it comes to Medicare Supplement plans. Here are some of the major areas where bad info tends to be most prevalent.

-” Such and such a company has the best Supplement plans”- In the world of supplements, there is no such thing as one companies supplement being better than the others. Supplements are mandated to have identical benefits. If United offers a plan F supplement, it has the EXACT same benefits as every other companies Plan F benefits. Supplement plans A-N are subsidized in Connecticut and New York. All plan benefits are the same. The only difference is the price that the company charges for them. If you have decided on a supplement and know which plan you want, take the company with the lowest cost for that supplement. (Example: You decide to take a plan N, Simply choose the lowest cost plan N being offered at the time.)

– “I can’t find all the companies offering supplements and the prices” – This is easy. Each state has a list of all companies in the state offering supplement plans and the prices of them. They can be found on the insurance websites of each respective state. Here is a link to Connecticut Supplement plans and prices for 2011

https://croweandassociates.com/images/stories/Medicare_Supplement_Rates_Connecticut_2011.pdf

“Supplements have underwriting outside of the guaranteed issue period”- There is no underwriting for supplements in Connecticut and NY. Both are guaranteed issue states even outside of the election periods.

“High Deductible F is not a good plan” – This could not be more off base. In Connecticut and Ny there are plans that have very low high deductible F plans. In fact, in Connecticut, Anthem BCBS offers a high deductible F plan for $39.00 a month. This math cannot be beat by any other supplement plan offered in CT. For more information on High Deductible F go to… https://croweandassociates.com/blog/?p=223 for NY

Although there are many good things about supplements, there is also a negative or two. First off is that they do not cover RX, you need to buy a separate drug plan if you want coverage. The going rate for Rx plans is about $32.00 a month. Secondly is the price of the supplements. The lowest cost plan F in CT is about $219.00 a month. When you add your Rx cost to that it brings you to about $250.00 a month for a plan. Keep in mind that you are going to be paying $3,000 in premium for the year no matter what. Even if you have a very healthy year you will have $3,000 less at the end of the year.

Medicare Advantage Plans
Medicare Advantage plans are managed care plans being offered by private insurance companies. They give you your A and B coverage, secondary coverage and Rx coverage all in one package. With a Medicare Advantage plan, your Medicare A and B is administered by the insurance company. As a result, when you go to the doctor you show them your Medicare advantage plan instead of your A and B card.

There are many positives and also negatives about an advantage plan. Here are the positives….

-They are included in your Medical and Rx in one package. You do not need to go and purchase a separate PDP plan.

-They are very inexpensive. All major carriers even offer $0 monthly premium* plans.

-They have out of pocket maximums.

-Preventative care is covered at no cost to the member.

*They can offer you a plan for $0 monthly premium because Medicare is paying the insurance company money to handle your enrollment and care for the year.

-Some carriers have national networks and plans with out of network coverage.

Some negatives about advantage plans…

-They have networks. If you take an HMO advantage plan (Which does not have out of network coverage) and you try to go to an out of network doctor, you will NOT be covered. Many people believe that Medicare will still cover them for the usual Medicare A and B amount if they go to an out of network doctor but it does not. You will need to pay the full cost.

-They have copays for services. You need to be aware of the copays on the plans you choose. Some plans cover certain services better than others. For example, one carrier may cover Major Radiology at 80% while the other covers it for an $80 copay.

-They have pre-certification requirements for some procedures. Your doctor is responsible for obtaining pre certs but they can hold things up at times.

Advantage plans tend to work very well for people in relatively good health that see a reasonable amount of doctors. You need to check to see that all your Docs and any hospitals you go to are in the network. There are now a number of plans with out of network coverage and national networks. This is good if you have a doc or two that is out of network.* The copays on most plans are reasonable and with $0 premium plans available, they can save the right person a lot of money for the year.

*Make sure your out of network doctor will bill your insurance company for you and not make you submit yourself.

Often clients get upset when they go on an advantage plan and incur a large copay. (For example, a CAT scan which is a $150 copay on some advantage plans) They will say “If I was on a supplement, I would not have paid anything”. They tend to forget that the supplement is costing them money every month when the advantage plan is not.

The math on advantage plans actually makes sense for the majority of people but not everyone. Make sure you review the benefits and check networks prior to enrolling. Do the math and see how much you will save in monthly premium vs. how much exposure you have to copays. In the end, the advantage plan will likely win out but a little time needs to be devoted to make a comparison before you make a final decision.

*Make sure your out of network doctor will bill your insurance company for you and not make you submit yourself.

The number of companies offering Individual Health Insurance in Connecticut is not a large list.  As of June 2011, you have a total of 6 companies offering plans.  Each company is offering a similar line of products from a benefit standpoint.  Today you will see all  companies offering multiple HSA plans with a range of deductibles and co-insurance options.  Read more

First United American has lowered rates on their high deductible F plan throughout NY state.  They are now offering a Plan F high deductible supplement for $67.00 a month in NYC and surrounding areas.  This represents the lowest rate available for a supplement in NYC.

Anyone currently in a Medicare Supplement plan should review the benefits and price point of  a high deductible F plan to see if it would be advantageous for them to change to one.  The High F plan is not often understood by the medicare eligible population and is not always popular with the companies offering them due to the low premium revenue they generate.

Medicare supplement plans offer freedom to access any doctor accepting medicare and also do not have a managed care component.  The high deductible F plan can offer considerable savings over the standard supplement plans currently on the market.

Medicare Savings Program or “MSP”  is a state based program available to Medicare Recipients.  Anyone on the program receives extraordinary benefits however, very few people understand how it works.   Here is a quick overview of how you can qualify and the tremendous benefits you can receive.

Read more

AEP “Annual Election Period” has changed for 2012.  The past AEP period to make plan changes was from November 15th to December 31st for a January 1 effective date.   This will change for 2012.  The AEP will now run from October 15th to December 7th for a January 1 effective date.  Read more