Long-Term Care Insurance: A Wise Purchase?

I volunteer at the Virginia Cooperative Extension where I occasionally teach classes on money management.  (It is a very worthwhile and inexpensive class held in six sessions over as many weeks.  If your employer sponsors the class, it might even be free to you.  Call the local office of your state’s agency to see what’s offered in your area, or ask your employer to sponsor a series with the local agency.)

 

In one unit we teach about different types of insurance and offer tips on evaluating and purchasing policies.  We employ a simple but effective grid for determining the need for insurance.  It is not based on the cost of the policy, though that is an underlying factor; rather, it looks at the potential cost of the hazard if it were to occur together with its probability of actually occurring.  The grid looks something like this:

 

 

High Cost/Low Probability   Recommendation: Transfer the risk (i.e. buy insurance)	High Cost/High Probability   Insurance is likely not available
Low Cost/Low Probability   Self-insure, i.e. use savings to cover any loss	Low Cost/High Probability   Self-insure, i.e. use savings to cover any loss

 

 

I thought of this tool when I read a Wall Street Journal article last week about the rising cost of long-term care insurance.  These policies are meant to protect against the costs of nursing home stays, assisted living, and personal aide/home health services.  They have never been cheap, in my opinion.  But now insurers who sold these policies to middle-aged people twenty or thirty years ago suddenly find themselves with claims to pay and have, in some cases, nearly doubled their annual premiums.  The article cited one couple whose premium jumped 90% to $4831 per year.  The dilemma for couples like that is that they must either pony up the money so they continue to have protection or else stop paying and receive no benefits for all the premiums they’ve already paid.  Tough choice.

 

So let’s apply the tool above to help you determine whether long-term care insurance is a smart purchase for you. 

 

Consider first the cost of this hazard.  For a year spent in a nursing home I’ve heard cost estimates of $35,000 to $120,000.  The national average is about $83,000 annually.  Unless you have a few million dollars in the stock market, I’d classify this as “high cost” and thus belonging in the top half of the grid above.

 

How about the probability of the hazard occurring?  The Wall Street Journal article showed a graphic on that.  For U.S. adults at least 65 years of age, statistics project the percentages of them that will need nursing home “or other care services” presumably not covered by Medicare or commercially available health insurance policies, as follows:

            Will never need it:  48%

            Will need less than two years: 27%

            Will need from two to less than five years: 12%

            Will need five years of more: 14%

(Rounding causes the numbers to equal more than 100%.)

 

Put another way, there’s a 52% chance a 65-year-old will need such care.  If there were a 52% chance your house would burn down, I think you’d classify that as “high probability”.  I would put this in the same category—which means it falls into the upper-right quadrant of our grid, “high cost/high probability”, an area where insurance is “likely not available”.  Yet it is.  But for how long and how reliably?

 

 In the face of the high cost of nursing home care, many insurance companies have stopped selling long-term care insurance.  The same article stated that at one time more than 100 companies offered this coverage.  Now it’s more like “a dozen or so”.  Will there eventually be none?

 

We will consider that question and others next week when I offer my thoughts on whether it’s appropriate or wise to purchase long-term care insurance.

 

Until next time,

 

Roger 

“Suppose one of you wants to build a tower.  What is the first thing you will do?  Won’t you sit down and figure out how much it will cost and if you have enough money to pay for it?” Luke 14:28 CEV

 

 

 

Applying the Spouse Test

I have a favorite scene from the movie “Rush Hour”, a comedy starring Jackie Chan and Chris Tucker.  Tucker, portraying a Los Angeles cop, grudgingly accepts an assignment to meet and escort Chan, playing the part of a Chinese detective sent to the U.S. to help solve a kidnapping case.  Meeting each other at the stairs off Chan’s plane, Chan pretends not to understand English.  An increasingly exasperated Tucker finally gets into Chan’s face and shouts as he over-enunciates, “Can you understand the words that are coming out of my mouth?!”

It kind of reminds me of how some people market investments.  Loud, in-your-face, and hoping that their volume alone will overcome some very real and reasonable barrier—usually your good sense.

Bitcoin makes a good example.  It’s a so-called cryptocurrency, and in December its value soared to over $18,000.  It was all the rage, made headlines.  If you weren’t invested some way in Bitcoins then maybe you weren’t a very savvy investor, and certainly not a “cool” one. 

Jump ahead one month.  Bitcoin’s value dropped by half last week.  It has recovered a portion of the loss, but it faces some head winds as some governments seek to crack down on its trading.  As one Chinese bank official observed, “Pseudo-financial innovations that have no relationship with the real economy should not be supported.”

So I ask you, “What is a Bitcoin?  How is it ‘mined’?  How does it derive its value?”

And here we come to the point of the story; it’s time to apply the Spouse Test.  (I didn’t create the test.  I got it from Howard Dayton of the Christian financial ministry Compass-Finances God’s Way, but I heartily endorse it.)  The Spouse Test simply requires anyone who is contemplating making an investment to explain in understandable terms to his/her spouse (or friend or brother or whomever) just what the investment is.  Can you do that with Bitcoin?  Can you put into layman’s terms this explanation I read of Bitcoin transactions: “Every Bitcoin user conducts transactions in a public ledger, but since the ledger is distributed across thousands of computers, it’s immensely tedious to reconcile and verify transactions across the network.  Transactions are grouped together in blocks that require finding a cryptographic key to verify….[T]his process is like finding solutions to complicated math problems that become progressively more difficult.” (Umair Irfan on the website Vox.com)

Huh?

I go back to Michael Lewis’s book, The Big Short, about the financial crisis a decade ago.  He masterfully detailed how banks and big investment firms—“Wall Street”—dreamed up investment ideas so complex that even they were hard-pressed to understand them fully.  If people had only applied the Spouse Test, had not given in to the hype and the irrational fear of being left behind in a booming stock market (in other words, had they not let the nonsensical shouting overcome their good sense) maybe the financial crisis and recession would not have been so deep or so severe.

But don’t think the Spouse Test is only for potential Bitcoin investors.  It should be a tool you pull out anytime someone, including your financial advisor, tries to sell you on an investment or some “no-fail idea” for making money.  Friends, family, spouses.  They’re in your life for a reason.  Bounce ideas off them.  In the case of spouses, they have a stake in the decision, too; and since opposites supposedly attract, it’s likely he or she will have another perspective on the idea you’re proposing, and that’s not a bad thing.

Until next time,

Roger

“The Lord God said, ‘It is not good for the man to be alone.  I will make a helper suitable for him.’ ” Genesis 2:18 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™
Used by permission.  All rights reserved worldwide.

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"But I Owe it to Myself!"

Now that the Christmas bills are starting to show up in the mailbox, it’s time to figure out how you’re going to pay them.  One possible option is to borrow against your 401(k) retirement plan.  Many people do; and I suspect many more would if they actually read the literature given them about their 401(k) plan and discovered they could borrow from themselves.

 

“Borrow from themselves.”  What an appealing idea, and one not totally without merit.  The interest rate is lower than at banks or certainly the credit card company.  And you make the payments to yourself…with interest…right?  Isn’t that a way to make us save more?  It offers the convenience of payroll deduction.  High interest credit card debt is avoided. 

 

I’m not sold on the idea, though.  It reminds me of words attributed to Franklin Roosevelt when the U.S. government began massive borrowing to fund the New Deal in the 1930’s, something to the tune of, “Don’t worry, we’re just borrowing it from ourselves.”  Yeah?  How is that working out for us?

 

When I worked at an investment firm, much of my responsibility involved assisting individuals in managing their account within their employer’s 401(k) plan.  Not all the plans allowed loans, but many did.  One employer permitted its workers to have as many as three loans outstanding.  I lost count of the number of its employees with whom I talked who had three loans out.  Often they would scrape up (borrow?) the money to make a couple of extra payments to knock off one loan—and pay FedEx to deliver us a check overnight.  Then they would call to see if the check had been received and posted and if so, ask me to process a new loan.  They became agitated if the money had not been posted, or worse, the money had been received but I had to tell them they could not borrow any more money yet—there are IRS regulations about how much may be borrowed over a certain period of time.

 

But aside from the cycle of debt that this borrowing encourages, taking a loan from your 401(k) has some other serious pitfalls.

 

1. Lost opportunity for growth: That money you took out of your retirement savings to spend on some depreciating asset, like a car, is not in your account growing.  With the stock market in a big upturn, what you would have earned within your account if the money were still there dwarfs the measly 5% interest you are paying yourself.  And that 5% is coming out of your pocket; it’s not new money earned on investments.

 

2. Lost investment opportunity:  This refers to the fact that you won’t be able to invest new money into your 401(k) while you are repaying your loan.  The vast majority of people need to put more, not less, money into their retirement account.  It might be argued that if the stock market is in decline then it’s a good thing to have your money out of the market and in your hands in the form of a loan, meaning point one above is moot.  Fair enough.  But say the market is down; stock prices are low.  That’s the time to buy more stock.  But instead of putting new money into your account and purchasing more, cheap shares, you are only making payments and gradually buying back shares of stock you sold to generate the money that you borrowed.

 

3. Loan comes due quicker than planned:  It might be a three-year loan on paper, but if you lose your job next week, that loan probably has to be paid back in full within 60 days.  Otherwise, it becomes fully taxable and might even be subject to a 10% early withdrawal penalty.

 

4. Double taxation:  The money you save into your 401(k) via payroll deduction is tax-deferred (we won’t address Roth accounts here), meaning you won’t pay taxes on that money until you start withdrawing it for retirement.  But if you borrow, say, $10,000 from that account, your payroll deductions to repay the loan are made with money that is already taxed.  Then that money is taxed again when you take it out for retirement.  If your tax bracket is 25% now and 15% during retirement, you’ve paid $4000 in taxes on that ten grand.  Suddenly that 5% interest rate doesn’t seem like such a bargain.

 

These points should give you pause before borrowing from yourself.  If it’s your only option in an emergency, then consider it.  But count the cost!

 

Until next time,

 

Roger

 

“Be sensible and store up precious treasures—don’t waste them like a fool.” Proverbs 21:20 CEV

A Few Ideas for Feeling Better in 2018

With hundreds of millions of people each year making New Year’s resolutions, there is really no way to know what the most common ones are.  But it would be a reasonably safe bet that they pertain to either finances or dieting.

 

Why finances?  Money continues to be—always will be, I believe—the leading cause of stress in this country according to the American Psychological Association.  Atop the list of financial concerns: not having enough emergency savings.  The PwC Employee Financial Wellness Survey of 2017 showed that this was true across all generations, from Boomers to Millennials.  Little wonder, given the abysmal state of most families’ savings accounts.  A Bankrate survey, also taken last year, found that about half of those earning $75,000 or more could not easily pay for a $500 car repair or a $1000 emergency room bill.  It was predictably worse among those making less than $75,000.

While the subject of money is fraught with emotion and usually (especially for men) related to self-esteem, we could say the same of dieting (especially for women).  It’s about self-image.  We don’t like the reflection in the mirror and determine to do something about it.  One source put the number of Americans suffering from low self-esteem at 85%.

 

Each January you may notice there are more advertisements for fitness gyms in the media.  Savvy marketers want their company to be the answer to your New Year’s resolution, for a price.  Can we find financial AND self-image security in 2018?  I want to offer just a few ideas on how to save money while staying fit. 

 

Skip the gym if it’s not free.  Sure, there’s so much to do at the gym and it’s a generally comfortable environment for doing it.  But is there any sense in paying to work out at the gym if you hire someone to shovel the snow off your driveway, always look for the parking spot closest to your destination, or mow your lawn with a riding mower?  Get your exercise for free while accomplishing something worthwhile.  Slaving at a rowing machine accomplishes nothing; it seems so pointless to me.  Go play with the kids or grandkids instead.  Besides, six months from now the financial planners will be advising people to evaluate their expenses—like credit cards with fees or gym memberships that aren’t being used—and advise them to “trim the fat”.  Ouch.

 

Don’t buy fancy exercise equipment either.  Despite our good intentions it tends to fall out of use after a few weeks or months; and it costs money and takes up space.  A basketball with a hoop; a bat, ball, and glove; a Frisbee: they’re cheaper, more fun, and can increase interaction with family or friends, thus feeding your social needs, too.

 

Evaluate that shoppers’ club membership.  I’ve managed to walk out of Costco exactly once with less than $50 in food purchases.  I’ve done the numbers:  there are two or three things I buy there often enough and which come at such a savings over the other stores where I can purchase them that it makes it worth the $55 membership fee.  (Or is it $65 now?  Any time the price goes up is a good time to re-evaluate what you get for your money.)  On top of that, I read recently that shopping at these mega-stores tends to increase the amount of packaged foods we eat at the expense of fresh food.  And you know which one you should be eating more.  Buying in big quantities can also lead to more waste.

 

Get more sleep.  This is a tough one for most people.  There’s just too much calling for our attention.  But getting 7 to 8 hours of sleep per night is a stress-buster—and stress contributes to weight gain.   This one is free.

 

Automate your savings.  The one feature that makes 401(k) accounts such a successful vehicle for retirement savings is payroll deduction.  Putting the money into the account is done automatically; the employee never gets his hands on it and therefore cannot spend it easily or without a good bit of pain inflicted by Uncle Sam.  Take another few dollars from your paycheck, perhaps the money that would have gone to a gym membership, and have it deposited into a separate savings account so you have an adequate rainy-day fund.  A Pew survey revealed that nearly two-thirds of U.S. households will suffer a financial crisis in any given five-year period.  From a health problem to a leaky roof, won’t you be a bit more relaxed, happy, and content to know you have some money socked away to cushion the blow?

Until next time,

Roger

“A cheerful heart is good medicine, but a crushed spirit dries up the bones.” Proverbs 17:22 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™
Used by permission.  All rights reserved worldwide.