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Personal Finance

Long-Term Care Insurance: Why You Need It

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Old-age home in Czechoslovakia

One of the features of the new government health-care plan is the option to take out a modest amount of long-term care insurance.  It’s not the greatest of all possible programs, but it’s a heck of a lot better than nothing.

We’re told that almost two-thirds of Americans over 65 will need long-term care. Nor are the young immune to these bankrupting costs: 40 percent of long-term care patients today are aged 18 to 64.

The government program, called CLASS (the Community Living Assistance Services and Supports program) probably will pay about $50 a day. Compared to the cost of a nursing home, that’s a tiny drop in the bucket. In 2010, according to a survey by Metlife, the average cost of a semiprivate room in a nursing home was $205 a day.

That’s with some poor soul moaning in the bed beside you, not a desirable thing. When my mother was dying, one of the wretches in the nursing home was in such pain she believed she was on fire. She kept screaming for her husband Orville, who never showed up. She screamed and screamed and screamed. If that’s not what you’d like keeping you awake 24/7, you’ll pony up $229 a day to have a room to yourself.

The costs shown in the link above are just averages; real costs vary widely by region (as does quality of care). In New York State, for example, the median price of a private room in a nursing home was $359 a day. Here in Arizona, it’s a mere $245 a day. Texans pay $181 a day, Nebraskans $207, Californians $269.

If you’re ambulatory but no longer able to keep up a house or apartment, you’ll pay $122 a day to reside in an assisted-living community. Think you’ll try to stay in your home? A home health aide gets paid $21 an hour to come in and care for you: that would be $168 for an eight-hour day, and many elders need to have someone with them through the night. Having someone come in to clean your house: $19 an hour. The cost of adult day care, where you’re carted off to spend your waking hours in an institution and then hauled home to sleep in your own bed: $67 a day.

Before you can qualify for Medicaid, you have to spend down all your assets on health and nursing care. This may include having to sell your home and your car. If you’re married, it means your surviving spouse will be pauperized. To rescue his mother from this fate while his father was dying of Parkinson’s, SDXB had to arrange to divorce them, a painful end to a 50-year marriage between two faithful Catholics.

If you’re in your 50s, now is the time to buy long-term care insurance, which ain’t cheap itself but is a lot less ruinous than those costs. The longer you wait, the higher your premiums will be. Unfortunately, providers are beginning to reconsider the wisdom of these policies, and so it’s not so easy to find a good one. Metlife, which was one of the better providers, got out of the long-term care business last November. Policies that survive will have higher premiums; my policy, which started with TIAA-CREF but was sold to Metlife, hasn’t gone up yet, but I’m sure it will. I’m not looking forward to a stiff increase in the $75 a month I’m already paying out.

The options are not very good. For those of us who are less than wildly affluent, the projected $100 to $200 per month premiums for the government plan—assuming it survives the Republican onslaught—are way too much for way too little. I can’t afford to pay that for something that will not come close to covering my needs, especially on top of my existing plan, which also probably will not cover all my costs. Besides, if you’re already retired, you may not qualify: you have to work for three years to get the benefits. Alternatives include life insurance policies that allow you to tap the death benefit, which might help you to pay for some old-age or health-care costs, annuities that pay out either a lump sum or an income stream, or limited-pay policies in which the premium is paid once or over a period of just a few years.

Nevertheless, if you don’t already have a policy, now may be the time to look into getting one. Despite having ceased selling new policies and planning to jack up premiums through the stratosphere, Metlife at least is still servicing those policies it does have. You may want to lock in a policy with another insurer while some are still available.

Be careful, though. Like all insurance products, long-term care insurance is a field full of potholes. Learn everything you can about long-term care insurance before buying. Pitfalls include policies that won’t cover you if you move out of state; assuming the payout will cover all your costs (it probably won’t); limited coverage periods; recurring deductibles; and an array of other little surprises. Call your State Health Insurance Counseling and Assistance Program, which will provide you with unbiased information. The American Association of Retired Persons offers some in-a-nutshell consumer education, but you should be aware that AARP sells long-term care insurance and so is not a disinterested party.

Consider how much you’ll really need. If you’re not living in your home, most of your monthly expenses will go away. Thus about 90 percent of your Social Security and pension or savings income can go toward maintaining you institutionally. For me, that would come to about $78 a day. Here in Arizona I would need $245 a day to put myself up in a nursing home; thus the insurance would have to cover only(!) $168 a day.

Nursing home costs go up every year, and so you should look for a policy that offers you a chance to opt for increased coverage to adjust for inflation.

That’s about the best you can do to protect yourself. Otherwise…pray for a quick end. 😉

Image: Rest Home for the Elderly in Czechoslovakia. Darwinek. Creative Commons Attribution-Share Alike 3.0 Unported license.

What I Learned During the Year of Penury

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Well, assuming all goes as planned (big assumption, I know!), according to my budgeting software this year I should see a combined earned and passive income of about $52,000. That’s only $13,000 short of my late, great full-time editorial salary, and $8,500 more than I earned teaching full-time. And it’s a far cry from what crossed my bank account’s threshold last year, about $28,000.

I learned a lot of things by trying to live on 43 percent of my pre-layoff salary, very valuable things:

• If you’re not in debt, you can live on a lot less than you think you need.
• If you are in debt, you’d better have a good stash of emergency savings to cover payments.
• You can live frugally and still be reasonably comfortable, most of the time.
• No matter what anyone says about the alleged tax advantages of carrying a mortgage, when you’re unemployed a paid-off roof over your head is your second-greatest asset.
• Your third-greatest asset is a paid-off car.
• Your greatest asset is good health, should you be so lucky to have it and keep it.
• Beans, rice, and pasta are splendid things to eat.
• Chard growing in the garden goes a long way toward putting a nice meal on your table.
• A stand of lettuce helps, too.
• With careful planning, it’s possible to stay out of stores for surprisingly long periods.
• Raising the deductible on your homeowner’s insurance comes under the heading of penny-wise and pound-foolish.
• When budgeting for irregular income, it may be good to create longer budgeting periods than a month. At times, two- or three-month budgets may work more effectively.
• When money is tight, that is when every unplanned expense in creation crashes down on your head.

Despite fears to the contrary, I managed to stay in my home and live without too much deprivation by budgeting carefully, stockpiling food, conserving energy, and putting less money in savings.

It’s surprising how little it takes to get by when you’re not working. I would have done OK on even less, had I been inclined to shop in thrift stores and low-end grocery stores. It’s also clear that I could have cut living expenses still further by moving out of my present home, which has relatively high operating costs, and going to Sun City, where taxes and insurance premiums are significantly less.

What kept me in my home was not having a mortgage. Some years ago I decided to defy conventional wisdom by paying off the mortgage I had on my last house. It occurred to me that each monthly mortgage payment I did not have to pay represented a return on investment of exactly that much. I owed about $70,000 on the house and was paying about $860 a month, which, when the alimony ran out, was more than half my monthly take-home pay. Less than $200 of the PITI comprised tax and insurance. My investments earn about 7 percent; 7 percent of 70 grand is $408. So despite the protestations of two investment advisers, it seemed to me that little would be lost by investing a chunk of savings plus an inheritance in residential real estate.

Over a ten-year period, the house’s value more than doubled, allowing me to buy my present house, a somewhat nicer place in a quieter part of the neighborhood, and pay for it in cash.

If I hadn’t owned the house outright, I can’t imagine what I would have done last year. Although the house has dropped $35,000 in value since I bought it, you don’t realize a loss until you sell, and because I didn’t owe anything, I wasn’t forced to sell or default. There’s simply no way I could have paid $10,320 out of a $22,000 net income and survived. It was extremely lucky that I made that choice all those years ago, and that I’d managed to accrue enough savings to pull it off at the time.

So, I learned that a smart decision can pay off a long time after you make it. And I learned that it is not a bad idea to pay off a residential mortgage.

Having a lot of savings rescued me from the potential disaster posed by the mortgage on the downtown house. I used the tax-free portion of a whole life insurance policy to pay my share of the monthly payments in 2010. Because we managed to get a temporary loan modification, a couple thousand dollars of that remain to help defray the 2011 PITI.

There were some difficult moments. The cost entailed in falling and hurting myself was a bit startling. It would have been even more startling had I consented to surgery that would have caused the loss of an entire semester’s pay. Living through the summer with the thermostat turned up so high that my friends wouldn’t come inside the house was uncomfortable, and I’ll be happy not to have to swelter like that come next July.

When I would run out of cash, not spending a dime for a week or ten days at a time was a challenge. And the summer months, during which income did not cover base expenses, were nightmarish. Even though I’d saved enough from teaching income, theoretically, to squeak through May, June, July, and August on Social Security, by the time fall semester started I was running out of money. Classes started sometime after mid-month, we didn’t get paid until the last of the month, and that was only a partial paycheck. The summer stipend didn’t help much, because most of it wasn’t disbursed until long after I needed it. Being paid for only two classes during the first eight weeks of the semester didn’t help things much, either.

By December, the money pile had not recovered from the effort to get through three and a half months with less income than outgo. Fortunately, though, the stock market had recovered. The strategy of delaying a drawdown from savings had worked, and my IRA and brokerage accounts had returned to something close to their pre-Crash levels. At that point, my financial adviser and I decided it was safe to start a 3 percent drawdown, which, until inflation kicks in, will guarantee enough in the checking account to pay the bills, exclusive of earned income.

In retrospect, I learned that I would have been better off if I’d put all my summer survival savings into my regular cash flow account at the end of spring semester, rather than setting the money aside in a savings account and doling it out to myself in monthly “paychecks.”

Instead, I should have treated the summer as one three-month budget cycle. This cycle should have contained three months’ worth of expense budget: three months’ worth utilities, insurance, etc., plus three months’ worth of spending money. On the credit side, it would have included all my spring-semester survival savings plus projected Social Security. Subtracting debits from the summer-long total, not from one month’s worth at a time, would have allowed me to see at a glance how much remained to get by on until salary started again. This would have relieved a great deal of worry engendered by fretting about how to get by from month to month. I still would have been in the red at the end of the summer…but I probably would have stressed about it only once, instead of three or four times.

It really would have helped not to have had a $165 palm tree trimming bill in June, a $30 copay to the Mayo in July, a $105 electrician’s bill in August, and a $120 plumbing bill in September. I suppose that when you foresee a financially tight time coming, you should add about $150 to your regularly budgeted expenses to cover Murphy’s Law.

The economy is improving. Eventually most of us will get jobs again, although probably not at what we used to earn. The Fall of the Bush Economy is not the last recession we’ll see. There’ll be more, and they may be worse. By way of preparing for those, I think, the take-away messages are as follows:

• Live within your means, even in good times.
• Within your means, live frugally, even in the best of times.
• Build savings. Don’t limit savings to your IRA or 401(k).
• Distribute savings wisely between cash and investment accounts.
• Pay off debt. That includes mortgage debt.
• Avoid accruing new debt. Use savings to help pay for big-ticket items in cash.
• Take care of your health.
• Expect the unexpected.

Tax Break Comin’ Your Way! What Will You Do with It?

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Last week President Obama signed a bill that will lower your 2011 Social Security taxes from 6.2% to 4.2%, for next year only. This tax holiday, which, bizarrely enough, will cost the federal government $120 billion at a time when the government is facing astronomical deficits and we’re being told Social Security is headed for Hell on a skateboard, could save you as much as $2,136 next year. If you’re a couple both of whom earn over $106,800, you’ll see a $4,272 tax break.

The theory behind it is that the increase people will see in their monthly or biweekly paychecks will be small enough to look like gravy and so they’ll diddle it away on stuff and services, thereby supposedly stimulating the economy.

Could be. Could be voodoo works to cure warts, too.

I must say, if someone handed me $2,136 it would go straight to savings—even if I were wealthy enough for that amount to apply. O’course, that’s not what you’re going to see in your paycheck; it’ll be dribbled out to you in $178/month increments, or $89 per paycheck if you’re paid twice monthly. Considerably less, actually, unless you earn a top-tier paycheck. In my case, this vast new lucre will amount, over the entire year, to $288.

But let’s say you earn enough to matter. In theory, if you’re earning that much, you ought to be able to afford to spend two, three, four thousand bucks on anything your heart pleases. Two percent of my former, relatively modest salary, for example, would have put an extra $1,300 in my pocket—but in the palmy days when I earned a salary, that was less than I budgeted for the American Express card each month.

Several options present themselves:

1. Diddle it away. We’re told this will improve the economy, making us all richer and happier sometime in the gilded future.

2. Pay down debt, if you still have any after the past few years of our national frenzy to get out of debt. It would make sense, if this is your choice, to figure out how much the windfall will add to your paycheck and set your online bank account to automatically pay it to the creditor that holds your largest or your highest-interest debt.

3. Set it aside to buy a big-ticket item, thereby keeping yourself out of future debt. A couple thousand bucks would buy you a nice refrigerator or—yes! a MacBook! Here, too, the smart strategy would be to arrange an automatic transfer of the temporary raise from checking to savings.

4. Donate it to charity. With the de jure unemployment rate still hovering near 10 percent, the de facto rate around 20 percent, and thousands more Americans poised to be dispossessed of their homes in 2011, the civil thing to do would be to put the money where it can help someone else.

5. Save it for retirement. This is just a taste of what we can expect when the Republicans get back into office, which is likely to happen at the end of Obama’s present term. Continued raids on Social Security will kill it fast. If you’re under 65, you’re going to need this money when you find yourself too old to work.

Just now,  my investments are earning between 5 and 7 percent; let’s say that averages 6 percent. And let’s say you’re 35 and you earn enough to qualify for the full $2,136: by the time you’re 65, this year’s windfall will be worth $12,268. If you’re a couple both of whom earn six-figure salaries, you’ll have an extra $24,536 in the community property, assuming you’re still married after 30 years. Ah, the miracle of compounding interest!

If it were me, I’d figure charity begins at home. At the rate we’re going, a person in her 20s or 30s can expect never to see a nickel from Social Security. If you have a Roth IRA, this will be an easy way to fund it. Simply have your bank send the extra income straight to the Roth. Second-best: if you’re not maxing out your 401(k) or 403(b), have your employer increase your contribution from your paycheck. Otherwise, invest it in a brokerage account, also by automatic deposit.

Eine Kleine Estate Planning

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Update: Bear in mind that much of what follows applies specifically in the state of Arizona. Each state has its own laws and regulations about the way property is held by more than one person, wills, and how heirs and appointed representatives can access, manage, and dispose of a deceased person’s property. You should check with a lawyer in your state to learn the best ways to pass down real estate and financial assets and how to make your wishes apply when you’re incapacitated.

So, when my lawyer and beloved tax preparer announced that she’s retiring, it crossed my mind that it’s been quite some time since my will was redone. It sets up a trust that expires when my son turns 21…and he’s now almost 35.

This morning I met with a Scottsdale lawyer and learned a number of interesting things. My vast financial holdings, of course, are so…uhm, less than infinite that they’re not very complicated. The main things I learned are these:

1. When a house is held in joint tenancy and one person dies, the other person gets title to the property without having to pay taxes or jump through probate hoops.

For reasons unknown to me, M’hijito and I are tenants-in-common on the downtown house. That entails a little more complication after the demise of one person. I don’t remember why we elected to do that…there may have been a reason. But since that house is going to have to be dealt with sooner than later, I expect the reason is moot.

2. When you own a house free and clear and there’s a single person you’d like to have inherit it, you should designate that person as the beneficiary for the house. Then he or she gets it without paying taxes on it and without hoop-jumping.

3. Same is true with bank accounts. If the heir is designated your beneficiary in the bank or credit union’s records, all the person needs is a death certificate to get access to the funds.

4. And you should also designate a beneficiary to your 401(k), 402(b), IRA, and mutual funds. Similarly, this avoids probate and gives the person immediate access to those funds that aren’t tax-deferred.

5. You now not only need a medical power of attorney to go with your living will, you need a mental health power of attorney. This allows your designee to get mental health care for you should you suffer dementia to the point where you need hospitalization.

6. Of course, you still need a durable power of attorney to permit your designee to pay your bills and otherwise deal with financial matters when you’re incapacitated.

7. If you haven’t updated your medical and durable powers of attorney recently, you need to do so ASAP. Recently the laws were changed so that some specific paragraphs need to be set out and initialed to make these instruments do what they’re intended to do.

8. When you owe on a mortgage, it’s a good idea to have a term life insurance policy that will provide the heir with enough to cover the cost of the mortgage. In M’hijito’s case, it’s de rigueur, since most of my funds are now in tax-deferred instruments, and he would lose about half the money to taxes if he had to withdraw enough from my IRAs to make payments. Besides, I want him to be able to keep the IRA funds until he reaches retirement age, since it’s very unlikely Social Security will be available for him.

She urged me, however, to talk with a real estate lawyer before taking out an insurance policy to cover the upside-down mortgage on the downtown house. Since I won’t be able to work much longer—certainly not at the pace I’m doing now—it  may be in our best interest to consider a strategic default now, not later.

{sigh} Really, I don’t want to have to default. But neither do I want my son to be left holding the bag, which is where he’s going to be after I die, unless the credit union agrees to drop the principal to something near what the house is really worth. Even if he collects enough insurance to pay off the mortgage, all that means is he has to throw $210,000 of insurance money down the toilet. Better that than that he should be shackled to unaffordable payments that are also flowing into the same black hole. But neither option is good: they both amount to financial self-immolation.

Wow. What a world! Ten years ago, if you’d said I would ever seriously think about walking away from a debt, I would have said you were nuts. Now it seems like it’s nuts not to seriously think about it. Who would ever have imagined such a thing would come to pass?

THIS Is a Disaster? More news from the insurance front

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The insurance adjuster came by to see what was what with the air conditioning unit. Nice guy: in from San Antonio to help the local Hartford office cope with the flood of claims erupting from the late hailstorm.

He said the air conditioner was pretty well bashed and thought the company would replace it. That wasn’t surprising. The west-facing side of the thing, a set of tinfoil louvers that have something to do with the way the coils operate, had taken quite a smushing, and, the unit’s maker having gone out of business, the part is no longer being made.

But I was surprised when he said the roof was damaged, and The Hartford probably will pay to replace that—a brand-new roof, we might add.

And then, even more amazingly, he announced that the various dings on the KoolDeck around the pool, many of which appeared about the time of the great hailstorm, also qualify for an underwritten repair job!

So for the cost of the $2,000 deductible, it looks like I’m about to get something like $10,000 to $15,000 worth of work done on the house.

A new heat pump is going to cost about $5,000 or $6,000, not counting the cost of installing it so it doesn’t overlap the skylight. The roof on this house, which I had put on a year or two after I moved in, cost something in excess of $5,000. And heaven only knows what it will cost to repair the KoolDeck…does anything happen for less than two grand?

Now that’s what I call a windfall!

Images:

Large Hailstones in Leipzig. Soon Chun Siong. Public Domain.

Hail clouds often exhibit a characteristic green coloration. National Oceanic and Atmospheric Administration/Department of Commerce. Public Domain.

It Never Rains but It…HAILS?

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Hailstones
Half-melted hailstones

{sigh} I give up worrying about this stuff. What’s the point? Trying to get abreast of the money thing is like trying to exceed the speed of light: it violates a law of physics.

The AC guy was here for the seasonal maintenance visit. He says the recent hailstorm trashed the coils on the aged Goettl HVAC unit on the roof. Goettl went out of the manufacturing business several years ago, and so the parts are no  longer available. Therefore, says he, the unit will have to be replaced.

Cost? About $7,890.

Because the storm is regarded as a “natural disaster,” insurers are covering the damage without raising people’s rates (although you can be sure everyone in the state will see their premiums go up next year as a result of this). All very  nice…except that by way of saving some cash on the already phenomenal homeowner’s insurance premiums, I raised my deductible to $2,000.

This statement the guy gave me shows the $1,500 tax credit the government supposedly will pony up and suggests the power company may or may not rebate $250. Presumably The Hartford will deduct those amounts from whatever they’ll pay toward this thing. So…that hailstorm is going to cost me a minimum of two grand.

And you know it’s not gunna stop there.

The AC guy thinks there’s no roof damage, but The Hartford is sending a claims adjuster over to examine not only the HVAC unit but also the roofing. The deductible, I’m told, will only apply once if I have to also make a claim for the roof.

Meanwhile, no one has looked at the downtown house, which also was hailed mightily upon and also has a high deductible.

So much for any silly ideas I had about catching up financially, having a little breathing space, being able to pay the underwater mortgage’s premiums with my teaching salary. Damn!

I’ll have to dig into the very savings that were going to be used to stock my bank account with enough each month to pay the day-to-day bills. The money from my next three months’ salary will have to go to make that up. And that will not leave enough to cover the cost of next year’s mortgage payments out of the remainder of what I will earn by teaching in 2011.

LOL! Is there any question why my belly hurts and my blood pressure is high?

hail1

The law of physics?

You can’t win.