Long Term Care Considerations

In a previous blog found HERE, we discussed  general  guidelines  of planning for long term care.  We will now discuss further considerations in this blog.

Cost of Care

The majority of individuals provide for long term care through insurance.  The cost for those policies has been changing (increasing premiums or reducing benefits) over the past few years.  For example:

1. Women frequently pay more because of their longer life expectancies and more expensive claim history.
2. Age at the time long-term care begins also affects policy costs:  the younger the applicant, the lower the policy premium. Determining when to purchase a policy requires a cost/benefit analysis.  The younger you are, the longer you pay premiums but at a lesser premium rate.

Eligibility Requirements

 

A study by the American Association of Long Term Care Insurance (see Kiplinger Retirement Report, Vol 21, number 3, March 2014) showed that insurance rejection rates of policy applicants) factored in both age and medical conditions.  Twelve percent of applicants below age 50 were rejected.  The rejection rate rose to 17% for those age 50-59; 25% for those age 60-69; and 44% for applicants in their seventies.

 

Gate Keepers

 

When evaluating long term care policies, one should carefully analyze the “gatekeepers.”  These are the provisions which must be met before the policy will pay benefits.  Analyzing their provisions for benefit payment s is critical and should be done for your individual circumstances.

 

How To Pay

 

Some recent changes have been made that may allow an applicant to pay long term care premiums more “efficiently.”  Premiums can be paid with tax-free rollovers from cash value life insurance policies or deferred annuities.

 

You can also use money tax free from a health savings account.  Since contributions to such accounts are limited (based on individual age), these plans will cover only a portion of the insurance policy cost.

 

Paragon Financial Advisors does not sell insurance or any products.  On the other hand, we do assist our clients in planning for the cost of long term care.  Please call us if you would like to schedule an appointment to discuss your circumstances.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financialplanning and investmentmanagement.

Long Term Care Expenses

As the American population ages, they face the prospect of long term care expenses.  Some families faced this problem with their own aged parents and are now trying to decide how to handle the possible need for themselves.  As people evaluate their options, they are facing several factors.
 
Cost of Care
 
According to the insurer Genworth, the median US rate for a private nursing home room in the US is approximately $84,000 per year.  In Texas, that figure is $65,000 and in the Bryan/College Station area, it is $62,963.
 
Assisted living facilities cost $41,400 (median US; Texas is $42,270; and Bryan/College Station is $44,400. The annual inflation rate in Texas has been approximately 5% for assisted living facilities.
 
Method of Provision
 
Several alternatives to fund long term care are available:
 

1. Insurance policies—Long term care insurance has been a method used by many to pay for care. However, this market is changing.  Some long-term care policies written in past years are not meeting actuarial assumptions; therefore the insurance caregivers are attempting to modify these contracts.   Newer polices are more expensive or have reduced benefits.  Policy premiums obviously vary depending on age and health of the policy applicant. In some cases, women are being charged more than men because their claims are longer (longer life expectancy) and more expensive.
2. Self Fund- -Individuals may plan to pay long term care costs from their assets.  In this case, the obvious questions arise:
• How long will the care be required?
• What will be the inflation rate on cost of care?
• What will be the rate of return on assets reserved for long term ca
3. “Coinsurance” Planning- Individuals may opt for reduced insurance benefits and plan to supplement those benefits with personal funds.  You have many options available for long term care insurance policies; determining the appropriate policy requires considerable evaluation to ensure the policy you purchase best meets your needs.

If you are self funding, we recommend that you reserve at least three years (inflation adjusted) needs per person based on the cost of care in your area.

Paragon Financial Advisors do not sell insurance (or any products).  However, we do assist our clients in the evaluation of planning options to provide for long term care expenses.  Please call us if you would like to schedule an appointment to evaluate your circumstances.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

2013-A Great Year in the Market

Last year (2013), the Dow Jones Industrial Average rose 32.4%. Sounds like a phenomenal increase, doesn’t it. A plus 32% increase is, indeed, an impressive increase. However, in this case, a little more analysis is warranted. Why did the market increase so much? The following data are from Standard & Poor’s and J.P. Morgan Asset Management Guide to the Markets-US (as of 12/31/2013).

Price/Earnings Multiple Expansion

 

Of the 32.4% increase, 18.4% (or 57% of the total increase) was due to an expansion in the price/earnings multiple. Investors buy stock in anticipation of a future earnings stream from the issuing company. The price to earnings ratio represents “how many times” the company’s earnings that investors are willing to pay for the stock. In 2013, that price/earnings multiple expanded from approximately 14 times to over 16 times. Quantitative Easing (the Fed’s buying of Treasuries and mortgage backed securities) figures prominently in this increase; the Fed’s buying drove interest rates so low that stock became a more viable investment (even with the increased risk).

 

Dividend Increase

 

Dividends accounted for 2.8% of the 32.4% gain (9% of the total increase).

 

Earnings

 

Corporate earnings accounted for 11.2% (or 34%) of the total 32.4% increase in 2013. What about those earnings? How were they obtained? In many cases, earnings were driven by expense reduction, not increased revenues. A company can do only a finite amount of expense reduction and still remain in business.

 

What Does This Mean?

 

Given the above, how likely are we to continue such growth? Ninety one percent of the gain was driven by factors that may not be in play going forward.  At Paragon Financial Advisors we believe that the equity markets offer significant long term benefits; however, the ride from “here to there” can be bumpy. Come visit with us about ways to try to manage the risk in reaching your long term financial goals.   Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

               

Investment Diversification

One of the basic axioms of investing is portfolio diversification. Simply put, an investor should not “put all eggs in one basket.” Prudent investing includes allocating your investment dollars among asset classes (stocks, bonds, cash, etc.) and different investment styles (large cap value, small cap growth, international, etc.). That allocation should be done in accordance with the investor’s goals and objectives; generally the higher the allocation to stocks, the greater risk in the portfolio. One of the factors that may not be considered is the investor’s job or employment. What do we mean?

First, one of the greatest destroyers of wealth is the necessity to liquidate investments in a down market to meet necessary living expenses. Therefore, anyone in a tenuous job situation should ensure an adequate cash/fixed income reserve to cover living expenses in the event of job loss. This reserve may mean a lower exposure to stocks. A corollary to this job situation is the entrepreneur or small business owner who may face significant new challenges in view of tax changes and health care requirements under the Affordable Health Care Act. Risk in the business environment might indicate more stable fixed income investments in the investment portfolio would be advisable.

Second, and a more likely scenario, is a concentration of investments and employment. Does an employee have most (all?) of their 401(k) investments in company stock? Some dangers exemplified here are wealth tied to the company (think Enron) or industry. Frequently investors will have investments associated with their profession/industry—perfectly logical given their understanding of the industry. However, such concentrations can pose special risks. A downturn in the industry can potentially affect both employment and ancillary investments. The downturn in the housing industry resulted in declines in home building employment and associated businesses that supplied the industry.

At Paragon Financial Advisors, we try to assist our clients in doing a through risk analysis. That risk analysis includes two components: 1) the investor’s risk tolerance, and 2) risk exposure to things of which the investor may not be aware such as the situations discussed above. Please give us a call if we can assist you.   Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Paragon Perspectives

Welcome to the spring installment of our quarterly newsletter.  For us, spring is a time for new growth as we emerge from the winter, spring cleaning, and TAXES…  We hope that you can use our newsletter to “spring clean” some of your financial planning topics with the included articles.

Each year around tax filing time we receive questions about the 1099.  Have you ever wondered why a corrected 1099 was sent or why it is taking so long to get your 1099 statement?  For help in understanding the how’s and why’s, our first article explores reporting requirements for custodians and different income inclusions that may be seen on the 1099 statement along with their tax treatment. 

The second article addresses strategies to maximize your IRA through timing of cash flow, maximizing potential assets to beneficiaries, tax efficiency in placement of assets and Roth conversions among others.  Which of these strategies would be advantageous for you?

With ever changing estate planning laws in the very recent history, we finish off with items from the estate plan that should be reviewed sooner rather than later.  Are there items from this list that you have been meaning to update?  There is no time better than the present!

If there are topics that you would like to see covered in more detail in our newsletter or blog please give us a call and thank you to our readers!  We are so thankful you have allowed us the opportunity to work with you.

Sincerely,

Sarah D. Buenger, CFP®


If you are not on the email list for Paragon Perspectives and would like to receive a copy of the newsletter please email info@paragon-adv.com.

Alternative Investments

There is considerable talk these days about “alternative investments.” The portfolios of large universities and pension plans frequently contain a significant percentage of their assets in such investments. What are alternative investments? Are they truly different investments from the traditional stocks, bonds, and cash; or, or they different tactical methods of managing those traditional asset classes? The answer: both!  Some portfolio managers specialize in types of securities that the “average” investor has not utilized (think “derivatives,” “futures,” “commodities,” etc.). Other portfolio managers specialize in using different tactics involving the traditional asset classes (think “long-short,” “quantitative,” “mergers and acquisitions,” etc.). Our purpose here is not to discuss the alternative universe in detail; it is instead to discuss whether such things might now be beneficial in the “average” investor’s portfolio.

Alternative investments/strategies have historically been used by large, sophisticated investors or institutions (pension plans, endowments, etc.) Why haven’t smaller investors been involved? The characteristics of this type of investing usually did not fit the goals/needs of the average investor. Alternative investments historically have been:

1. Less liquid-thus not allowing easy access to the investor’s money in case the need arose,
2. Less transparent in value-since many of the investments traded outside traditional markets making the determination of portfolio values more subjective,
3. More risky-since many of these assets could lose a significant (all) portion of the investment, and,
4. Long time frame-some investments (private equity) are designed to have life spans of 7-10 years.

Given these factors, why are we discussing such investing? Because some things have changed. Prior to the financial crisis, there were only a few dozen mutual funds that used such investments. Now there are over 400 such funds-funds which basically use hedge fund strategies but are done in a mutual fund wrapper. Such mutual funds are desirable for the smaller investor because they provide the ability to buy/sell small investment amounts on a daily basis. In addition, we face some “interesting times” in the investment markets. Interest rates are at historic lows and investors realize that increasing interest rates are going to result in the loss of bond investment principle. The stock market is at an all-time high—are we due for a significant correction with a resulting loss in stock investments?

Do alternative investments/strategies have a place in individual portfolios? Possibly-it depends on the goals/objectives of the individual. The biggest advantage is to diversify the portfolio. Alternative investments usually don’t provide the same level of return on the upside of the markets, but they also don’t lose as much in down markets. Therefore, using alternative investments can dampen the risk of the portfolio. We at Paragon Financial Advisors have investigated some alternative investment mutual funds and back-tested their use in integrated portfolios. Please call us and let’s discuss whether or not alternative investing has a place in your portfolio. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Long Term Care

Declining ability to take care of one’s self is a rising concern, especially as life expectancy increases. The prospect of spending time in a care facility is not something anyone desires; however, it will be a fact of life for some. As such, prudence demands that long term care provisions be addressed in any financial planning—especially for aging individuals. Let’s review some facts:

1. Currently, 70% individuals over the age of 65 will spend time in a long term care facility.
2. The average length of stay in a long term care facility is 2.44 years.
3. The national average cost of a semi-private room in an assisted living facility is about $250 a day, or $91,000 a year
4. Long term care costs have been rising at about 4% per year.

Given these statistics, the financial impact of long term care must be considered in retirement planning. In addition, family conditions must be considered. Will there be a support system (family close-by) that will allow individuals to live at home as the ability to take care of themselves declines? How do we plan for those contingencies? We discuss some of the options below.

 

Self-Insure

 

Individuals with significant assets have the ability to cover costs of long term care from their own income/assets. Level of benefits and quality of care simply becomes a cost/benefit decision. However, the majority of individuals are not in the position of doing this.

 

Long Term Care (LTC) Insurance

 

Long term care insurance is an option for many individuals; however, the LTC insurance industry is in a state of flux. There are several factors to consider here:

1. Insurance Company- As with any insurance product, the quality of the insuring company affects the likelihood of future ability to pay. It is interesting to note that two of the largest insurance companies (Genworth Financial and John Hancock) have filed for premium increases on their long term care product. Apparently the actual costs experienced have exceeded the actuarial assumptions used in pricing older long term care policies. NOTE: An obvious implication for policyholders of older policies is to carefully weigh any “opportunity” to switch from an older policy to a newer policy. It is quite likely that newer policies will not provide the same level of benefits at a comparable cost.
2. Insurance Policy- The actual insurance policy options vary significantly. Some of the questions to ask about policy coverage are:
• Gate keepers- Gate keepers are those conditions that must be met before the policy begins paying benefits. Usually these are expressed in the ability to perform specific functions (i.e. feeding, toileting, transfer of locations, etc.)
• Care location- Does the policy provide for benefits when the individual is at home with a caregiver, or do benefits become payable only when the individual is in a long term care facility?
• Benefit coverage- How long will care benefits be paid? Is there an escalation benefit to allow for increases in long term care coverage costs over time?
• Exclusion provisions- How long must the individual wait before benefits under the policy begin paying? Is a prior hospital stay required?

Long term care policy purchase decisions warrant significant consideration. Policy differences can be substantial and costs vary dramatically. A frequent question arises concerning when to purchase a policy. The older the individual, the more costly the policy; consequently, purchasing a policy at a younger age (in the 50s age group) might make more sense.

 

Medicaid

 

In some cases, long term care benefits are available for individuals who lack personal resources or long term care insurance. Such Medicaid payments are made to the long term care provider on behalf of the individual. Obviously there are conditions which must be met. There are two primary conditions:

1. Means test- The amount of monthly income for the individual cannot exceed a certian amount per month.
2. Asset test- The assets available to the individual in terms of savings, investments, etc. cannot exceed specified levels.

There are planning techniques available to address these two conditions; they are complex and warrant discussion on an individual case basis.

 

We at Paragon Financial Advisors do not sell insurance (or any other) products; however, we can help our clients evaluate long term care options available to them. There are alternative products (usually in the life insurance market) which are available but the cost/benefit in them warrants specific analysis. Please call us if you need assistance in planning for your long term care needs.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

 

 

United States. Department of Health & Human Services. Long –term Care Insurance Costs. N.p.: Administration on Aging, June. 2012. Web. 14 March 2014.