Long Term Healthcare Insurance

This past week I visited my mother in-law who is recovering from knee replacement surgery in a long term care facility. While she is doing well and will be home this week, some of the other residents of the facility aren't so lucky. Many will be confined to the facility for an extended period, and for some it is a permanent home.

According to research posted by the Agency for Healthcare Research and Quality, about 43% of people turning 65 will use a nursing home before they die, and about 20% of users will be confined for five or more years. With the average cost of nursing home care running $4,500 per month and the cost of in home care averaging $1,500 per month long-term care insurance will be needed by many to protect their assets and maintain the life-style of the healthy spouse.

Medicare coverage only begins after a hospital stay of at least three days, has substantial co-payments after the first 20 days, and can be used no more than 100 days. Medicare only covers homecare if the individual is homebound and needs therapy or skilled nursing care according to a physician's plan. The limitations of Medicare coverage can be understood by the fact that coverage is intended to help an individual recover from an illness or disability, and does not extend coverage to persons with chronic needs such as Alzheimer's.

Medicaid is the single largest payer of nursing home expenses. However to qualify for coverage families must spend down their assets to a level determined by their state of residence. These levels are purposely low. In South Carolina income cannot exceed $13,200 for a married couple, and resources for a married couple (excluding home) cannot exceed $66,480. The Deficit Reduction Act of 2005 made it harder to qualify for Medicaid nursing home benefits by increasing penalties on individuals who have transferred assets below market value in the past five years and making individuals with home equity greater than $500,000 ineligible for nursing home benefits.

With the potentially high cost of nursing home care many families should consider private long-term care insurance, to protect their spouse, their assets, and their heirs. While LTC insurance is not cheap, it is more affordable if purchased at a younger age, so even individuals in their 50s should consider this option. Premiums for LTC insurance can be deductible on your federal income tax return if as a part of other medical expenses they exceed the 7.5% of adjusted gross income floor as an itemized deduction. Some states, North Carolina for one, offer state tax incentives for LTC policies as well.

All LTC policies must meet the minimum requirements set by the state in which they are issued. To qualify as deductible at the federal level they must also meet some federal minimum requirements such as:

• May not limit or exclude coverage by type of illness - ie Alzheimer's
• Cannot increase premiums due to age
• Cannot cancel because of age or deterioration in health
• Must offer a nonforfeiture benefit which guarantees that if you cancel your policy or let it lapse, some portion of your benefits will be available to you for some period of time.
• Must offer an inflation protection benefit.

LTC insurance can be a wise choice, but like all other insurance, you hope you will never need it. It is protection you should consider. Below are some links to useful information, carefully consider if LTC insurance should be a part of your financial plan.

US Administration on Aging LTC insurance toolkit

States with tax incentive for LTC insurance

State contacts for Medicaid information

Consumer brochure from American council of Life Insurers

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Transfer on Death

Many times I have had clients ask about having a child named as a Joint Tennant with right of survivorship on an investment or banking account. The reasons the client cites is usually to provide liquidity for the estate, avoid probate, and have someone who can access funds should they not be able to write checks for a period of time. I will generally discourage this as it can cause problems with the final disposition of assets and leave the clients vulnerable to divorce or other legal proceedings.

An often overlooked tool is called Transfer on Death (TOD). Many states have adopted laws that enable individuals to transfer assets by contract rather than by will, which greatly simplifies final distributions for heirs. For a complete list of states that have adopted the Uniform TOD Securities Registration Act you can look here.

A TOD account allows you to specify beneficiaries for each account you may have that is registered in your name. You may specify a different percentage ownership for each beneficiary. Upon your death the assets in the TOD account will transfer to the named beneficiaries without the delay of probate, and separate from other items in your will. You can make changes to the beneficiaries and their percentage participation whenever you choose. There is usually no additional charge for having the TOD designation added to your account, but not all institutions may offer this type of account, so be sure to ask.

For banking accounts you should know about the Pay on Death designation which works in a similar fashion, and also avoids probate. Again, ask your banking institution if they offer this account.

If you need someone who can write checks and pay bills for you if you become incapacitated you should have an attorney draw up a Durable Power of Attorney. But that's the subect of a future post.

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Why?

Though there is never a really good answer to why the market moves up or down in a dramatic fashion, today there are several points that have converged to make an explanation serve at least in a lesson on how our markets work.

Just over a week ago hopes were high that a new Federal Reserve chairman might end the latest series of Fed Funds rate increases. The Fed's statement said future increases would be tied to econimic data. Today, the Consumer Price Index release showed prices rising .6% (a 7.2% annual rate) and "core" inflation, which excludes food and energy, rising .3% (a 3.6% annual rate). This news means the liklihood of more increases from the Fed just went up.

Inflation has remained relatively tame considering the huge increases in oil prices over the last year, but with petroleum used so pervasively in the manufacturing processes of so many products it is inevitable that those increased expenses must either be passed on to the consumer, creating inflation, or production must fall as profitability is eroded causing recession.

When the Federal Reserve raises interest rates it serves as a brake on economic growth, which lowers future earnings of corporations, which lowers the implied future value of individual companies and stocks. Rising rates also causes bond prices to fall, as the income stream from fixed income investments becomes less valuable on two fronts. First, if rates continue to rise, who would want to buy a bond today that may well pay less than bonds issued tomorrow. Secondly, the inflation data shows that the purchasing power of that fixed income investment may well be eroded by rising prices and the principal payment received when the bond matures may buy less groceries tomorrow.

Higher rates also strengthen the dollar. Foriegn investors could find our rates higher in relation to rates available in their home country, so they sell investments in their local currency and purchase US dollar denominated securities. This rise in foriegn investment can help moderate interest increases here, but is dangerous for American's who own foriegn securities.

Recently the dollar has been falling in relation to other currencies, which explains part of the reasons why foriegn investments have outperformed the US markets in the last few years. If you own foriegn securities you have sold dollars and purchased another currency. When the dollars value declines relative to that currency you can convert your investment into more dollars when you sell that currency than when you began. So in the last few years US investors in foriegn securities have enjoyed returns from those company's rising earnings and from the appreciation of the foriegn currency.

Finally, investor psychology, just two weeks ago CNBC (which is usually playing in the backgound in my office) started talking about the Dow reaching and surpassing it's all time high. Pundits were queried about when they thought it would occur. It was remenicent of the markets glory days when there was a party as we watched for the Dow to reach 9,000 then 10,000, then 11,000. What a contrarian signal! Understandably, many felt it was time to take some profits, and some came late, afraid they would miss the dance. The market has a way of inflicting the maximum amount of pain to the maximum number of people, and so it seems once again.

Bottom line oil, the Fed, inflation,and currencies all converged to create more uncertainty and fear this week. People generally dislike uncertainty and risk so they vote with their feet, leaving the dance in droves. When will it end? Maybe tomorrow, maybe next week, no one really knows. But it will end. Nick Murray put it well when he said the price of the permanant ups in the market are the temporary downs.

The South Carolina 529 College Savings Plan

The state of South Carolina's 529 College Savings Plan- FutureScholar - is managed by Columbia Management a division of BankAmerica. For South Carolina residents it offers one very clear advantage to any other 529 plan a South Carolina Resident may be considering - a deduction from your South Carolina state income taxes. Note- Not a deduction on your federal return.

Contributions to the FutureScholar program work much like a traditional IRA deduction on your South Carolina income taxes, contributions reduce your taxable income. With the realatively flat income tax rates in South Carolina this means most residents will save 7% for any contribution made to their FutureScholar accounts. For example, if you are a South Carolina resident and contribut $10,000 to a FutureScholar account for your child or grand child you will recognize savings of $700 when you file your state income tax return (this will, unfortunately, also reduce your deduction for state income taxes paid on your federal return if you itemize deductions).

Like all 529 college savings accounts the investments in your account will grow tax deferred and currently can be withdrawn tax free to pay qualified education expenses. While there is a sunset provision for tax free withdrawals in 2010, 529 plans have become so popular that Congress may well extend this tax break, and even if they do not, the portion of the withdrawals representing investment gain would be taxed at the students income tax rate.

529 plans also have some features that make them useful in developing an estate plan. You and a spouse can both contribute, allowing contributions of up to $12,000 each without triggering a gift tax return and you can make up to a five year contribution in one year or up to $120,000 for a married couple if they make no other gifts to the student during that period of time, and if you die before the five year period has passed a prorated portion of the gift will be includable in your estate. Many worry about moving large sums of cash from their personnal assets, however the contributor retains control of the assets and can even reclaim (withdraw) the assets themselves subject to taxes and a 10% penalty on the earnings portion of the withdrawal.

South Carolina residents can also establish a 529 plan directly, without a financial intermediary, and invest in the mutual funds offered in the plan with no sales charge (commision). The forms needed are available on the website, FutureScholar.com.

With college costs rising at about twice the reported CPI, an early start is essential. If you are a South Carolina resident you should consider this college savings option. For more information visit FutureScholar.com.

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