Recently in Insurance Category



Here's the leading edge of the problems and cost of persecuting insurance companies by requiring they insure things they did not agree to insure: Homeowners drop insurance after Katrina





Facing soaring premiums or feeling shortchanged by their insurers, a growing number of homeowners and businesses in Louisiana and Mississippi are "going bare," or dropping their coverage altogether, insurance agents and consumer advocates say. Many more are drastically reducing their coverage.





You didn't realize making insurers pay claims for things they didn't insure would raise rates? Insurance doesn't appear out of some hyperspatial vortex. Policy premiums have got to cover claims, in the aggregate. Nor are the insurance companies charities or even utilities. They are entitled to charge enough to make a profit. If not, tell me, who would willingly insure others? Who would invest in an insurance company? They don't get their money by printing it, you know.





Elderly homeowners -- particularly those on fixed incomes and those who have paid off their mortgages -- may be the most likely to go uninsured. Most homeowners don't have that choice, because mortgage companies require borrowers to have insurance. Those whose homes are paid off can drop their policies, unless they are getting government grants or loans that require one.





Really? How utterly predictable.





Many small business owners are feeling the sharpest pinch. The insurer of last resort for many Mississippi homeowners and businesses is the state's "wind pool," and its commercial rates have jumped 268 percent since Katrina.



Tom Simmons, who owns three office buildings in Gulfport, Miss., said he paid $3,070 in premiums for the rental properties before Katrina. Maintaining that level of coverage this year would cost more than $25,000, he said.





Seems the state of Mississippi doesn't get its money by printing it either. It has to charge premiums or tax citizens. Guess what? It's doing both!



All of this is bad, but it's only the first problem. Wait until there is a disaster and people lose everything without insurance because the insurance companies were forced to raise rates, or stopped issuing insurance entirely. It will happen; it's only a matter of when. And when it does happen, the ones responsible will be the people, politicians and judges who drove the insurance companies out by forcing them to pay billions for claims that weren't covered by policies, legal fees for defending their right to not pay claims for items not covered and for which they never charged a penny in premiums.



Now aren't you glad the state of Mississippi socked it to those insurance carriers and forced them to pay flood claims even though their policies didn't cover flood damage?



Too bad the people, politicians, and judges involved will never see the inside of a jail cell. We send business executives to prison for things that don't do a minute fraction of the harm done here.

Mississippi AG seeks legislation on State Farm





Mississippi Attorney General Jim Hood said Friday he will seek legislation aimed at blocking State Farm Insurance Cos. from refusing to write new homeowners and commercial policies in the hurricane-battered state.



He said the plan was modeled after actions taken by Florida and would require any company that writes automobile insurance to write homeowners policies as well.



"We're looking at a robber baron in the face that is trying to make an example of Mississippi," Hood said of State Farm.





So the Mississippi Attorney general wants to make it tougher and more expensive to buy auto insurance as well as homeowner's insurance?



State Farm is not a "robber baron." Nor is any other insurance company. At least here in California, they have to defend their rates to actuaries working for the state.



But when you make them pay for things which were explicitly not insured, don't you think they're entitled to second thoughts about whether to do business in that state? State Farm is not a charitable organization. They are entitled to charge enough to make a profit - otherwise there is no reason to be in business. If they decide they cannot do that within the environment in a given state, they are entitled to decide to leave. If they can't do it at all, the correct decision is to go out of business.



Add hefty punitive fines for not wanting to pay out claims for things which weren't insured, and it's a miracle that anyone is willing to issue homeowner's insurance in Mississippi. Make them write homeowner's insurance in order to write automobile insurance, and some insurers might do it - but others will cancel their policies of automobile insurance. Exactly how bad does the state of Mississippi want their insurance situation to get?



Now there is a solution. It's not a good solution, but it is a solution. Suppose the state of Mississippi decides to step up to the plate and insure its citizens? It certainly has the assets and the ability. Of course, then they might discover exactly how hostile the environment they have been fostering for insurers is.



The course they are on is on a collision course with this rather elegant piece of prose:





No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.





We throw one part out, the whole thing goes. So much for one of the biggest checks upon the advance of the statists. Not to mention that if they decide to take the property of the wealthy, politically powerful insurance agency, what is there to stop them from taking yours?

Punitive damages awarded in Katrina case





The Broussards sued State Farm for refusing to pay for any damage to their home, which Katrina reduced to a slab. The couple, who wanted State Farm to pay for the full insured value of their home plus $5 million in punitive damages, claimed that a tornado during the hurricane destroyed their home. State Farm blamed all the damage on Katrina's storm surge.





The article has a picture. That is not a house destroyed by wind, if you'll compare it to the pictures at this website, for instance. Notice how the components are still mostly there, even if they've been turned into matchsticks? here's another. more here. Still more. In every case, the components are still mostly there. In order to get the foundation scrubbed clean like that requires a massive surge of water. It may be possible with sufficiently strong, sufficiently sustained winds, but much more powerful storms than Katrina have failed to produce that sort of result. Katrina wasn't even a particularly powerful hurricane when it hit land - it's just that the levee failed.



As I have said before, Homeowner's Insurance does not cover flood damage. Furthermore:





State Farm and other insurers say their homeowner policies cover damage from wind but not from water, and that the policies exclude damage that could have been caused by a combination of both, even if hurricane-force winds preceded a storm's rising water.



Senter, however, ruled that State Farm couldn't prove that Katrina's storm surge was responsible for all of the damage to the Broussards' home. The judge also said the testimony failed to establish how much damage was caused by wind and how much resulted from storm surge.





This is a standard policy form, and should have been made clear to them at purchase, especially living in a flood zone. If it wasn't, the correct place to file a claim would be with the Errors and Omissions Insurance of the agent who sold them the policy. Of course, that's not "deep pockets", and that agent could be just as sympathetic a figure as the claimants, meaning the jury might not award anything.



The clause on "combined damage with excluded perils" is supposed to prevent wasting money paying lawyers on exactly this sort of charade. The homeowners hypothesize that there was some sort of tornado that did the initial damage, but the fact is that their home would have been destroyed by the storm surge in any case. They needed flood insurance and decided not to purchase it. Sure, the house might have been knocked over first by the wind, but the fact of the storm surge renders that all moot.



Now, I've got loads of sympathy for the folks who lost their homes, but that's no excuse to make insurers liable for things they did not agree to insure when the policy was purchased. Had they known they were insuring that, they would have charged more money for the policies. Had the victims bought a policy of flood insurance, the entire point would be moot.



If you're wondering why homeowner's insurance is so expensive, particularly in areas subject to this sort of concern, court cases like this are exactly why. If you're looking for reasons why insurers cancel policies, refuse coverage, leave the state, or even get out of the business entirely, this sort of case is it. I predict that in a few months, there will be articles all over the place about how hard it is to get homeowner's insurance in the Katrina hit areas, and people whose policy was not renewed, was canceled, or left without coverage when the company stops doing business in the state. Furthermore, no other company will want to step in, and prices of those few who are will be much higher. All of this hurts the people who actually need homeowner's insurance in the area. If you can't get homeowner's insurance on a property, lenders will not lend on it. This impacts property values in a major negative way. It's bad enough for many kinds of construction without this additional hit. If nobody will lend on it, you are limited to loaning the money yourself, or taking whatever cash the buyers have. I don't know what home values are like in the area, although I imagine they're not anywhere like California prices, but whatever they are, I'll bet this is going to cause at least a 50% hit.



I'm certain that this will be a popular decision. "Yeah! Sock it to those (expletive) (expletive) insurance companies!"



It is nonetheless wrong. It will cause major reductions in home values in the area, make homeowner's insurance more difficult to obtain and more costly if it is available, and leave many of those in the area unable to obtain, or unable to afford, homeowner's insurance.



Nor are the insurance companies in any way, shape, or form, the "bad guys" here. That was the Army Corps of Engineers, which failed to do their jobs in properly constructing the levee to withstand things that were within the design specifications. The levee was not over-topped; it crumbled. Nonetheless, from my studies of riparian and littoral rights about ten years ago, my guess is that there is no case against the Army Corps of Engineers or the federal government here.



I hope that the court of appeal has the presence of mind and intestinal fortitude to to overturn both the judge ordered damages and the jury ordered punitive damages. It's a hard case decision to make, but the correct one if they do not want to sabotage the entire system of casualty insurance we have developed in the United States, and along with it, the property values and peace of mind of everybody in the region.



Other information:

According to this place, Allstate already pulled out.

I have a confession to make: When I was doing financial planning, I didn't put enough emphasis on Disability Income Insurance. I was hardly alone in this; Disability Insurance is one of the two most undersold financial products there is. The other is Long Term Care Insurance, which product I at least researched properly and sold enough of (and the exact right product, also).



An article I found the other day brought Disability Insurance, or as it is technically known, Disability Income Insurance back to me. It's a good article and I really do suggest you read the whole thing, especially if you have a family or intend to. I have nothing but sympathy for the victims of this, and yet I would like to arm those reading with some information for preventing it from happening to them.



Disability Insurance isn't sexy; in fact it's damned hard to sell to the average person. Where I can sell Mutual Funds and Variable Annuities and Life Insurance all day long, it's because the basic understanding of the benefits or the needs is present in most people in society. Everybody understands that when you're making an investment, it is because you hope to Make Money. Everybody understands that Life Insurance is there for your family in case you are not. But this basic understanding is lacking for Disability Insurance. What they understand is that you Want To Sell Them An Insurance Policy. An Attacking Salesperson! Red Alert! Shields to maximum, Mr. Sulu! Fire Photon Torpedoes! Fire Phasers! Turn us around and head back to safe territory, Maximum Warp! Fire! Fire!



Disability Insurance is one of the red-headed step-children of the financial planning process. SEC and NASD guidelines don't mention it; it is only when a practitioner really digs into the nuts and bolts of financial planning that you find out how important it is. I did at least get to the point where I would discuss Disability Insurance with every one of my clients who was still working.



It's very easy to tell if you are in need of Disability Insurance. Ask yourself this question: If you couldn't work for the rest of your life, starting now, would you have enough money to live the lifestyle you want for as long as it lasts? If the answer is "Hell Yes!", you don't need it. Otherwise, you probably do.



Some basic facts about Disability Insurance: It is three times more common for a worker to go through a period of disability and need wage replacement than it is for them to die before age 65. Family finances do not tend to recover well from lack of disability insurance, whereas they do from lack of life insurance. In other words, the consequences of no Disbility Insurance on a family without it are worse and longer lived than the consequences of no Life Insurance on a family without that. Surveys of what happens to families five or ten years after the death of an uninsured breadwinner are much rosier than the equivalent ones five or ten years after the disability of an uninsured breadwinner, and the latter scenario is far more common.



The federal government does contribute something to disability insurance. But within the financial planning community, Social Security Disability is famous for three things: Denial, Difficulty, and Delay. It is far and away the most difficult Disability Income program to qualify for benefits under. A private insurer would not be permitted qualifications so strict by any state. As a percentage of from those who have some real disability, the federal government denies more claims than any private insurer. The paperwork (which I have never filled out, so I'm reporting secondhand) is supposedly awful, and it takes months for a decision, and it doesn't kick in and start paying benefits until at least five months have passed. It is my understanding that it doesn't pay back benefits if the application and approval process takes longer than five months, either.



You cannot buy, nor should you want, disability insurance which replaces your entire income. I think that there is an actual legal limit of 70% on a single policy in California. On the other hand, disability income is (typically) tax free and you're not commuting to work every day, both of which go a long way to stretch what you get. 50 to 65 percent is probably about what most folks should have.



There are two main types of disability policy: So-called "own occupation" and "any occupation," differentiated by what triggers the benefits. Both require medical certification, but the "own occupation" policy makes it easier to qualify for benefits. What you are buying here is a policy that will pay benefits when you can no longer do basically the same thing you are doing to earn your money now. It is more expensive than the "any occupation" policy, but then again, you are getting more coverage. When you get an "any occupation" policy, you will not qualify for benefits unless you are unable to perform the duties of any occupation for which you are suited by education and training. In other words, if you can still work at 7-11 or McDonalds or as a receptionist somewhere, no benefits.



Other major factors in how expensive the policy will be are: What you're doing now (an office worker gets cheaper rates than someone who works with dynamite), How much income you are looking to replace (it's less costly to replace 30% of your income than 60%), how long before benefits kick in (a policy where they kick in after one month is going to pay more benefits more often than one where they don't kick in for six months, and is therefore more expensive), and how long benefits last (a policy that pays benefits for two years is cheaper than one that pays until you're 65. Take note of this - especially if you're 63).



Disability Insurance is sold in two ways: as part of a group program, or individually. If you read the article, you may have figured out that this is a critical difference. As a general rule, Disability Insurance sold as part of a group plan through an employer is subject to ERISA, individual policies are not. This is a critical difference. If the insurance company wrongly denies your claims under a policy subject to ERISA, all you can get is the actual money you would have qualified for. No penalties, no interest, no legal fees, no court costs. I tend to look at buying insurance from a point of view of what happens if I need it. I want to make clear that most insurance companies are ethical. Nonetheless, if the most Colossal Insurance Company can lose by denying my claim is the actual money they would be on the hook for anyway, they might be going to look for any excuse to deny my claim, as they have nothing to lose and the prospective benefits to gain. If, as in most individual policies, you are the owner of a non-ERISA covered Disability Insurance policy, now there is a significant potential downside to Colossal Insurance denying your claim. If you sue and win, they're on the hook for not only the benefits they denied, but potentially also interest, penalties, and the legal costs of the fight, a much larger number of dollars. They are much more inclined to consider your claim from an unbiased viewpoint in this case.



It is to be noted that group coverage is cheaper, for precisely this reason. But why anyone would want to pay money to buy an insurance policy that's more likely to deny benefits when you need them is beyond my ability to comprehend.



Group Disability Insurance can have part of the premiums paid by an employer, group insurance can even be portable or convertible to individual policies, albeit with a higher premium. On the other hand, you can become uninsurable in the meantime, if for instance you contract any one of a number of diseases or conditions, some of which are terrible and some of which only set the stage for worse things to potentially happen. If you are uninsurable and lose you current policy through losing your employer, guess what? You literally cannot buy another policy. Individual policies offer more protection; once issued, they generally cannot be cancelled (there are exceptions!), and there are no worries with portability or conversion. If, on the other hand, you can only afford a group policy, better that than nothing. Like everything else in life, it is a set of trade-offs.



Caveat Emptor

Life Insurance is something that nearly every adult should have, and almost every adult who buys goes about purchasing it the wrong way, at the wrong time, for the wrong reasons, and buys the wrong policy.



Is that an indictment of the system or what?



Let's start with what life insurance is. Life insurance is a bet that you make with an insurance company that you will or will not live. The idea is that if you die, while nothing can replace you, your family will get money to replace your salary. If you die while the policy is in force, the insurance company loses the bet. If you live for the full time the policy is in effect, congratulations for being alive, but you lost the bet. If you die after the policy stops, not only did you die, but you spent all that money and your family got nothing. Now it is critically important to understanding life insurance to understand that nobody gets out of life alive. Unfortunately, everybody has to die sometime. As of this writing, the chances of you missing out on this one final life experience that practically everyone wants to avoid forever are zero. So you might as well make plans that include anybody you leave behind benefitting from it, because (I have it on excellent authority) dying stinks. (Yes, I'd use a stronger word except that I try to keep the language here family safe as much as possible)



There are two major types of life insurance, term and cash-value, and the latter type has several subtypes which I will explain in due course. Term can be thought of as "renting" life insurance, while cash value can be thought of as "buying" it. Like owning versus renting a home, there are arguments on both sides of this story as to which is better. I will attempt to cover the pros and cons of all of the major camps, and there are people for whom each makes sense, but like buying a home, if you choose the right policy, cash value life insurance is a losing proposition in the short term while becoming fantastically remunerative after a few years. The vast majority of all people would do better to consider cash value, particularly when you crank the actual numbers and consider the alternatives.



Another thing that needs to be crystal clear is that life insurance is the second most tax advantaged investment you can make, right after buying a home. In fact, it's better in many ways although it requires more planning. If you plan properly, and die while it is in force, the death benefit comes to your heirs tax free. Furthermore, all investments in the cash value of a life insurance policy earn money tax deferred, and any money withdrawn from the cash value of a life insurance policy gets "first in, first out" treatment - something no other investment can say. There is no legal dollar limit on this tax treatment for life insurance. There are no income limits for this tax treatment of life insurance. Literally anyone who can qualify for a policy can receive these tax benefits, and so long as you comply with federal guidelines to retain this treatment, there are no dollar limits to the amount you can invest. Even if you violate those limits, the only consequence is that the tax treatment on actual withdrawals flips to "Last in, first out," and since there is no limit on the number of policies you can have, either, there aren't many reasons to violate those guidelines.



You can also take loans against the cash value of any life insurance policies you may have, and loans are not taxable. Let's say that again. Loans are not taxable. Remember that. It's going to be important later. When put together with the other parts of the tax advantaged nature of life insurance, it's an awesomely powerful tool if used correctly.



Now I'm going to violate one of my cardinal rules for this site: no graphics. The reason is that this picture is too darned important to the essay. It's graphic of some features of a life insurance policy. The vertical axis is money - dollars - and the horizontal axis is time. And the reason I'm putting it up is to illustrate a generic life insurance policy. It doesn't look like much at first, but here it is:



Lifeillustration.xls


Now I'm going to explain it. There are three areas: red, yellow, and gray. Grey is just background - dollars above policy value. Like the altitude above an airplane, it's useless, unless you climb into it later, as some policies can, painting ever larger numbers first red, then yellow. Red, or actually, the top of the red line, is the total dollars your family (or other heirs) will receive when (not if) you shuffle off the mortal coil. Yellow is the cash value of the dollars in your policy. The difference between the two is the amount of insurance you're actually paying your hard earned money for at any given time. Get it? Got it? Good.



Now it is necessary to note and remember that the cost of the red dollars - the difference between the top of the red curve and the top of the yellow curve - get more expensive with time. Sometime in your sixties, dollars of actual life insurance start getting expensive. Mind you, they are always getting costlier from the first day you buy any policy of life insurance out there. But in your sixties, this process accelerates rapidly, and this has all kinds of implications later in the essay as well as later in life. And now that we've covered the basics, it's time to cover policy types.



Term life insurance, as I said, is like renting your life insurance. It's like the red line, without the yellow curve in there at all. For the entire time your policy is in effect,you are going to be buying the full amount of insurance dollars every time you make a payment. This means that in an unaltered term policy, your premium goes up every year; sharply so once you've hit your sixties. If you are initially purchasing at a young age, most companies will give you the option of paying more starting right now, so that for a certain period your premiums will not increase. If you buy young enough, most companies have at least a 30 year fixed term product. It's very difficult to find a company that will sell you a policy allowing this fixed period to go later than your sixty-fifth year, however. In all cases, once the fixed term is over, it converts to yearly renewable term, where you can expect the yearly bill to go higher every year. What happens when people start getting these suddenly much larger bills? They cancel. This is what the insurance companies want. Fewer than three percent of all term policies ever pay a death benefit because they are canceled. When you cancel, you're letting the insurance company off the hook on your bet, and all that wonderful money you spent on their pretty policy bought you some peace of mind for a while, but now it's gone, and you have nothing. Term is very expensive insurance, when you talk about real cost to the consumer in aggregate, and very profitable to the insurance companies. It doesn't require writing a check for nearly the number of dollars now, but it doesn't provide nearly the benefits either. Remember that stuff I told you about how tax-advantaged life insurance is? Term makes almost no use of this fact. It's kind of like buying a Ferrari body, and putting a Yugo engine into it.



Now we're going to move into cash value life insurance in all its variants. They're called cash value because they have one. Now we're putting the yellow curve back into the picture above. What these policies are calculated to do is endow at a certain age. This used to be 100 for all policies, now the companies are trending more towards 120. This is a good thing because with more people living to 100, they are getting checks when they really want life insurance. Policies endow when the yellow curve rises to meet the red line, off to the right of the rest of the picture above. If it's your policy, you get a check for the amount of the red line in exchange for your policy of life insurance. This ends the tax benefits, and can have adverse effects upon your tax liability, too. So most folks want to get their policy value as a death benefit to their heirs, not as a check while they're still alive. Confused? Follow me.



The first major variant of cash value is whole life. This is what that default picture above is all about, because that's pretty much what a policy of whole life insurance looks like. The difference in dollars between the cost of the term insurance and the cost of the policy is invested with the general account of the company. It earns about eight percent or so, and they pay you about three, which is pathetic. Nonetheless, that three percent is tax deferred, tax free, First In First Out, so it's probably close to an effective 5 percent for most folks. Like all cash value life insurance, there are provisions for tax free withdrawals and zero percent effective rate loans and all of that. Also like all cash value insurance, to an ever increasing degree over the life of the policy, this moves from paying the cost of the insurance from the check you are writing, which is after tax dollars, to money already within the policy, which is before tax dollars. Finally, like all cash value life insurance, over the life of the policy you are buying progressively smaller amounts of actual life insurance (the difference between the red curve and the yellow one), which means that your actual cost of insurance is less, particularly later on when the cost of that actual insurance goes up. Because of this, cash value policies are likely to stay in effect your whole life and not get canceled. Nonetheless, this is a putrid return and makes the insurance company even more money than term insurance. Many people would have you believe that whole life is the only variety of cash value life insurance out there. It isn't. But you would not believe the number of straw man arguments against cash value life insurance I have read in the financial press that did their best to read as if that claim were true. For someone who is supposed to make their living informing consumers about the financial industry, this is either fundamentally ignorant, or fundamentally dishonest.



Probably about fifty years ago, some bright young person working at an insurance company realized that the need for life insurance may not be constant throughout life, and so came the first major addition to the choice of "whole life or term." This was Universal Life. The concept was simple. You could decrease the amount of insurance in set units, or increase it in set units, up to a certain value, and the initial underwriting would still cover it. This was really cool at the time, because it meant that you didn't have to apply again for life insurance and go through the underwriting and health insurance exam and health insurance questions all over again, and possibly get "rated" for some new health problem that wasn't there last time, or possibly even turned down. Unfortunately, in Universal Life Insurance, you're still investing your money in the general account of the life insurance company, and they are still only paying you about four percent. Once again this has all of the neat tax advantages, but even an effective six percent return is nothing to write home about. To most folks, it's almost embarrassing. Nonetheless, Universal Life Insurance has broad applicability to small dollar value policies, mostly for older folks. The return is guaranteed, the company assumes the investment risk, and the policyholder gets peace of mind for the rest of their life, knowing that whatever expenses they had in mind are covered.



Not too long after the enterprising young person had the idea for Universal Life, another one had the idea for Variable Life. This is a truly different product, but it really didn't go anywhere until the late seventies, when inflation was rampant and things were generally going south in a hand-basket until Ronald Reagan et al brought them back under control. The concept is simple: Instead of investing in the general account of the company, you have the opportunity to invest in a certain number of sub-accounts that act a lot like mutual funds. These sub-accounts are basically comparable to the ones in variable annuities, having roughly the same advantages and disadvantages except that most people do not have qualified money in life insurance because the interplay of withdrawal requirements with funding requirements gets nasty complex.



Now in those articles that do admit the existence of variable life, they most commonly write against it because "They have this expense and that expense and the other expense," ad nauseum, with the strong implication, never proven, that they are somehow more expensive than other policies. The fact is that these are expenses associated with all life insurance. The only additional expense that the variable life insurance policy has that the term life insurance policy (or any other) does not is the expense of running the mutual fund-like sub-accounts, which actually average a bit lower than the equivalent mutual fund upon which these are usually based. Every other expense is part of every life insurance policy - indeed, most of them are part of every insurance contract of any sort. Administration, Insurance, etcetera. They buy the stuff that makes the cash value life insurance policy an interesting and potentially worthwhile investment - the death benefit, that wonderful tax treatment, among other things. But because you're dealing with something regulated by the SEC, the agent and the company have to tell you about them in variable annuities, whereas with every other insurance policy, they are a "black box" into which money goes and insurance comes out.



Variable Life Insurance, like Variable Annuities, requires not only a life insurance license, but also an NASD Series 6 or Series 7 license to sell. This means that it is generally sold through financial planners, not "pure" insurance agents. These folks are competition for the financial "do it yourself" press, and if you are working with a professional you trust, you're not nearly as likely to go back to the bookstore or magazine stand for generic drivel with no fiduciary responsibility towards you. Admittedly, some advisors abuse it - and when they are caught, they are prosecuted and the insurance they are required to carry pays. The generic advice in books, newspapers, magazines and websites never has this responsibility in the first place. They are specifically exempted by the Investment Company Act of 1940. But Variable Life Insurance has all of the advantages possessed by all cash value policies that I listed above, and it also has the advantage that you are getting market returns, which the tax advantages leverage significantly in your favor.



Finally, in the early 1970s, another bright young person had the idea of combining the features of Variable Life Insurance with Universal Life Insurance. This product, called Variable Universal Life Insurance, is about the most flexible, most versatile financial investment there is, because you can do so much with it, and it facilitates changes in plans like nothing else. You get market rates of return via the mutual fund-like sub-accounts, effectively augmented several points above market rates because of favorable tax treatment. You can withdraw your principal tax free, and take loans at zero effective interest rate against the earnings after that. Remember, loans are not taxable. You can increase or decrease the dollar amount of insurance within limits. Actually, variable universal has the unique ability that both the red and the yellow areas in the graph above usually start climbing into the gray area somewhere about twenty-five to thirty years in, getting to the point where the cash value of the policy can be multiple times original issue value. All of this amounts to things like you can start saving for your children's college as soon as you decide you'd like to have some someday. You can save for literally anything, because of all of the options you have for putting money in and taking it out. Matter of fact, you get the biggest advantage from overfunding the policy, putting more money in than you have to, although there are federal limits on how much and how fast you can overfund and retain the most important tax advantage, that of "First In First Out" tax treatment. (It is to be noted that there are "single payment" policies that intentionally throw this benefit out the window, and are still an excellent investment in a lot of circumstances.)



There is one danger to variable life, and to a lesser extent variable universal life. It is possible that through inopportune timing of market declines and/or excessive withdrawals that there will not be enough money in the policy to keep it in force. This is, to use Orwell speak, double plus ungood. Let's say you took invested some number of dollars as principal, and later withdrew them. Then you took loans of $30,000 per year every year for ten years. But then your investments went through a market decline, and you kept taking the full $30,000 per year for another ten years. If you die with the death benefit still in force, it's all just a loan against the death benefit and therefore nontaxable because the death benefit is nontaxable. But if the policy self-destructs, now you have to pay the taxes on that $600,000 of income I've just described. The IRS is utterly unimpressed by "blood from a turnip" type arguments. They can usually figure a way to get their money a way that you won't be happy with.



The oldest of these policies are only thirty-odd years old, and there were a lot of improvements made in the early years, so there's no experience, as yet, with the first generation they were really designed for as lifelong financial instruments. The first people who bought them in their twenties are only just now starting to turn sixty, approaching retirement age. Going back via market performance in the last century or so, there does not appear to be major danger of self destruction on policies given time to mature and prudently advised, but there have been people who withdrew more than the market could really support, who had major adverse experiences as a result. Especially with the variable universal policy, there are alternatives to prevent losing the policy completely, but it's still not something you want to have happen. I will point out, however, that the same danger exists for investors of any stripe, it's just that the sword here is especially terrible. This is one of the good reasons why these policy require dual licensing to sell - to insure that there's someone involved who should understand the structural limitations of the policy, and can help you avoid the lurking gotcha! by keeping your withdrawals and loans to a sustainable level.



One strategy many people, particularly in the self help financial press, advise is "buy term insurance and invest the difference." This isn't a bad strategy, especially if you plan on dying while the fixed term period is still in effect. But most people in their twenties and thirties are going to live well past their sixty-fifth birthday, and the fact is that most people who are young today are going to work well past it, as well. The reason why insurance premiums start to climb then is largely because that's when folks start dying off in larger numbers. Investing in life insurance is something best begun while you are young, with few health problems and lots of time. Whatever the strategy you begin while you're young, you're typically stuck with the decision, even if you do figure out what's wrong with it around the time you're fifty. At that age, your effective compounding is marginal in most cases, even if you're planning to delay retirement a few years. But I encourage everyone with a potential life insurance need to look at projections of not what's likely to happen for merely the next thirty years, but for the entire rest of your life. Buying variable, or better yet, variable universal, especially while you're young is a better way to end up with more usable money later on in life for most people. And that's the whole purpose of retirement planning, right?



Caveat Emptor.

Every few days, I get junk mail wanting me to buy Mortgage Life and/or Disability Insurance.



Buy regular policies instead.



These are not, in general, good policies of insurance, because the benefits go straight to someone else.



Mortgage Life Insurance is straightforward enough. It's decreasing term insurance - the insurance company's favorite kind of policy. As it goes along, the payments stay the same, but the coverage decreases as you pay off your mortgage. The problem is that until you get into your sixties the cost of insurance per thousand dollars should not increase swiftly enough to counterbalance the fact that you are theoretically paying your mortgage down. Not to mention the fact that level term policies exist for about the same amount of money, and that term is a poor form of life insurance in the first place.



The idea is that if you croak, the mortgage gets paid off. As in the money goes straight to the lender. Well, even assuming that you don't refinance, this is a bad deal for your family. Let's look at the situation, and the time value of money. I keep using $270,000 as a mortgage amount, so lets stick with that. Assume you have a 7 percent thirty year fixed rate. Or you can invest the money and keep paying the mortgage out of the proceeds. You pay the loan off, and your family have nothing, while still needing to come up with property taxes and homeowner's insurance and maintenance money. But let's say you put it into a variable annuity that earns a net of 9% (the market does 10-13 over time, depending upon who you ask). Your monthly payment is $1796.32, and adding reasonable amounts for property taxes and homeowner's insurance, it goes to about $2170 per month. You end up with 363 months of payments - 3 months more than you could possibly need. On a forty year schedule of payments ($2050 monthly PITI payment), the money would actually last 590 months - an even better situation. So instead of having nothing and needing to come up with money every month, your family's housing needs are completely taken care of, with a bit left over, and that's on a somewhat pessimistic projection. Even if the fact that the market isn't even over time messes them up, at a minimum they've got many years of making the full house payment before they have to think about selling. Additionally, they have the option of using some of the money for other things like say, college for the kids so that they can support the surviving spouse. Or college for the spouse, so that they can support themselves. One hopes that you get the idea. Furthermore, if you have a regular policy of life insurance, your family can always choose to use it to pay off the mortgage. With mortgage insurance, you do not have that option. I can tell stories of people who had it, and the family lost the house anyway because they didn't have the cash flow for the other expenses of owning a home.



Mortgage Disability Insurance is the same concept, applying to disability insurance instead of life insurance. If you are disabled, it makes your payment after some elimination period (the elimination period is the time after you qualify but before you receive benefits - short elimination periods are expensive!).



This has two problems, same as mortgage life insurance. First off, that's a horrible way to allocate tax-free money - straight to anyone else. The second problem, unlike mortgage life insurance, is that it's not enough money. Disability insurance should replace fifty to sixty five percent of your income, depending upon your situation. Depending upon the lender and the program, maximum qualifying debt-to-income ratio is 36 to 50. This is a total of all debts, including mortgage, property taxes, insurance, and any other monthly obligations like credit cards, car payments, etcetera. All mortgage disability pays is your actual mortgage loan payment, and it shouldn't take a mathematical whiz to see that this is clearly going to be insufficient unto the task. You're going to need another policy anyway, so why not just buy one good one and save yourself a second set of administrative costs?



Caveat Emptor.

I've run two prior articles this week on the theme of Long Term Care, one on Long Term Care Issues, and one on Non-Tax-Qualified versus Tax-Qualified, and Partnership Insurance Policies. Now, I'm getting down to nuts and bolts of what you need to know while shopping for a policy.



The two most important characteristics are the total benefits and the daily benefits. It may be helpful for many people to think of total benefits as a lake, where instead of water, it contains the total amount that is available to you, and the daily benefits as the size of the pipe that brings those benefits to you when you need them. It doesn't do you much good to have a huge lake and a too-small pipe that can't put out the fire, which is the daily bills you have to pay for care.



The way policies are generally sold is that they are for X number of years, with a daily benefit limit of $Y. The product of these numbers (and 360 days per year) is the initial total benefits limit. A one year policy with a $150 per day limit is good for $54,000 of total coverage. A three year policy with a limit of $300 per day is worth $324,000 of total benefits. A five year policy with a limit of $180 per day has that exact same aggregate coverage limit of $324,000. There are lifetime policies available; these have no aggregate limit but are limited to whatever the daily benefit is.



Note that a three year $300 per day policy is superior to a five year $180 per day policy in that although they both have the same "lake" of benefits, the former has a larger "pipe" (or "stream", if you'd prefer) to get them to you. Therefore, the policy with the large pipe will be more expensive. It is an often misunderstood part of policies that there is no time limit for benefits. You can use less if you like, but you can't use it faster than the pipe brings it to you. If it takes you three, five, seven, or seventeen years to exhaust the "lake" that's how long it takes. I've known agents who did not understand this clearly. If you only use $60 per day, either of these policies will last fifteen years. But if you use $250 per day, the former will pay off the full amount of your daily benefit until exhausted (about 3.6 years), whereas if you have the latter, you're going to be out of pocket $70 per day from day one. This can cause you to exhaust the resources you were trying to protect well before the policy is done paying benefits. The "time duration stated" - the Y years part - is the shortest amount of time in which it is possible to exhaust your lake of benefits. It has nothing to do with how long the benefits can last, which is always "until exhaustion." Given the facts of the situation, it is better to have a big "pipe" than a long duration, and in the example given, the 3 year $300 per day policy will be the more expensive. It's also likely to be worth the difference. For Partnership policies, the state of California currently has a minimum daily benefit limit of $130.



It is to be noted that for the Partnership policies, at least in California, the limit is actually a monthly limit of thirty times the daily limit. Many other policies follow this as well. This means if you get something that costs extra once or twice a week, like physical therapy, as long as your entire monthly care does not exceed thirty times the daily benefit, you won't be out of pocket for those not-so-little extras.



Policies are sold as home care only, facility care only, or comprehensive, so called because it covers care where ever you may need it. Actually, here is a Glossary of terms you may want to refer to. Partnership is only sold in facility care only and comprehensive policies. My advice to to buy a comprehensive policy, because you never know what your situation will be when you actually need to use benefits. The difference in cost is typically small.



One of the really sneaky ways some insurance companies can stick you with a gotcha! is to require you to continue paying premiums while you are receiving care. Since you're likely in a situation of incompetence, or just plain unable, this is a good way to get out of paying benefits. ("But your honor, Ms. Jones did not continue to pay her premiums as is clearly required by the policy! We are clearly within our rights to cancel"). Insist upon a policy with waiver of premium upon commencement of benefits. This means you don't have to continue paying your premiums when you may not be mentally capable, or able to get new checks, or any of dozens of other possible hitches. In California, waiver of premium is required for all Partnership policies.



Policy Lapse Protection is similar, having to do with reinstating your policy if you neglect to pay the premium before you are diagnosed as needing care and it lapses for that reason, but good policy lapse protection is actually fairly widespread. You're going to have to pay the back premiums, "bring your payments current," and there may be an administrative or interest charge, but better that than needing an entirely new policy. This is not "don't make your payments for ten years and drop a lump sum on them when your doctor diagnoses you with Alzheimer's." About six months to maybe a year in some cases, is about the limit of lapse protection.



Elimination period is the time after you start receiveing care, before your policy starts paying benefits. It's analogous to the "deductible" on your automobile insurance. Short elimination periods are more expensive, longer ones less so. I would not consider an elimination period of less than ninety days, or more than six months. Even at $200 per day, the person who is an appropriate buyer of long term care insurance should be able to fund three to six months or so. Lengthening the Elimination period makes the policy cheaper. Indeed, a three year policy with a six month elimination period may be cheaper that an equaivalent two year policy with a three month elimination period. The average stay in long term care is something approximating two years, but in a large number of cases it is five years or more. If you've got assets to protect, you can likely afford three to six months, but fewer people can afford years of coverage. If you're lucky enough to live in one of the states with an active Partnership for Long Term Care, the asset protection function means you continue to receive benefits even after the policy is exhausted. Even if you don't live in one of those states, the policy can get you through the "lookback period" where Medicaid will go back and attach any assets you transferred elsewhere. I know I've said Medicaid coverage is awful, but if you still have money, or people willing to spend money on your behalf, you can make it a lot more tolerable than it is for someone who is truly destiture.



Pre-existing conditions are not something to unduly worry about here, in my experience. If you have a pre-existing condition, the insurer is only allowed to exclude paying to treat it for six months in California, and I believe (but I am not certain) that this is an NAIC rule, which would mean it likely applies nationwide. This can mean that you will be flat out rejected until/unless you recover, but this is in accordance with the principles of insurance. You buy insurance when it's a risk, not a certainty. You don't wait to buy health insurance until the heart attack starts, you don't wait until you've got terminal cancer to buy a life insurance policy, and you don't wait until the doctor diagnoses you with Alzheimer's to buy a policy of Long Term Care Insurance. You would be quite properly rejected for coverage in all three cases.



Other bells and whistles you should be interested in include "step down" options for if the premium increases beyond your ability to pay. This gives you the ability to change to a less expensive policy without new underwriting, rather than simply losing coverage, if your circumstances change..



One protection I strongly advise everyone to get is inflation protection. If you buy a $200 per day policy, that may be adequate now. It may not be adequate when you need to use benefits. All California Partnership policies require compound interest inflation coverage if you are less than seventy at time of purchase. This is a good thing. If you are over seventy when you first buy, simple interest inflation protection is permitted, but I wouldn't advise it unless you are going to use benefits within the next couple of years or not at all.



Inflation protection applies to both daily benefit and total available benefits. So if you start with a 3 year, $300 per day policy, after one year of 5 percent inflation protection, it goes to a $315 per day policy with a total benefit pool of $340,200. Let's say it's twenty years down the line, and your "total pool" of dollars has gone to $871,000, but now you start using them. Let's say you use $21,000 of benefits that year, leaving $850,000. That $850,000 pool becomes $892,500 the next year, demonstrating that even after you start using benefits, it is still possible for your "available lake" to increase if you have inflation protection. Now the last I was aware, actual cost rises were running about 7% per year, so 5% isn't really long-term adequate, but it's what's available. If you're relatively young, you probably want to overbuy by some factor to compensate for this.



One rider that you probably do not want is return of premium. Return of premium means if you die without using benefits, your estate gets the money you paid in premiums back. This is very attractive to laypersons, and it makes a nice addition to the salesperson's commission. Unfortunately, it can also double - or more - your cost of coverage, and the older you are, the larger the multiplier will be. This can cause people who can and should buy a policy to buy a smaller policy benefit than they really need, smaller than they should have. Even though they are spending the same amount of money on the premium, their coverage is far less. Furthermore, the return of premium is usually with only a very small interest, or none at all. It takes comparatively little time before you would have been better off investing the difference.



Now, who should and should not buy a policy of long term care insurance. There are no hard and fast rules, but if you have no assets to protect or the policy premiums are a real hardship, then you should not buy a policy. The state of California defines this as assets between $50,000 and $250,000, but those standards are the same as when I took my training, and would suspect that a truer picture would be those with liquid assets under $75,000 should not bother. On the other hand, California has some very smart millionaires with top of the line advisers buying Partnership policies because they are never certain their circumstances will not change. Income wise, the state of California has a .pdf document that they referred me to. Furthermore, someone who could afford long term care indefinitely would have no reason to purchase an insurance policy - the insurance company doesn't work for free. In California Partnership Policies, at least, you do have an additional protection in that the company is required to advise you if you are not within the income and asset guidelines for policy purchase, and offer a full refund.



The best time of life to buy long term care is as early as practical. If you buy at 40, your premiums will always be less - a lot less - than someone who buys the same policy at 50, who in turn will save a lot over someone who buys at 60, and so on. Typically, if you wait until after you are sixty, you will have to pay far more in yearly premiums than you saved by waiting - even considering the time value of money. I always called this the "penalty box", and it makes sense for the same reason life insurance is cheaper the younger you buy it. This is not to say it doesn't make sense to buy after age 60; what I'm saying is that the statistically average person will save a lot of money over the course of their life expectancy by buying earlier. I've had people eighty years old ask me for quotes, and are surprised when minimal coverage is thousands of dollars per year. This is because, first, if you're buying at age 80, you are overall more likey to use benefits, and for a longer time, and second, becuase it's likely to be sooner rather than later, leaving less time for the insurance company to invest your premium dollars and earn a return.



Caveat Emptor

Originally here

(Part 2 of a three part Series on Long Term Care)



I wrote in the previous column a lot about long term care issues. This column deals with the insurance policies available for long term care. There are two major types, with one subtype available for people who are lucky enough to live in one of four states. There is non-tax-qualified (NTQ), tax qualified (TQ), and for those lucky enough to live in California, Connecticut, New York, and Indiana, there is a superior brand of tax-qualified, Partnership. In many states, there are indemnity policies available for those who don't like paperwork, but the gotcha is that they are all NTQ, non-tax-qualified.



Let me explain what's going on here.



In all of the legal policies, there are listed Activities of Daily Living, or ADLs. For non-tax qualified, there are seven, and for tax-qualified, there are six. It is the inability to perform a certain number of these activities without assistance that triggers eligibility for benefits. For tax-qualified policies, these are Bathing, Eating, Transferring, Continence, Toileting, and Dressing. Non-tax qualified adds the ADL of Ambulating, for a total of seven possible qualifiers. Note that the preparation of food is not a qualifying factor, hence Meals on Wheels and similar programs, as well as the traditional family support structures. "Assistance" ranges the gamut from just having somebody there in case something happens ("Standby assistance") to having to have someone do it completely for you.



Bathing is performing the functions to clean yourself.

Eating is feeding yourself food you are given.

Transferring is being able to "transfer" from one support mechanism to another - for example, bed to wheelchair or wheelchair to toilet.

Continence is what you'd think.

Toileting is ability to perform the tasks necessary to eliminate waste material in a normal fashion.

Dressing is the ability to get clothing on and off as required.

Ambulating is moving yourself under your own power on your own feet from place to place.



Of these ADLs, bathing is almost always among the first to go and hence a trigger for the policy. Eating is probably the least prevalent trigger for benefits, followed by dressing, but there are no solid study figures I can find. Ambulating always goes before or with Transferring. Within broad parameters, each individual insurance company can write their own definitions of each of these. For instance, a number of companies used to define "Transferring" more or less the same as most people think of as walking, thus making it easier to qualify for benefits, and hence, a better policy than competing policies. Of course, they will be priced accordingly, as well, but there is a lot of variance on pricing within the industry. Of the policies I used to sell, the one with the broadest coverage was usually the second-cheapest in the competitive quotes. So shop around.



Now the point needs to be made that just because you qualify for benefits now doesn't mean you have to start taking benefits now. Sometimes people are in situations where family can take care of them right now, but may not be able to do so indefinitely. Taking care of someone in this manner is brutally tough, and there is no shame in not doing so, or in saying "That's enough, I can't take it any more!" For this reason, every policy sold also includes respite care, where a caregiver who is usually a family member can get relieved by a paid provider. If you think about it, it's to the insurance company's advantage as they pay out less money this way, as opposed to the person starting to use full benefits right away.



Non-tax-qualified (NTQ) policies have one more trigger for care - ambulating, which tends to make them attractive-seeming to most laymen. However, they usually require three triggers to be pulled (ADLs requiring assistance), as opposed to a limit of two for tax-qualified. This is kind of like showing pictures of something that looks like a Rolls-Royce, but the the interior is vinyl, the body is made out of plastic, and the engine came out of an old Yugo.



Indeed, almost all of the games you will hear about being played are with NTQ policies. The issue is this: In order to become Tax-qualified, the policies have to toe the line of legal requirements. So the NTQ folks, who don't meet the guidelines anyway, offer all kinds of bells and whistles that don't really mean anything to make their policies appear more attractive to those who don't know any better.



You see, NTQ policies are NOT generally deductible on schedule A of your income tax as a medically related expense. Furthermore, if and when they pay you any benefits, those benefits are taxable income. Remember I told you in the previous column that median billing was about $200 per day? So if you're in there the whole year, that's about $73,000 of taxable income, on which someone in the 28 percent federal bracket pays $20,440 on federal taxes, never mind state taxes.



Tax Qualified, or TQ, policy premiums are deductible as medical expenses, and the benefits they pay out are not taxed.



Now, for those readers who like myself, may have some knowledge of the nature of the tax code, let me take a minute for an aside. I am well aware that, in general, the IRS only allows, at most, one end of a transaction to get away from taxes. So this kind of got my attention, and before I sold any policies I verified it extensively. I confirmed a few days ago that it is still that way. To further ease your mind, remember that these are health insurance policies. The premiums I pay to my HMO are deductible, and the dollar value of the care I receive is not taxed. Tax Qualified policies of Long Term Care Insurance are treated the same way.



What this means is that it is very hard for me to imagine a scenario where an NTQ policy is better than a Tax-Qualified one. Indeed, I've never sold any policies that weren't. It is for this reason that the state of California requires all Long Term Care Policies to state whether or not they are designed to meet the requirements to be tax qualified. Ask the agent looking to sell you one of these straight out whether it's a tax qualified policy. Any answer other than a one word straight "yes" or "no" is grounds for terminating the talk. Walk out of their office or throw them out of your home, and go find an agent who knows what they're doing and is willing to give you straight answers. And if the answer is "no", ask them to tell you about a policy that is tax qualified. You see, one of the ways NTQ policies get sold is by paying higher commissions. They are harder to sell, because they aren't as good for most people, so the companies give the agents a reason why they want to sell them. More $$$. It's your call, but I wouldn't do business with anyone who tried to sell me an NTQ policy, and yes, that means jettisoning them and finding someone else for your future needs, even if you've been doing business with them for decades. They've just demonstrated that they don't have your best interests at heart.



I also want to make the point that agent's commission should not, in general, be one of your criteria for choosing a policy. That's a good way to end up with a policy that's too small to do you significant good, as smaller policies pay less in commission also. Shop by the cost and benefits to YOU. A good agent will show you how they arrived at the figure of the coverage they are recommending, and if you shop around, the good agents will all come up with similar figures and the same way of calculating it.



Back to the main subject: we can regard it as settled that, in general, you want a tax qualified policy. Let me tell you about a subtype of tax qualified policy that people who are lucky enough to live in California, Connecticut, Indiana, and New York are able to buy: Partnership.



All Partnership policies are tax qualified. But in addition to their ordinary benefits and their tax qualified nature, Partnership policies have an extra feature: Medicaid asset protection. If you'll remember, when I was talking about Medicaid (Medi-Cal here in California), I explained that before they will give you benefits, you are required to spend your assets on your care (or give them a lien in the case of your house) down to where you are basically poverty stricken. And indeed, if the benefits you have purchased under any other long term care policy have run out, that is precisely what you still have to do. Indeed, many people give their assets away during their policy benefit periods, so that when the policy runs out, they no longer own or legally control the assets and are eligible for benefits without a spend down. Since California's thirty month lookback was the shortest in the nation last I checked (many states are at five years), this means you need to buy a policy where the benefits are going to last longer than that.



But once a Partnership policy's benefits are exhausted, it protects from Medicaid recovery not only the same assets everyone else gets to protect, but additional assets as well, on a dollar for dollar basis. For every dollar the policy paid out before you applied for medicaid, you get to keep an additional dollar in assets, in addition to whatever everyone else gets to keep. Say you had a two year policy at $200 per day. That's $146,000 you still have and that you get to keep. The Partnership instructor I had told us in class that she calls her policy her Visitors Insurance. Because she's still going to have money, her family and heirs are going to want to keep visiting her so that they don't get written out of the estate. Horrible thought, but this wonderfully funny lady is in her sixties and has been working with nursing home issues her whole life. She has seen too much of what really happens in these instances to be ignored. Visitors also means better care. Not to mention the fact that she will have had a policy in the first place, which means that if the facility she ends up in takes Medi-Cal patients at all, they have to keep her, and that means if there's no Medi-Cal bed, she stays in the non-indigents ward until there is, so she's not going to end up in Barstow, where it's tough for friends and family to visit, and she will have hundreds of thousands of dollars to make her life more tolerable when she is moved to the Medicaid ward.



For this reason, the thing that makes sense with Partnership policies is to buy enough to protect your liquid assets (The New York program uses a different, in my mind far more onerous and less cost effective, plan where you have to buy a minimum of three years of policy benefits). In other words, the dollar value of whatever investments you may have. Since I'm in a Partnership state, this makes it easy to calculate how much of a policy would accomplish that. In non-partnership states, there's more guesswork involved, and a large amount of sheer guts on behalf of the client.



Let me state emphatically that by inducing people who can afford them to actually buy Long Term Care Policies, Partnership policies save the states who have them a large amount of money - billions of dollars - as those people who would have needed state based aid now have insurance policies to cover their needs. The folks at the California, as well as New York, Connecticut, and Indiana Partnerships for Long Term Care, have saved their states blortloads of money by having this program in place. Luckily for all concerned, this includes two of the three most populous states.



(Supporting articles here and here and here)



However, back in 1993, OBRA (Section 1917 Paragraph 3, about halfway down the page, is the reference) was passed, which at the explicit insistence of Congressman Henry Waxman, who was then chair of the Commerce Committee's Subcommittee on Health and the Environment, removed from all future states the ability to waive or modify the asset recovery requirement of medicaid. (I understand that Iowa and Massachusetts also have plan documents dated early enough, but have not actually implemented a Partnership program, and the Massachusetts document is even more onerous than the New York one, but better something than nothing). I understand Congressman Waxman's concern for the budget, yet nonetheless by their propaganda you would expect Democrats to be in favor of something that benefits the middle class like this - particularly the lower middle class blue collar worker, and actually ends up saving the taxpayers money, to boot. Of course, Congresscritter Waxman is from California, which already had a program in place, and he grand-standed against "Money for the poor being used to pay for care of millionaires". He represents a heavily blue collar district in Los Angeles, so you'd have thought he'd have done more research as to who it actually benefits. So due to this gutting of the primary benefit of having a Partnership policy, there will be no more of these wonderful programs until the law is changed back to what it was prior to 1993. In my opinion, whichever politician gets such a law through Congress should be a national hero. It gives people real incentive to buy a policy if they can afford it, secure in the knowledge that even if it doesn't cover everything they need, they won't be destitute after it runs out, while saving the Medicaid program tens to hundreds of thousands of dollars per patient.



So there really is such a thing as an insurance policy that keeps paying you even after the benefits are exhausted. Partnership policies are no more expensive that any other policy, and they provide asset protection, as well as additional benefits. If you are in a state that has a Partnership for Long Term Care, I would not consider any policy that was not a Partnership policy. Here in California, every policy sold must state whether it is or is not a Partnership policy. If it makes sense for you to buy a Policy for Long Term Care Insurance (a subject I will tackle in the next article), and you are in a state that has such a program, make certain that the policy you buy is one of those policies available through your state's Partnership for Long Term Care.



Links to the four states with Active Partnership Programs:

California

New York

Connecticut

Indiana



(Continued in Part III here.)

Caveat Emptor

Originally here

Long Term Care Issues

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One of the two most undersold financial products is long term care insurance. Yet it is a critical need, ranking just below disability insurance in the estimation of most financial planning agencies.



Long Term Care is already a large part of our nation's health care costs. In 2002, the last year I actively worked as a financial planner, in the state of California, approximately 2 percent of the recipients of Medi-Cal (California's version of Medicaid) were in long term care of one sort or another. Those 2 percent used approximately 47 percent of the budget. A little over fifty percent of the population is expected to need long term care of a year or longer, and this percentage has been rising and is expected to rise further. With medical science able to stabilize people to live longer lives, the probability of people living years after they reach that level of frailty rises.



The reason they use so much money is simple. Once you're in them, you tend to be in them for a long time. You may be in the hospital overnight, or for a week, and it costs a thousand dollars or two per day. Long term care may only cost $150 to $200 per day, but it costs that much every day for months, if not years or the rest of your life. So one seventh to one tenth the money per day, but for a hundred or a thousand times longer.



End of life is not the only time someone uses long term care. Approximately 40 percent of the inhabitants of long term care facilities are under the age of 65. For whatever reason, they have a disability or a condition that requires around the clock watchful care.



California licenses two types of residential long term care facility: Skilled Nursing Facilities (SNF), and Residential Care Facilities (RCF). The SNF has more medical requirements to meet, and is therefore the more expensive of the two, both to operate and to reside in. There are also Senior Daycare Centers (much like child daycare centers) and various in-home options.



Many people think that the federal medicare program covers long term care. It doesn't. The Federal Medicare program provides only a very small part of long term care. For a one time stay, it will cover the costs of a stay of up to twenty days, and pick up days 21 through 100 with a copay of about $110 per day. This means that for the first three months, you're out about nearly $9000. After that, you're on your own, as far as the federal government is concerned. So if you're talking about hospice care for a terminal patient, Medicare may or may not stretch to cover it, depending upon how close they were to death when the doctors gave up on curative treatment.



Even so-called "medi-gap" policies only cover a tiny amount of long term care. The reason why is because its costly insurance. So for the same reason you don't find cars on your supermarket shelves across from the bread, you have to go to a special policy to get significant coverage.



The median billing here in California runs about two hundred dollars per day, and it can go much higher for Skilled Nursing Facilities. This works out to $73,000 per year for as long as it lasts. Not a big deal if you're a multi-millionaire, but if all you've managed to save is $150,000, two years and it is gone. So for most folks, self insurance just doesn't cut it.



Now there is one program that will cover Long Term Care - state-run Medicaid (called Medi-Cal here in California). Unfortunately, in order to get coverage, you've got to pay yourself down into practical poverty first. Nor are you allowed to give assets away or put them into trusts. The various states have "lookback" periods ranging from thirty months to five years prior to your application for benefits. Anything given away in that period is subject to asset recovery - in other words, the person you gave it to is going to have to cough it back up, even if it was already spent.



Let me give you an idea of what poverty looks like. Many people make a big deal of the "community spouse" regulations, that permit the keeping of $2000 per month and eighty-some thousand dollars of liquid assets, as well as a life interest for a married couple in one piece of real estate. First concern, let's say hubby goes in to care while wife stays out. Can wife live on $2000 per month? Maybe, if she doesn't have any huge medical problems. But if she's not drawing a pension herself, most of income is likely to be attached for hubby's care, and it doesn't take long to draw down $80,000 in assets when that's all you've got to live on. Plus medicare is not the greatest care in the world, so there is always the need to purchase side items. Also, these places are not high margin. They are not making money hand over fist, and they make a truly rotten investment. Many of them go bankrupt, and the ones that survive and provide good care tend to be in lower cost areas. So if you live in Los Angeles, your spouse could well be in a home in Barstow because that's the only place you could find that had a spare bed. Far away means visitors are rare, and visitors being common is one of the best predictors of how good the treatment will be, and how well they will respond.



Finally, this is just not what happens, statistically speaking. What usually happens is when one spouse gets sick, the healthy spouse takes care of them as well as they can for as long as they can, either with or without assistance. Then the first spouse is gone, and at some later point in time the second spouse becomes ill, and that's when long term care happens. Less that ten percent of the people in long term care have living spouses, and this includes counting the situations where both spouses are in long term care. (this .pdf document has a decent explanation)



Many attorneys will advertise structured trusts and other weird schemes to get you to qualify for Medicaid care while still retaining your assets. Spend a couple of thousand dollars on a one time basis, the pitch goes, and you'll be able to shelter your assets from the state. Unfortunately for this, the states narrow the gaps in the regulations every year, because they want to catch cheaters and people doing precisely this. A good general rule is that if you own the asset, if you control it, or if it can be used for your benefit, the state will force it to be spent or attach it in order to provide your care. Medicaid was meant for the poverty stricken, not to provide medical care for the wealthy. So it's a little change here for $1000, another little change there for $1000, and pretty soon you've spent all your money on the attorney. Best way to nip this in the bud is to ask said attorney point blank: "So you're going to write out a commitment to pay for my care yourself if this doesn't work, right?" Needless to say, this is not going to happen.



Furthermore, assuming it does work out and you manage to retain assets while the state pays for your care. Well then, I say, "Congratulations! You've won WELFARE!", in my best Monty Hall voice, and you can imagine the curtains coming back on "Let's Make A Deal" to reveal their gorgeous hostess, smiling from ear to ear while holding the lead on an old sway-backed donkey.



The medicaid package is not a lavish one. Remember I told you that nursing homes average billing is about $200 per day, and that they go bankrupt a lot? Well here in California, the state will pay about $110 per day for medicaid patients in long term care. You should be able to imagine the implications from there. I've visited a couple of medicaid wings, and the "Eeewww!" factor is significant. It starts with the smell, which hits even people like me who don't have much of a sense of smell, and goes downhill from there.



The final option to avoid this is purchase Long Term Care Insurance. There are two major types, with one subtype available for people who are lucky enough to live in one of four states. There is non-tax-qualified, tax qualified, and for those lucky enough to live in California, Conneticut, New York, and Indiana, there is a superior brand of tax-qualified, Partnership.



Part II on "Long Term Care Insurance: Non-Tax-Qualified versus Tax-Qualified, and Partnership" is here

Part III on "Shopping for Long Term Care Insurance - Who Should and Shouldn't Buy, and Policy Characteristics" is here.

Caveat Emptor

Originally here

This question brought someone to my site:



If my house is going into foreclosure but the house is also in probate, can the lender actually go forward with the foreclosure sale while the house is in probate?





The short answer is yes.



The Trust Deed (or Mortgage Note) that was signed by the now deceased undefined gives a security interest in the property to that lender in exchange for money. The lender lived up to their end of the bargain. That security interest is valid until the loan is paid off. It is not removed by the death of the person that signed over the security interest.



Probate takes an absolute minimum of nine months. During this time, the court will likely allow those members of your family to continue to live there, but they will not likely approve disposition of the asset except in an emergency, and that emergency is going to cost your heirs money for the courts, and money for the disposition. On the other hand, the lender still needs to get paid according to the terms of the contract, and they are entitled to foreclose if the terms are not being met. I'm not a lawyer, but I've never heard of an estate being permitted to declare bankruptcy, which some living folks use to temporarily stave off foreclosure, almost always to their eventual major detriment. Since your executor is claiming that your estate cannot pay its bills and rarely are you earning any more money, declaring bankruptcy would seem like an open and shut case of "the creditors get all of the assets and your heirs get nothing." Probably not what anybody who's part of the situation wants.



There are simple steps possible to avoid probate for major assets. A trust is probably the most flexible of these, in that the trust owns the asset and the successor trustee takes over the management and within the limits of the trust, does what needs to be done without the courts getting involved. Flexible, much cheaper than getting a probate court involved, and your heirs get control right away. But it requires planning ahead (which many people are loath to do, being in denial about the idea of death) and an upfront investment.



Given the fact that there is a loan and a Trust Deed against the property, somebody is going to have to make those payments until the loan is paid off, whether by outright payoff, refinancing, or sale. Given that in the absence of a trust, your heirs probably are not going to have access to any liquid wealth you left either as it is also locked up in probate, the odds are that your heirs are either going to have to come up with the cash out of pocket, or the property is going to be foreclosed upon.



Now there are some good options. If your heirs are wealthy and have the cash, perhaps some one or combination of them will make the payments in the interim if it's been agreed they will be compensated later. Not likely, I'll admit, and they're likely to drive a bargain for larger eventual replacement. In some instances, the probate judge may agree to taking out a Home Equity Line Of Credit (HELOC) to make the payments, but somebody's going to have to be able to qualify to make the payments, and a dead person is not on the list of options, which means somebody still living is going to have to do it. The rates on these are typically horrendous, and cost a lot more than a little bit of planning.



Another excellent option is life insurance. Life insurance passes (usually) tax free on death outside of probate to a named beneficiary. Therefore, it's available pretty much right away to pay bills and stuff. It's also leveraged money, so a few dollars now buys more dollars when you need them. The difficulty is that you've got to have it beforehand. There's that planning thing rearing it's ugly head again, and the upfront investment of the premium dollars for the life insurance policy. Finally, any money created by this becomes the property of those beneficiaries, and there is no way to compel them to spend the money on bills of the estate. If the beneficiary is the estate, well, the money is locked up in probate again, and you've got to get the probate judge to agree with doing the necessary.



Another option is the named beneficiary Transfer on Death feature of most investment accounts. These also transfer outside of probate to named beneficiaries. Problem is, they require the investment of those dollars beforehand, and they also require that you keep the beneficiaries current, and all of this requires, once again, planning. The money also becomes the property of the beneficiaries, just like life insurance, and if there's no named beneficiary, it gets locked up in probate.



There is no free, no-planning-necessary, magic bullet. I strongly suspect it's all part of the various Lawyers Full Employment Acts, but you've got to take the system as it exists. At the very least, you've got to do some planning ahead, and an upfront investment is probably going to return itself several times over. Remember, everyone is going to die sometime - I know of precisely zero exceptions thus far in the history of the world. Denial of this simple fact simply digs you in deeper, and puts your heirs in line to have to lose or waste a major portion of what you would have left covering for your deficiency, as is evidenced by the person who asked this question.



Caveat Emptor.

Lenders and Insurance Proceeds

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The question that inspired this was



can a mortgage company use the flood insurance claim money towards homeowners mortgage loans?



This is equally applicable to every other form of insurance on your home - earthquake, regular homeowner's insurance, and any others that you may have or require.



The short answer is yes.



The reason that the lender requires being added to every policy of insurance you have on your home is so they have a claim on the policy proceeds. Let's say you buy a $500,000 home for nothing down, and the value of the structure is $150,000 while the value of the land is $350,000. Let's say the house burns down next week. If they weren't on there as beneficiary, you could theoretically take that check for $150,000 and split, leaving them with a $500,000 loan that they're maybe going to net $270,000 for by selling the property that secured it - after all the time for foreclosure, et al, which means they're out all those costs plus thousands of dollars in interest. If you're a lender, you're going to suffer this loss once at most before you decide not to trust anybody.



On the other hand, the lender doesn't want the property or a partial repayment. They want the loan repaid in full. What they're going to do is sit on any funds they get and make certain they're used to rebuild, unless they have some reason to believe that rebuilding is a bad risk. Banks don't throw good money after bad, so if this is the case, they're going to keep the money. On the other hand, if you've been keeping your payments up, they're going to want you to rebuild. Their taking custody of the money is a way to make certain that you do.



Caveat Emptor.

Life Insurance is something that nearly every adult should have, and almost every adult who buys goes about purchasing it the wrong way, at the wrong time, for the wrong reasons, and buys the wrong policy.



Is that an indictment of the system or what?



Let's start with what life insurance is. Life insurance is a bet that you make with an insurance company that you will or will not live. The idea is that if you die, while nothing can replace you, your family will get money to replace your salary. If you die while the policy is in force, the insurance company loses the bet. If you live for the full time the policy is in effect, congratulations for being alive, but you lost the bet. If you die after the policy stops, not only did you die, but you spent all that money and your family got nothing. Now it is critically important to understanding life insurance to understand that nobody gets out of life alive. Unfortunately, everybody has to die sometime. As of this writing, the chances of you missing out on this one final life experience that practically everyone wants to avoid forever are zero. So you might as well make plans that include anybody you leave behind benefitting from it, because (I have it on excellent authority) dying stinks. (Yes, I'd use a stronger word except that I try to keep the language here family safe as much as possible)



There are two major types of life insurance, term and cash-value, and the latter type has several subtypes which I will explain in due course. Term can be thought of as "renting" life insurance, while cash value can be thought of as "buying" it. Like owning versus renting a home, there are arguments on both sides of this story as to which is better. I will attempt to cover the pros and cons of all of the major camps, and there are people for whom each makes sense, but like buying a home, if you choose the right policy, cash value life insurance is a losing proposition in the short term while becoming fantastically remunerative after a few years. The vast majority of all people would do better to consider cash value, particularly when you crank the actual numbers and consider the alternatives.



Another thing that needs to be crystal clear is that life insurance is the second most tax advantaged investment you can make, right after buying a home. In fact, it's better in many ways although it requires more planning. If you plan properly, and die while it is in force, the death benefit comes to your heirs tax free. Furthermore, all investments in the cash value of a life insurance policy earn money tax deferred, and any money withdrawn from the cash value of a life insurance policy gets "first in, first out" treatment - something no other investment can say. There is no legal dollar limit on this tax treatment for life insurance. There are no income limits for this tax treatment of life insurance. Literally anyone who can qualify for a policy can receive these tax benefits, and so long as you comply with federal guidelines to retain this treatment, there are no dollar limits to the amount you can invest. Even if you violate those limits, the only consequence is that the tax treatment on actual withdrawals flips to "Last in, first out," and since there is no limit on the number of policies you can have, either, there aren't many reasons to violate those guidelines.



You can also take loans against the cash value of any life insurance policies you may have, and loans are not taxable. Let's say that again. Loans are not taxable. Remember that. It's going to be important later. When put together with the other parts of the tax advantaged nature of life insurance, it's an awesomely powerful tool if used correctly.



Now I'm going to violate one of my cardinal rules for this site: no graphics. The reason is that this picture is too darned important to the essay. It's graphic of some features of a life insurance policy. The vertical axis is money - dollars - and the horizontal axis is time. And the reason I'm putting it up is to illustrate a generic life insurance policy. It doesn't look like much at first, but here it is:





(Restored! Thanks Chris!)



Now I'm going to explain it. There are three areas: red, yellow, and gray. Grey is just background - dollars above policy value. Like the altitude above an airplane, it's useless, unless you climb into it later, as some policies can, painting ever larger numbers first red, then yellow. Red, or actually, the top of the red line, is the total dollars your family (or other heirs) will receive when (not if) you shuffle off the mortal coil. Yellow is the cash value of the dollars in your policy. The difference between the two is the amount of insurance you're actually paying your hard earned money for at any given time. Get it? Got it? Good.



Now it is necessary to note and remember that the cost of the red dollars - the difference between the top of the red curve and the top of the yellow curve - get more expensive with time. Sometime in your sixties, dollars of actual life insurance start getting expensive. Mind you, they are always getting costlier from the first day you buy any policy of life insurance out there. But in your sixties, this process accelerates rapidly, and this has all kinds of implications later in the essay as well as later in life. And now that we've covered the basics, it's time to cover policy types.



Term life insurance, as I said, is like renting your life insurance. It's like the red line, without the yellow curve in there at all. For the entire time your policy is in effect,you are going to be buying the full amount of insurance dollars every time you make a payment. This means that in an unaltered term policy, your premium goes up every year; sharply so once you've hit your sixties. If you are initially purchasing at a young age, most companies will give you the option of paying more starting right now, so that for a certain period your premiums will not increase. If you buy young enough, most companies have at least a 30 year fixed term product. It's very difficult to find a company that will sell you a policy allowing this fixed period to go later than your sixty-fifth year, however. In all cases, once the fixed term is over, it converts to yearly renewable term, where you can expect the yearly bill to go higher every year. What happens when people start getting these suddenly much larger bills? They cancel. This is what the insurance companies want. Fewer than three percent of all term policies ever pay a death benefit because they are canceled. When you cancel, you're letting the insurance company off the hook on your bet, and all that wonderful money you spent on their pretty policy bought you some peace of mind for a while, but now it's gone, and you have nothing. Term is very expensive insurance, when you talk about real cost to the consumer in aggregate, and very profitable to the insurance companies. It doesn't require writing a check for nearly the number of dollars now, but it doesn't provide nearly the benefits either. Remember that stuff I told you about how tax-advantaged life insurance is? Term makes almost no use of this fact. It's kind of like buying a Ferrari body, and putting a Yugo engine into it.



Now we're going to move into cash value life insurance in all its variants. They're called cash value because they have one. Now we're putting the yellow curve back into the picture above. What these policies are calculated to do is endow at a certain age. This used to be 100 for all policies, now the companies are trending more towards 120. This is a good thing because with more people living to 100, they are getting checks when they really want life insurance. Policies endow when the yellow curve rises to meet the red line, off to the right of the rest of the picture above. If it's your policy, you get a check for the amount of the red line in exchange for your policy of life insurance. This ends the tax benefits, and can have adverse effects upon your tax liability, too. So most folks want to get their policy value as a death benefit to their heirs, not as a check while they're still alive. Confused? Follow me.



The first major variant of cash value is whole life. This is what that default picture above is all about, because that's pretty much what a policy of whole life insurance looks like. The difference in dollars between the cost of the term insurance and the cost of the policy is invested with the general account of the company. It earns about eight percent or so, and they pay you about three, which is pathetic. Nonetheless, that three percent is tax deferred, tax free, First In First Out, so it's probably close to an effective 5 percent for most folks. Like all cash value life insurance, there are provisions for tax free withdrawals and zero percent effective rate loans and all of that. Also like all cash value insurance, to an ever increasing degree over the life of the policy, this moves from paying the cost of the insurance from the check you are writing, which is after tax dollars, to money already within the policy, which is before tax dollars. Finally, like all cash value life insurance, over the life of the policy you are buying progressively smaller amounts of actual life insurance (the difference between the red curve and the yellow one), which means that your actual cost of insurance is less, particularly later on when the cost of that actual insurance goes up. Because of this, cash value policies are likely to stay in effect your whole life and not get canceled. Nonetheless, this is a putrid return and makes the insurance company even more money than term insurance. Many people would have you believe that whole life is the only variety of cash value life insurance out there. It isn't. But you would not believe the number of straw man arguments against cash value life insurance I have read in the financial press that did their best to read as if that claim were true. For someone who is supposed to make their living informing consumers about the financial industry, this is either fundamentally ignorant, or fundamentally dishonest.



Probably about fifty years ago, some bright young person working at an insurance company realized that the need for life insurance may not be constant throughout life, and so came the first major addition to the choice of "whole life or term." This was Universal Life. The concept was simple. You could decrease the amount of insurance in set units, or increase it in set units, up to a certain value, and the initial underwriting would still cover it. This was really cool at the time, because it meant that you didn't have to apply again for life insurance and go through the underwriting and health insurance exam and health insurance questions all over again, and possibly get "rated" for some new health problem that wasn't there last time, or possibly even turned down. Unfortunately, in Universal Life Insurance, you're still investing your money in the general account of the life insurance company, and they are still only paying you about four percent. Once again this has all of the neat tax advantages, but even an effective six percent return is nothing to write home about. To most folks, it's almost embarrassing. Nonetheless, Universal Life Insurance has broad applicability to small dollar value policies, mostly for older folks. The return is guaranteed, the company assumes the investment risk, and the policyholder gets peace of mind for the rest of their life, knowing that whatever expenses they had in mind are covered.



Not too long after the enterprising young person had the idea for Universal Life, another one had the idea for Variable Life. This is a truly different product, but it really didn't go anywhere until the late seventies, when inflation was rampant and things were generally going south in a hand-basket until Ronald Reagan et al brought them back under control. The concept is simple: Instead of investing in the general account of the company, you have the opportunity to invest in a certain number of sub-accounts that act a lot like mutual funds. These sub-accounts are basically comparable to the ones in variable annuities, having roughly the same advantages and disadvantages except that most people do not have qualified money in life insurance because the interplay of withdrawal requirements with funding requirements gets nasty complex.



Now in those articles that do admit the existence of variable life, they most commonly write against it because "They have this expense and that expense and the other expense," ad nauseum, with the strong implication, never proven, that they are somehow more expensive than other policies. The fact is that these are expenses associated with all life insurance. The only additional expense that the variable life insurance policy has that the term life insurance policy (or any other) does not is the expense of running the mutual fund-like sub-accounts, which actually average a bit lower than the equivalent mutual fund upon which these are usually based. Every other expense is part of every life insurance policy - indeed, most of them are part of every insurance contract of any sort. Administration, Insurance, etcetera. They buy the stuff that makes the cash value life insurance policy an interesting and potentially worthwhile investment - the death benefit, that wonderful tax treatment, among other things. But because you're dealing with something regulated by the SEC, the agent and the company have to tell you about them in variable annuities, whereas with every other insurance policy, they are a "black box" into which money goes and insurance comes out.



Variable Life Insurance, like Variable Annuities, requires not only a life insurance license, but also an NASD Series 6 or Series 7 license to sell. This means that it is generally sold through financial planners, not "pure" insurance agents. These folks are competition for the financial "do it yourself" press, and if you are working with a professional you trust, you're not nearly as likely to go back to the bookstore or magazine stand for generic drivel with no fiduciary responsibility towards you. Admittedly, some advisors abuse it - and when they are caught, they are prosecuted and the insurance they are required to carry pays. The generic advice in books, newspapers, magazines and websites never has this responsibility in the first place. They are specifically exempted by the Investment Company Act of 1940. But Variable Life Insurance has all of the advantages possessed by all cash value policies that I listed above, and it also has the advantage that you are getting market returns, which the tax advantages leverage significantly in your favor.



Finally, in the early 1970s, another bright young person had the idea of combining the features of Variable Life Insurance with Universal Life Insurance. This product, called Variable Universal Life Insurance, is about the most flexible, most versatile financial investment there is, because you can do so much with it, and it facilitates changes in plans like nothing else. You get market rates of return via the mutual fund-like sub-accounts, effectively augmented several points above market rates because of favorable tax treatment. You can withdraw your principal tax free, and take loans at zero effective interest rate against the earnings after that. Remember, loans are not taxable. You can increase or decrease the dollar amount of insurance within limits. Actually, variable universal has the unique ability that both the red and the yellow areas in the graph above usually start climbing into the gray area somewhere about twenty-five to thirty years in, getting to the point where the cash value of the policy can be multiple times original issue value. All of this amounts to things like you can start saving for your children's college as soon as you decide you'd like to have some someday. You can save for literally anything, because of all of the options you have for putting money in and taking it out. Matter of fact, you get the biggest advantage from overfunding the policy, putting more money in than you have to, although there are federal limits on how much and how fast you can overfund and retain the most important tax advantage, that of "First In First Out" tax treatment. (It is to be noted that there are "single payment" policies that intentionally throw this benefit out the window, and are still an excellent investment in a lot of circumstances.)



There is one danger to variable life, and to a lesser extent variable universal life. It is possible that through inopportune timing of market declines and/or excessive withdrawals that there will not be enough money in the policy to keep it in force. This is, to use Orwell speak, double plus ungood. Let's say you took invested some number of dollars as principal, and later withdrew them. Then you took loans of $30,000 per year every year for ten years. But then your investments went through a market decline, and you kept taking the full $30,000 per year for another ten years. If you die with the death benefit still in force, it's all just a loan against the death benefit and therefore nontaxable because the death benefit is nontaxable. But if the policy self-destructs, now you have to pay the taxes on that $600,000 of income I've just described. The IRS is utterly unimpressed by "blood from a turnip" type arguments. They can usually figure a way to get their money a way that you won't be happy with.



The oldest of these policies are only thirty-odd years old, and there were a lot of improvements made in the early years, so there's no experience, as yet, with the first generation they were really designed for as lifelong financial instruments. The first people who bought them in their twenties are only just now starting to turn sixty, approaching retirement age. Going back via market performance in the last century or so, there does not appear to be major danger of self destruction on policies given time to mature and prudently advised, but there have been people who withdrew more than the market could really support, who had major adverse experiences as a result. Especially with the variable universal policy, there are alternatives to prevent losing the policy completely, but it's still not something you want to have happen. I will point out, however, that the same danger exists for investors of any stripe, it's just that the sword here is especially terrible. This is one of the good reasons why these policy require dual licensing to sell - to insure that there's someone involved who should understand the structural limitations of the policy, and can help you avoid the lurking gotcha! by keeping your withdrawals and loans to a sustainable level.



One strategy many people, particularly in the self help financial press, advise is "buy term insurance and invest the difference." This isn't a bad strategy, especially if you plan on dying while the fixed term period is still in effect. But most people in their twenties and thirties are going to live well past their sixty-fifth birthday, and the fact is that most people who are young today are going to work well past it, as well. The reason why insurance premiums start to climb then is largely because that's when folks start dying off in larger numbers. Investing in life insurance is something best begun while you are young, with few health problems and lots of time. Whatever the strategy you begin while you're young, you're typically stuck with the decision, even if you do figure out what's wrong with it around the time you're fifty. At that age, your effective compounding is marginal in most cases, even if you're planning to delay retirement a few years. But I encourage everyone with a potential life insurance need to look at projections of not what's likely to happen for merely the next thirty years, but for the entire rest of your life. Buying variable, or better yet, variable universal, especially while you're young is a better way to end up with more usable money later on in life for most people. And that's the whole purpose of retirement planning, right?



Caveat Emptor.

Every few days, I get junk mail wanting me to buy Mortgage Life and/or Disability Insurance.



Buy regular policies instead.



These are not, in general, good policies of insurance, because the benefits go straight to someone else.



Mortgage Life Insurance is straightforward enough. It's decreasing term insurance - the insurance company's favorite kind of policy. As it goes along, the payments stay the same, but the coverage decreases as you pay off your mortgage. The problem is that until you get into your sixties the cost of insurance per thousand dollars should not increase swiftly enough to counterbalance the fact that you are theoretically paying your mortgage down. Not to mention the fact that level term policies exist for about the same amount of money, and that term is a poor form of life insurance in the first place.



The idea is that if you croak, the mortgage gets paid off. As in the money goes straight to the lender. Well, even assuming that you don't refinance, this is a bad deal for your family. Let's look at the situation, and the time value of money. I keep using $270,000 as a mortgage amount, so lets stick with that. Assume you have a 7 percent thirty year fixed rate. Or you can invest the money and keep paying the mortgage out of the proceeds. You pay the loan off, and your family have nothing, while still needing to come up with property taxes and homeowner's insurance and maintenance money. But let's say you put it into a variable annuity that earns a net of 9% (the market does 10-13 over time, depending upon who you ask). Your monthly payment is $1796.32, and adding reasonable amounts for property taxes and homeowner's insurance, it goes to about $2170 per month. You end up with 363 months of payments - 3 months more than you could possibly need. On a forty year schedule of payments ($2050 monthly PITI payment), the money would actually last 590 months - an even better situation. So instead of having nothing and needing to come up with money every month, your family's housing needs are completely taken care of, with a bit left over, and that's on a somewhat pessimistic projection. Even if the fact that the market isn't even over time messes them up, at a minimum they've got many years of making the full house payment before they have to think about selling. Additionally, they have the option of using some of the money for other things like say, college for the kids so that they can support the surviving spouse. Or college for the spouse, so that they can support themselves. One hopes that you get the idea. Furthermore, if you have a regular policy of life insurance, your family can always choose to use it to pay off the mortgage. With mortgage insurance, you do not have that option. I can tell stories of people who had it, and the family lost the house anyway because they didn't have the cash flow for the other expenses of owning a home.



Mortgage Disability Insurance is the same concept, applying to disability insurance instead of life insurance. If you are disabled, it makes your payment after some elimination period (the elimination period is the time after you qualify but before you receive benefits - short elimination periods are expensive!).



This has two problems, same as mortgage life insurance. First off, that's a horrible way to allocate tax-free money - straight to anyone else. The second problem, unlike mortgage life insurance, is that it's not enough money. Disability insurance should replace fifty to sixty five percent of your income, depending upon your situation. Depending upon the lender and the program, maximum qualifying debt-to-income ratio is 36 to 50. This is a total of all debts, including mortgage, property taxes, insurance, and any other monthly obligations like credit cards, car payments, etcetera. All mortgage disability pays is your actual mortgage loan payment, and it shouldn't take a mathematical whiz to see that this is clearly going to be insufficient unto the task. You're going to need another policy anyway, so why not just buy one good one and save yourself a second set of administrative costs?



Caveat Emptor.

I've run two prior articles this week on the theme of Long Term Care, one on Long Term Care Issues, and one on Non-Tax-Qualified versus Tax-Qualified, and Partnership Insurance Policies. Now, I'm getting down to nuts and bolts of what you need to know while shopping for a policy.



The two most important characteristics are the total benefits and the daily benefits. It may be helpful for many people to think of total benefits as a lake, where instead of water, it contains the total amount that is available to you, and the daily benefits as the size of the pipe that brings those benefits to you when you need them. It doesn't do you much good to have a huge lake and a too-small pipe that can't put out the fire, which is the daily bills you have to pay for care.



The way policies are generally sold is that they are for X number of years, with a daily benefit limit of $Y. The product of these numbers (and 360 days per year) is the initial total benefits limit. A one year policy with a $150 per day limit is good for $54,000 of total coverage. A three year policy with a limit of $300 per day is worth $324,000 of total benefits. A five year policy with a limit of $180 per day has that exact same aggregate coverage limit of $324,000. There are lifetime policies available; these have no aggregate limit but are limited to whatever the daily benefit is.



Note that a three year $300 per day policy is superior to a five year $180 per day policy in that although they both have the same "lake" of benefits, the former has a larger "pipe" (or "stream", if you'd prefer) to get them to you. Therefore, the policy with the large pipe will be more expensive. It is an often misunderstood part of policies that there is no time limit for benefits. You can use less if you like, but you can't use it faster than the pipe brings it to you. If it takes you three, five, seven, or seventeen years to exhaust the "lake" that's how long it takes. I've known agents who did not understand this clearly. If you only use $60 per day, either of these policies will last fifteen years. But if you use $250 per day, the former will pay off the full amount of your daily benefit until exhausted (about 3.6 years), whereas if you have the latter, you're going to be out of pocket $70 per day from day one. This can cause you to exhaust the resources you were trying to protect well before the policy is done paying benefits. The "time duration stated" - the Y years part - is the shortest amount of time in which it is possible to exhaust your lake of benefits. It has nothing to do with how long the benefits can last, which is always "until exhaustion." Given the facts of the situation, it is better to have a big "pipe" than a long duration, and in the example given, the 3 year $300 per day policy will be the more expensive. It's also likely to be worth the difference. For Partnership policies, the state of California currently has a minimum daily benefit limit of $130.



It is to be noted that for the Partnership policies, at least in California, the limit is actually a monthly limit of thirty times the daily limit. Many other policies follow this as well. This means if you get something that costs extra once or twice a week, like physical therapy, as long as your entire monthly care does not exceed thirty times the daily benefit, you won't be out of pocket for those not-so-little extras.



Policies are sold as home care only, facility care only, or comprehensive, so called because it covers care where ever you may need it. Actually, here is a Glossary of terms you may want to refer to. Partnership is only sold in facility care only and comprehensive policies. My advice to to buy a comprehensive policy, because you never know what your situation will be when you actually need to use benefits. The difference in cost is typically small.



One of the really sneaky ways some insurance companies can stick you with a gotcha! is to require you to continue paying premiums while you are receiving care. Since you're likely in a situation of incompetence, or just plain unable, this is a good way to get out of paying benefits. ("But your honor, Ms. Jones did not continue to pay her premiums as is clearly required by the policy! We are clearly within our rights to cancel"). Insist upon a policy with waiver of premium upon commencement of benefits. This means you don't have to continue paying your premiums when you may not be mentally capable, or able to get new checks, or any of dozens of other possible hitches. In California, waiver of premium is required for all Partnership policies.



Policy Lapse Protection is similar, having to do with reinstating your policy if you neglect to pay the premium before you are diagnosed as needing care and it lapses for that reason, but good policy lapse protection is actually fairly widespread. You're going to have to pay the back premiums, "bring your payments current," and there may be an administrative or interest charge, but better that than needing an entirely new policy. This is not "don't make your payments for ten years and drop a lump sum on them when your doctor diagnoses you with Alzheimer's." About six months to maybe a year in some cases, is about the limit of lapse protection.



Elimination period is the time after you start receiving care, before your policy starts paying benefits. It's analogous to the "deductible" on your automobile insurance. Short elimination periods are more expensive, longer ones less so. I would not consider an elimination period of less than ninety days, or more than six months. Even at $200 per day, the person who is an appropriate buyer of long term care insurance should be able to fund three to six months or so. Lengthening the Elimination period makes the policy cheaper. Indeed, a three year policy with a six month elimination period may be cheaper that an equaivalent two year policy with a three month elimination period. The average stay in long term care is something approximating two years, but in a large number of cases it is five years or more. If you've got assets to protect, you can likely afford three to six months, but fewer people can afford years of coverage. If you're lucky enough to live in one of the states with an active Partnership for Long Term Care, the asset protection function means you continue to receive benefits even after the policy is exhausted. Even if you don't live in one of those states, the policy can get you through the "lookback period" where Medicaid will go back and attach any assets you transferred elsewhere. I know I've said Medicaid coverage is awful, but if you still have money, or people willing to spend money on your behalf, you can make it a lot more tolerable than it is for someone who is truly destitute.



Pre-existing conditions are not something to unduly worry about here, in my experience. If you have a pre-existing condition, the insurer is only allowed to exclude paying to treat it for six months in California, and I believe (but I am not certain) that this is an NAIC rule, which would mean it likely applies nationwide. This can mean that you will be flat out rejected until/unless you recover, but this is in accordance with the principles of insurance. You buy insurance when it's a risk, not a certainty. You don't wait to buy health insurance until the heart attack starts, you don't wait until you've got terminal cancer to buy a life insurance policy, and you don't wait until the doctor diagnoses you with Alzheimer's to buy a policy of Long Term Care Insurance. You would be quite properly rejected for coverage in all three cases.



Other bells and whistles you should be interested in include "step down" options for if the premium increases beyond your ability to pay. This gives you the ability to change to a less expensive policy without new underwriting, rather than simply losing coverage, if your circumstances change..



One protection I strongly advise everyone to get is inflation protection. If you buy a $200 per day policy, that may be adequate now. It may not be adequate when you need to use benefits. All California Partnership policies require compound interest inflation coverage if you are less than seventy at time of purchase. This is a good thing. If you are over seventy when you first buy, simple interest inflation protection is permitted, but I wouldn't advise it unless you are going to use benefits within the next couple of years or not at all.



Inflation protection applies to both daily benefit and total available benefits. So if you start with a 3 year, $300 per day policy, after one year of 5 percent inflation protection, it goes to a $315 per day policy with a total benefit pool of $340,200. Let's say it's twenty years down the line, and your "total pool" of dollars has gone to $871,000, but now you start using them. Let's say you use $21,000 of benefits that year, leaving $850,000. That $850,000 pool becomes $892,500 the next year, demonstrating that even after you start using benefits, it is still possible for your "available lake" to increase if you have inflation protection. Now the last I was aware, actual cost rises were running about 7% per year, so 5% isn't really long-term adequate, but it's what's available. If you're relatively young, you probably want to overbuy by some factor to compensate for this.



One rider that you probably do not want is return of premium. Return of premium means if you die without using benefits, your estate gets the money you paid in premiums back. This is very attractive to laypersons, and it makes a nice addition to the salesperson's commission. Unfortunately, it can also double - or more - your cost of coverage, and the older you are, the larger the multiplier will be. This can cause people who can and should buy a policy to buy a smaller policy benefit than they really need, smaller than they should have. Even though they are spending the same amount of money on the premium, their coverage is far less. Furthermore, the return of premium is usually with only a very small interest, or none at all. It takes comparatively little time before you would have been better off investing the difference.



Now, who should and should not buy a policy of long term care insurance. There are no hard and fast rules, but if you have no assets to protect or the policy premiums are a real hardship, then you should not buy a policy. The state of California defines this as assets between $50,000 and $250,000, but those standards are the same as when I took my training, and would suspect that a truer picture would be those with liquid assets under $75,000 should not bother. On the other hand, California has some very smart millionaires with top of the line advisers buying Partnership policies because they are never certain their circumstances will not change. Income wise, the state of California has a .pdf document that they referred me to. Furthermore, someone who could afford long term care indefinitely would have no reason to purchase an insurance policy - the insurance company doesn't work for free. In California Partnership Policies, at least, you do have an additional protection in that the company is required to advise you if you are not within the income and asset guidelines for policy purchase, and offer a full refund.



The best time of life to buy long term care is as early as practical. If you buy at 40, your premiums will always be less - a lot less - than someone who buys the same policy at 50, who in turn will save a lot over someone who buys at 60, and so on. Typically, if you wait until after you are sixty, you will have to pay far more in yearly premiums than you saved by waiting - even considering the time value of money. I always called this the "penalty box", and it makes sense for the same reason life insurance is cheaper the younger you buy it. This is not to say it doesn't make sense to buy after age 60; what I'm saying is that the statistically average person will save a lot of money over the course of their life expectancy by buying earlier. I've had people eighty years old ask me for quotes, and are surprised when minimal coverage is thousands of dollars per year. This is because, first, if you're buying at age 80, you are overall more likey to use benefits, and for a longer time, and second, because it's likely to be sooner rather than later, leaving less time for the insurance company to invest your premium dollars and earn a return.



Caveat Emptor

UPDATED here

(Part 2 of a three part Series on Long Term Care)



I wrote in the previous column a lot about long term care issues. This column deals with the insurance policies available for long term care. There are two major types, with one subtype available for people who are lucky enough to live in one of four states. There is non-tax-qualified (NTQ), tax qualified (TQ), and for those lucky enough to live in California, Connecticut, New York, and Indiana, there is a superior brand of tax-qualified, Partnership. In many states, there are indemnity policies available for those who don't like paperwork, but the gotcha is that they are all NTQ, non-tax-qualified.



Let me explain what's going on here.



In all of the legal policies, there are listed Activities of Daily Living, or ADLs. For non-tax qualified, there are seven, and for tax-qualified, there are six. It is the inability to perform a certain number of these activities without assistance that triggers eligibility for benefits. For tax-qualified policies, these are Bathing, Eating, Transferring, Continence, Toileting, and Dressing. Non-tax qualified adds the ADL of Ambulating, for a total of seven possible qualifiers. Note that the preparation of food is not a qualifying factor, hence Meals on Wheels and similar programs, as well as the traditional family support structures. "Assistance" ranges the gamut from just having somebody there in case something happens ("Standby assistance") to having to have someone do it completely for you.



Bathing is performing the functions to clean yourself.

Eating is feeding yourself food you are given.

Transferring is being able to "transfer" from one support mechanism to another - for example, bed to wheelchair or wheelchair to toilet.

Continence is what you'd think.

Toileting is ability to perform the tasks necessary to eliminate waste material in a normal fashion.

Dressing is the ability to get clothing on and off as required.

Ambulating is moving yourself under your own power on your own feet from place to place.



Of these ADLs, bathing is almost always among the first to go and hence a trigger for the policy. Eating is probably the least prevalent trigger for benefits, followed by dressing, but there are no solid study figures I can find. Ambulating always goes before or with Transferring. Within broad parameters, each individual insurance company can write their own definitions of each of these. For instance, a number of companies used to define "Transferring" more or less the same as most people think of as walking, thus making it easier to qualify for benefits, and hence, a better policy than competing policies. Of course, they will be priced accordingly, as well, but there is a lot of variance on pricing within the industry. Of the policies I used to sell, the one with the broadest coverage was usually the second-cheapest in the competitive quotes. So shop around.



Now the point needs to be made that just because you qualify for benefits now doesn't mean you have to start taking benefits now. Sometimes people are in situations where family can take care of them right now, but may not be able to do so indefinitely. Taking care of someone in this manner is brutally tough, and there is no shame in not doing so, or in saying "That's enough, I can't take it any more!" For this reason, every policy sold also includes respite care, where a caregiver who is usually a family member can get relieved by a paid provider. If you think about it, it's to the insurance company's advantage as they pay out less money this way, as opposed to the person starting to use full benefits right away.



Non-tax-qualified (NTQ) policies have one more trigger for care - ambulating, which tends to make them attractive-seeming to most laymen. However, they usually require three triggers to be pulled (ADLs requiring assistance), as opposed to a limit of two for tax-qualified. This is kind of like showing pictures of something that looks like a Rolls-Royce, but the the interior is vinyl, the body is made out of plastic, and the engine came out of an old Yugo.



Indeed, almost all of the games you will hear about being played are with NTQ policies. The issue is this: In order to become Tax-qualified, the policies have to toe the line of legal requirements. So the NTQ folks, who don't meet the guidelines anyway, offer all kinds of bells and whistles that don't really mean anything to make their policies appear more attractive to those who don't know any better.



You see, NTQ policies are NOT generally deductible on schedule A of your income tax as a medically related expense. Furthermore, if and when they pay you any benefits, those benefits are taxable income. Remember I told you in the previous column that median billing was about $200 per day? So if you're in there the whole year, that's about $73,000 of taxable income, on which someone in the 28 percent federal bracket pays $20,440 on federal taxes, never mind state taxes.



Tax Qualified, or TQ, policy premiums are deductible as medical expenses, and the benefits they pay out are not taxed.



Now, for those readers who like myself, may have some knowledge of the nature of the tax code, let me take a minute for an aside. I am well aware that, in general, the IRS only allows, at most, one end of a transaction to get away from taxes. So this kind of got my attention, and before I sold any policies I verified it extensively. I confirmed a few days ago that it is still that way. To further ease your mind, remember that these are health insurance policies. The premiums I pay to my HMO are deductible, and the dollar value of the care I receive is not taxed. Tax Qualified policies of Long Term Care Insurance are treated the same way.



What this means is that it is very hard for me to imagine a scenario where an NTQ policy is better than a Tax-Qualified one. Indeed, I've never sold any policies that weren't. It is for this reason that the state of California requires all Long Term Care Policies to state whether or not they are designed to meet the requirements to be tax qualified. Ask the agent looking to sell you one of these straight out whether it's a tax qualified policy. Any answer other than a one word straight "yes" or "no" is grounds for terminating the talk. Walk out of their office or throw them out of your home, and go find an agent who knows what they're doing and is willing to give you straight answers. And if the answer is "no", ask them to tell you about a policy that is tax qualified. You see, one of the ways NTQ policies get sold is by paying higher commissions. They are harder to sell, because they aren't as good for most people, so the companies give the agents a reason why they want to sell them. More $$$. It's your call, but I wouldn't do business with anyone who tried to sell me an NTQ policy, and yes, that means jettisoning them and finding someone else for your future needs, even if you've been doing business with them for decades. They've just demonstrated that they don't have your best interests at heart.



I also want to make the point that agent's commission should not, in general, be one of your criteria for choosing a policy. That's a good way to end up with a policy that's too small to do you significant good, as smaller policies pay less in commission also. Shop by the cost and benefits to YOU. A good agent will show you how they arrived at the figure of the coverage they are recommending, and if you shop around, the good agents will all come up with similar figures and the same way of calculating it.



Back to the main subject: we can regard it as settled that, in general, you want a tax qualified policy. Let me tell you about a subtype of tax qualified policy that people who are lucky enough to live in California, Connecticut, Indiana, and New York are able to buy: Partnership.



All Partnership policies are tax qualified. But in addition to their ordinary benefits and their tax qualified nature, Partnership policies have an extra feature: Medicaid asset protection. If you'll remember, when I was talking about Medicaid (Medi-Cal here in California), I explained that before they will give you benefits, you are required to spend your assets on your care (or give them a lien in the case of your house) down to where you are basically poverty stricken. And indeed, if the benefits you have purchased under any other long term care policy have run out, that is precisely what you still have to do. Indeed, many people give their assets away during their policy benefit periods, so that when the policy runs out, they no longer own or legally control the assets and are eligible for benefits without a spend down. Since California's thirty month lookback was the shortest in the nation last I checked (many states are at five years), this means you need to buy a policy where the benefits are going to last longer than that.



But once a Partnership policy's benefits are exhausted, it protects from Medicaid recovery not only the same assets everyone else gets to protect, but additional assets as well, on a dollar for dollar basis. For every dollar the policy paid out before you applied for medicaid, you get to keep an additional dollar in assets, in addition to whatever everyone else gets to keep. Say you had a two year policy at $200 per day. That's $146,000 you still have and that you get to keep. The Partnership instructor I had told us in class that she calls her policy her Visitors Insurance. Because she's still going to have money, her family and heirs are going to want to keep visiting her so that they don't get written out of the estate. Horrible thought, but this wonderfully funny lady is in her sixties and has been working with nursing home issues her whole life. She has seen too much of what really happens in these instances to be ignored. Visitors also means better care. Not to mention the fact that she will have had a policy in the first place, which means that if the facility she ends up in takes Medi-Cal patients at all, they have to keep her, and that means if there's no Medi-Cal bed, she stays in the non-indigents ward until there is, so she's not going to end up in Barstow, where it's tough for friends and family to visit, and she will have hundreds of thousands of dollars to make her life more tolerable when she is moved to the Medicaid ward.



For this reason, the thing that makes sense with Partnership policies is to buy enough to protect your liquid assets (The New York program uses a different, in my mind far more onerous and less cost effective, plan where you have to buy a minimum of three years of policy benefits). In other words, the dollar value of whatever investments you may have. Since I'm in a Partnership state, this makes it easy to calculate how much of a policy would accomplish that. In non-partnership states, there's more guesswork involved, and a large amount of sheer guts on behalf of the client.



Let me state emphatically that by inducing people who can afford them to actually buy Long Term Care Policies, Partnership policies save the states who have them a large amount of money - billions of dollars - as those people who would have needed state based aid now have insurance policies to cover their needs. The folks at the California, as well as New York, Connecticut, and Indiana Partnerships for Long Term Care, have saved their states blortloads of money by having this program in place. Luckily for all concerned, this includes two of the three most populous states.



(Supporting articles here and here and here)



However, back in 1993, OBRA (Section 1917 Paragraph 3, about halfway down the page, is the reference) was passed, which at the explicit insistence of Congressman Henry Waxman, who was then chair of the Commerce Committee's Subcommittee on Health and the Environment, removed from all future states the ability to waive or modify the asset recovery requirement of medicaid. (I understand that Iowa and Massachusetts also have plan documents dated early enough, but have not actually implemented a Partnership program, and the Massachusetts document is even more onerous than the New York one, but better something than nothing). I understand Congressman Waxman's concern for the budget, yet nonetheless by their propaganda you would expect Democrats to be in favor of something that benefits the middle class like this - particularly the lower middle class blue collar worker, and actually ends up saving the taxpayers money, to boot. Of course, Congresscritter Waxman is from California, which already had a program in place, and he grand-standed against "Money for the poor being used to pay for care of millionaires". He represents a heavily blue collar district in Los Angeles, so you'd have thought he'd have done more research as to who it actually benefits. So due to this gutting of the primary benefit of having a Partnership policy, there will be no more of these wonderful programs until the law is changed back to what it was prior to 1993. In my opinion, whichever politician gets such a law through Congress should be a national hero. It gives people real incentive to buy a policy if they can afford it, secure in the knowledge that even if it doesn't cover everything they need, they won't be destitute after it runs out, while saving the Medicaid program tens to hundreds of thousands of dollars per patient.



So there really is such a thing as an insurance policy that keeps paying you even after the benefits are exhausted. Partnership policies are no more expensive that any other policy, and they provide asset protection, as well as additional benefits. If you are in a state that has a Partnership for Long Term Care, I would not consider any policy that was not a Partnership policy. Here in California, every policy sold must state whether it is or is not a Partnership policy. If it makes sense for you to buy a Policy for Long Term Care Insurance (a subject I will tackle in the next article), and you are in a state that has such a program, make certain that the policy you buy is one of those policies available through your state's Partnership for Long Term Care.



Links to the four states with Active Partnership Programs:

California

New York

Connecticut

Indiana



(Continued in Part III here.)

Caveat Emptor

UPDATED here

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