The shaken 8 ball says…………………”probably”
According to government statistics if you live to age 65 there is a 70% chance that you will need Long Term Care of some kind after that point. According to research by the Office of Health and Human Services, the average person turning 65 will incur $138,000 in future LTC services. This could be anything from a family member helping you day to day at home, a nurse professional at home, all the way to full time care needed at a long term care facility.
This is not an easy topic to think about or discuss but with tens of millions of people who will find themselves in that position in the upcoming years it is mandatory to get over the uncomfortable nature of the topic and discuss options. You basically have 3 options at your disposal:
- Do nothing and hope you are in the 30% that needs nothing of the sort or pray that if you are one of the 70% you won’t need “much” care and maybe a family member could help when the time comes
- Plan ahead and purchase a long term care insurance policy for you and your spouse and pay monthly premiums that would cover you both (to what degree is very much individual company and policy driven)
- Structure your existing assets to create a “hedge” or “cushion” that could pay for long term care or home health care expenses and possibly without any monthly premiums payable. Typically referred to as “Asset based long term care”
The first option is what most people choose and it’s hard to blame them because it’s without a doubt the easiest (currently) decision to make. Most people decide by not deciding or being properly educated about the other two options that are available. Surely, you and your spouse will fall into the minority group of 30% or into the “Not too expensive or long” group of people in the 70% majority that will need some type of care; right?
If you are correct with your hope and wish, and both you and your spouse don’t need long term care help in your later years, than you have dodged the proverbial bullet. If, however, your bet is a loser then you run the real possibility of not receiving the care you need or receiving the care you need but at cost of draining all the assets you have worked so hard to accumulate during your lifetime. You run the risk of leaving behind little to no estate for your family or cherished causes.
Many people who find themselves needing long term care, but haven’t planned for the possibility, end up attempting to transfer assets out of their names into family member’s names or trusts to appear poor so they can have their care paid for by the government. This strategy is wrong on many levels. First there are very specific time tables when those transfers will have had to occur BEFORE you knew you needed long term care (usually years before) and most people fall well short of meeting these time tables. This will mean you will have to exhaust almost all your assets before any help from Uncle Sam kicks in to help.
If the government is involved and paying for your care, do you think you will get the best care available allowing you to extend your life; in time and in terms of quality of life? Just look at the VA health system and realize you will likely be getting the same sub-standard care.
Also, I have always wondered why the government should have to pay for someone’s long term care? I am not talking about the truly poor and needy as I think we have enough wealth to provide needed safety nets to that group of people. I am talking about people who have worked their entire lives and built up assets. Those assets are meant to be used to make your life better and if you leave money behind to your family that is an added bonus. We are not supposed to fleece the system because we refused to plan accordingly when we had the means and ability to do so just so we can leave our family behind a chunk of money. If you want to pay for your care and leave money behind to your family then this will require knowledge and planning.
The second option is to take out long term care insurance policies for you and your spouse. This can be a great way to plan ahead for the possibility of needing long term care in the future. These premiums will not be inexpensive but neither is long term care or eventual poverty. There are many variables to these plans based on the kind of coverage you’re looking to obtain. The upside is you will have an insurance policy that will pay out monthly to help you and your spouse pay for long term care expenses (make sure you can use the policy for home health care as well as actual long term care facilities) should they occur. Terms and amounts will vary widely so if this is the way you decide to plan for these expenses find an agent who has much experience and knowledge about these kinds of policies and has access to several of the top carriers in this arena.
The downside of this option is that many people can’t afford the premiums and even if they can afford them, if they never use the policy they don’t get the money back (in almost all cases) just like your car insurance. If you don’t file a claim on a car they don’t send you back all your premiums because if they did the entire system would become insolvent. It is very possible that you could pay tens and even hundreds of thousands in premiums and yet never need the coverage. This is a thought that drives many crazy and causes some not to decide to use this option.
(If you would like more information on this topic visit www.perpetualltc.com for a short video presentation.)
The third option is called “Asset based long term care” and it has several variations. Let’s talk about the most common use of this strategy. A person might opt to take a sum of money and open up a specifically designed life insurance policy. Most of these policies are opened up with a very specific goal of generating a death benefit but that “death benefit” can be accessed during the applicant’s lifetime to pay for long term care expenses. The applicant put in a certain amount of money (could range from $50,000 to $200,000 per applicant) and buys a life insurance policy on themselves. Let’s use $50,000 one time single premium into the policy that buys a $200,000 death benefit and that death benefit is guaranteed not to go away after that single premium.
This is not done to have the $50,000 premium actually perform and do anything except generate the bigger death benefit. However, there will also be cash value generated that can be accessed should the policy owner choose to in the future. Any loans taken from the policy will reduce the eventual long term care payout. There is a rider built into this type of policy that allows you to access your death benefit early should you need long term care. (Make sure the policy will allow you to use the benefit for home health care as well as going to a facility) So in this case you could draw up to $200,000 to pay for long term care expenses. If you went into a facility this would be enough to pay for about 3 years of care (depending upon where you live and what kind of facility you enter) and if you can stay at home your money would typically last longer assuming it is part time nursing or family members coming in to help you live.
What happens if I live longer than the benefit? You will then start using other assets or consider putting in more money up front to generate a bigger death benefit. Maybe $100,000 would generate $350,000 worth of death benefit that could be drawn on later for long term care. There are also certain policies that might have a “lifetime long term care benefit” after that initial period of coverage is spent you might be able to pay some nominal annual premium on top of the upfront premium already paid years beforehand. There are many options depending on the company and product chosen.
What happens if I die and never need the long term care benefit? Simple, this is a life insurance policy so the $200,000 death benefit is paid out tax free to your heirs. So with that up front premium you either get a higher multiple to use for your eventual long term care or you leave that amount behind for your family.
We hope this article helps shine some light and makes you aware of the options for you and your family. If you would like more information on asset based long term care please visit www.perpetualltc.com for a short video presentation.
Did you know it’s not preordained that you must lose money in the stock market? If you use the strategies of indexing and resetting you can grow your money without the risk of stock market losses. Enjoy this quick video explaining these two powerful yet little used strategies and let us know if we can help further.
Many Americans have traditional Individual Retirement Accounts, where your annual contributions are reduced from your taxable income, yielding a tax deduction now, but your withdrawals are taxed. And many also have Roth IRAs, where the money you invest is taxed normally in the year you deposit it, but the profits grow tax-deferred and can be withdrawn tax-free after you retire.
The two options raise the obvious question: Would you rather pay tax on the seed money now or the crop of money later? This point has been debated for years, but for this post we are going to assume you would rather pay the known tax now vs. an unknown tax later.
Many people with traditional IRAs also open and fund a Roth IRA. But, if you’d like, you can convert a traditional IRA into a Roth account. Taxes are due on any amount you convert. The benefits of conversion:
- Tax-free qualified distributions.
- Tax-free growth of earnings.
- Uncertainty of future tax rates eliminated.
- Lower taxes owed on retirement benefits, such as Social Security
- No required minimum distributions.
- Possible larger estate to leave behind for heirs.
As great at these benefits are, a conversion may not be for everyone. The longer you have until the money is needed, the better a move conversion can be. Get advice from a professional, input your data into one of the many software programs designed to calculate the costs and benefits, or email me for a free customized analysis.
Partial Conversions Can Be Powerful
Many people don’t realize that they can convert just a portion of a traditional IRA. If you combine the partial conversion with certain financial products, your tax burden can be lessened dramatically.
Let’s assume you have $400,000 in a traditional IRA and your effective tax rate is 20 percent.
You initiate a partial conversion of $130,841, which would mean you have to pay $26,168 in taxes. This gives you $104,673 for your Roth account and leaves you $269,157 in your traditional IRA.
You could elect to combine the conversion with a rollover into a solid fixed indexed annuity that offered a initial premium bonus. If you roll over your $269,159 traditional IRA into a product that gave you a 7 percent premium bonus and did the same thing with your new Roth account with a balance of $104,673 after taxes, then you would receive a $26,168 bonus that would put your starting balance of your combined IRA accounts back to the original $400,000 before the conversion.
The difference is that now $104,673 is now tax-free and not just tax-deferred. Assuming a modest 5 percent growth rate inside of both accounts, after just 10 years, you would be $43,785 ahead with this strategy than if you just let your traditional IRA stand. In 20 years, you will have over $83,000 more in your combined accounts (even after factoring in the taxes on your traditional IRA) than you would have had without the conversion.
Creating and preserving wealth is much like any other endeavor in which you would like to have success. A good system plus discipline equals more success than just “winging” it in life. This one simple strategy can create tens and even hundreds of thousands of extra dollars in your later years or to leave behind for those you love. If you would like more information on this strategy visit us and request your free report.
When my mother entered her 70s, she began focusing more on what she would leave for her kids than her own financial well-being. She was more than fine; she had assets and steady income from two pensions, Social Security and an annuity. If you’re in that phase of life, you may have similar priorities. The question is: Do you know the best ways to increase your estate?
Most people mistakenly believe that once they stop working, their net worth will shrink as they draw on assets for living expenses. Many people who are still working into their 60s and 70s also believe that it’s too late to add any significant wealth to their estate. Neither of those has to be true — if you have a well-designed plan.
Whole Life Policy
Let’s consider a client who is 64 and plans on working another 10 years. He is reallocating some existing assets and putting some extra cash into life insurance. We are not talking about an end-of-life policy sold by the truckloads by TV personalities with a $10,000 payout to cover funeral expenses. This might be a good call if you have very little in assets and worry about your kids paying for your funeral. This client has some resources, so we could do something a little more creative.
He elected to fund a whole life policy with $25,000 a year for eight years for a total of $200,000. His starting death benefit is $310,000. If he dies in the next eight years, his family would receive $310,000 to $508,000, depending on when that happens. If he reaches 72, he will have the entire $200,000 that he put into the policy over those eight years back in the form of cash value in the policy. He is free to take loans and disbursements, or just let the money sit and grow during the rest of his lifetime.
Should he reach 85, he would have more than $376,000 of cash value in the policy — even though he has only paid in $200,000 into it. Upon his death, his family will receive more than $470,000 of tax-free cash. He will more than double his estate by simply reallocating assets and letting tax-free compounding and guarantees go to work. Meanwhile, he can access the cash he is funding the policy with. If he does, he will lower the death benefit, but he has no need in the foreseeable future.
Fixed Indexed Annuity
Another client, who is 70, had concerns about leaving money behind to benefit a child with a mental handicap. The first step was finding a rock-solid trustee to make sure any money benefits the child after the death. Since the client was 70, the cost of life insurance was prohibitive.
The client had put away $300,000 for the child. The last market downturn had cost $130,000, but most of those losses have been recouped.
The client was very clear on wanting no market risk and elected to go with a fixed indexed annuity with a death benefit rider. This rider guarantees that the $300,000 will never decrease in value and will increase at a minimum of 4 percent — plus any indexed market gains. The least average growth rate combined with the 4 percent percent guarantee means that if the client dies in 10 years, the client will leave behind more than $650,000 in cash. If the client lives only five more years, annuity will leave behind $488,000.
A fixed indexed annuity can also have a lifetime income rider that guarantees you income no matter how long you live and even if the underlying cash goes to zero from income withdrawals. The National Association of Fixed Annuities has more information about how these products work.
Image Credit iStockPhoto -by nanita
Last week, I introduced my concept of the six circles of wealth, and discussed the first circle, cash flow. The second circle is investing. Simply defined, an investment is an asset whose value can grow or shrink. Some of the most common investments are:
- Stocks and bonds.
- Mutual funds from many different asset classes, including stocks and bonds.
- Gold and other precious metals.
- Real estate.
- Commodities, such as oil, frozen orange juice and wheat.
Some are less commonly used:
- Private placements (money is pooled and invested in properties, venture capital, inventions or other assets).
- Limited partnerships (money is pooled to invest in something a general partner usually has expertise in).
- Notes and income streams (this includes payments on a note, private contract or annuity).
- Tax deeds and tax liens (a form of real estate with different rules).
In passive investments, you have no say in what is done with your money once you invest it. You are relying on other people’s expertise. Examples from above would be:
- Stocks held for long term (stock trading is more of a business venture).
- Mutual funds.
- Private placements (assuming you are just a cash investor and not the principle).
- Limited partnerships
Active investments require more of your time and expertise to make them successful. As a rule, the more effort and specialized knowledge required to make an investment successful, the bigger its potential returns. Examples from the above:
- Real estate will require you to study values, rents, acquisition techniques, liquidation strategies and other factors. To be a successful real estate investor, you must think build a team of professionals.
- Business investing will require you to understand the business and the industry and to have a team of professionals and maybe even joint venture partners. There is potential for huge returns and a loss of your entire investment.
- As the general partner in a limited partnership investment, you are the one with the expertise and time. Many times you will not invest money (although every arrangement is different). You will need a power team and the ability to raise private capital.
- Discounted notes and income streams will require knowledge of collateral, cash flow, figuring rates of return on discounts and the ability to find private notes for sale.
- Tax deeds and liens cover parcels (mostly unimproved land) that are auctioned off for back taxes. Great deals are possible, but you need to know the rules (every state and most counties in the state are different), the values, possibilities for land and guarantees offered by the local government.
Maybe splitting your investments between hands-off and hands-on programs makes the most sense. You might need to spend some time educating yourself to make hands-on investments succeed. Simply book time in your schedule to read, listen to CD’s, and attend workshops that will help your eventual goal of solid hands on investing returns.
More Than Just Investing
Many people might think I have left out certificates of deposit, savings accounts and life policies as investments. These are important parts of your wealth plan, but since they are guaranteed, risk-free products — you can’t lose money in them — they fall into other circles.
I also don’t include options on stocks or commodities in the investing circle. Most of the time, options are very short-term cash-flow plays. They require the stock or commodity you’ve bought options on to move a certain way fast if they’re going to pay off (up for call options, and down for put plays). They’re more a quick cash-flow generator rather than a longer-term investment strategy.
Far too many people make the mistake of just focusing on their investment circle while letting other circles fall into disrepair. Picture the six circles of wealth operating in a balanced way. When one circle gets too heavy or out of control, all the other circles suffer. When you understand this (and so few people ever do) you can take steps to balance out the circles and create a financial fortress.