The Biggest Risk to Your Golden Years -- It's Not What You Expect

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Retirement

It Isn't What You Expect

Two hints: it's not inflation, and it's not taxes. The biggest risk to your nest egg is a long-term care event.

With the average cost of long-term care in an assisted living facility at $3300 per month, a $100,000 nest egg could be wiped out in two-and-a-half years. A private room in a nursing home at an average daily rate of $222 will decimate that $100,000 balance in just 15 months. Still worse, the cost of long-term care has increased nearly 6% annually for the past five years.

Advances in medicine allow us to live longer, but have increased our need for care when we're old and worn out. And if acute diseases like heart failure don't do us in, the chronic ones like Alzheimer's and cancer eventually do. In the process, they'll extend the number of months -- maybe years -- that we'll likely need long-term care.

The four options we have when facing a long-term care event include spending down our assets, relying on family, going on Medicaid (not to be confused with Medicare), and buying long-term care insurance. Long-term care insurance policyholders typically cite "not wanting to be a burden on family" as the main reason for purchase.

The Odds Speak for Themselves

Consumers hate paying for something on which they may never see a return, but consider the following.

  • Odds of your home burning to the ground -- 1 in 16,000
  • Probability of totaling out your car -- 1 in 100
  • Odds of meeting a $2,500 medical insurance deductible annually -- 1 in 25
  • Probability of needing long-term care -- 1 in 2 for a woman; 1 in 3 for a man

We wouldn't go a day without owning home, auto, or health insurance. But statistically speaking, the probabilities of these events occurring pales in comparison to that of needing long-term care.

Want even more reason to ponder long-term care insurance for yourself or a loved one? Consider this: Over half of U.S. states have "filial support" laws that could prod you into forking over cash for your parents' unpaid long-term care debts.

Long-term Care Insurance 101

Health insurance and Medicare help pay for immediate medical expenses, whereas long-term care insurance helps people cope with the cost of chronic illnesses.

Long-term care insurance typically covers out-of-pocket expenses that come with home care, assisted living facilities, and nursing homes. The policies pay for help with everything from the basics, like dressing and bathing, to skilled care.

A long-term care insurance policy creates a pool of money for your future use. How big the pool is depends on the size of the policy; the larger the pool, the bigger the premiums. How fast the pool is drained depends on what type of long-term care is required and how often it's needed.

The Biggest Risk to Your Golden Years -- It's Not What You Expect

Sadly for users of acupuncture, massage, chiropractic adjustment, herbalism and other medical treatments outside the mainstream, the Affordable Care Act will only cover "essential health benefits" -- an umbrella that, many analysts argue, does not include "alternative" or "complimentary" medicine. Some critics of the Affordable Care Act argue that this will, effectively, kill alternative medicine in America.

On the other hand, most insurers offer policies covering some form of alternative medicine, and they've done so without a federal mandate. Further, some states have required that insurance plans cover certain alternative treatments -- for example, in California, insurers must cover acupuncture and chiropractic. It remains to be seen if these individual states will keep their alternative medicine requirements.

There is some truth to this rumor, although it isn't nearly as comprehensive as Obamacare critics are arguing. In reality, the new tax, which goes into effect in 2013, would only apply to households making more than $200,000 per year, and would only be levied on extremely profitable capital gains. To be specific, you will have to pay this tax if you:

- Make more than $200,000 per year ($250,000, if you're married);
- Sell your home;
- And make more than $250,000 in profit on the sale ($500,000, if you're married).

 Then you would have to pay a 3.8% tax on any profits above $250,000 ($500,000, if you're married). So, for example, if you and your wife earn $260,000 a year, and your sell your house for $510,000 more than you paid for it, then you would have to pay 3.8% tax on $10,000 ... or $380.

A grain of truth, yes -- but not quite as daunting home sales tax as the critics are arguing.

Under the requirements of the PPACA, companies with more than 50 "full time equivalent" employees have to offer a health care package that doesn't cost more than 9.5% of a given worker's salary. If enough workers don't opt into the employer-sponsored health care program, the company can face steep fines.

But there's a loophole: Companies don't have to offer health insurance to part-time employees. Consequently, conservative pundits have argued that many companies will shift to hiring only part-timers as a means of lowering their health care costs.

There may be some truth to this -- after all, the recession brought with it a 20% increase in part-time employees, as companies cautious about expanding their payrolls avoided full-time hires. Given that fact, it seems odd that the PPACA would offer yet another impetus for companies to avoid creating full-time jobs.

On the other hand, as Sarah Kliff recently noted in The Washington Post, when Romneycare passed in Massachusetts, there wasn't a mass shift toward part-time employees. Part of that can be credited to the fact that providing health insurance actually has some benefits for employers: In addition to encouraging employee retention, health insurance costs are paid for out of pre-tax dollars. In other words, a dollar paid into health insurance is worth more than a dollar paid into salary, an equation that benefits employers.

This is not just semi-true; it's plain ordinary true.

The requirements for employer-backed health insurance plans are that they have to cost less than 9.5% of an employee's salary. If an unmarried worker making more than 133% of the poverty line refuses to get this employer-sponsored (and, often, subsidized) insurance, he or she will have to pay a minimum penalty of $695 and a maximum of slightly less than 2.5% of yearly income. In other words, a single filer can choose to pay 9.5% of his or her income ... or a penalty of less than 2.5%.

As for employers with 50 or more employees, they will eventually be forced to pay a penalty of $2,000 for every full-time employee who opts out of their plan. Given that, in 2011, the average employer health insurance contribution for a single employee was $4,508, the average employer would save $2,508 per single worker by refusing to offer competitive insurance.

To further sweeten the pot, employers are not required to insure part-time workers, and can deduct their first 30 full time employees.

So, to take as an example a scenario inspired by the Congressional Research Service, consider a firm with 35 full-time employees, and 20 part-timers who each work 24 hours a week (equivalent to 16 full-time employees). The company would have 51 full-time equivalent workers. When the penalties finally go into effect, if the owner of that company chooses not to offer insurance, he will only have to pay $10,000 in penalties -- as opposed to $157,780 in health care contributions.

This is also true, to a point. In addition to the 3.8% tax on some capital gains, the PPACA contains several other taxes, including:

- A 10% tax on indoor tanning booths.
- A 0.9% tax on filers making more than $200,000 per year
- A new tax levied on insurers who market luxury-level health care plans whose premiums cost more than $10,200 for individuals or $27,500 for families.
- A 2.3% tax on sales of medical machinery
- A tax on pharmaceutical manufacturers
- A new tax on insurers, scaled to their market share


In addition to new taxes, the PPACA will also place limitations on some previous tax breaks:

- People will only be able to put $2,500 of pre-tax income into their flexible spending accounts. (This isn't really a new tax, so much as a limit on an earlier tax break).
- A reduced deduction for healthcare expenses

 So yes, the PPACA will actually create a bunch of new taxes -- very few of which will directly impact middle class families. Critics argue that many of these taxes will trickle their way down onto the middle class through increased premiums, higher prices for health care, or other charges. Another argument would be that the PPACA will also pour billions of dollars into the health care system, more than balancing out the increased tax levies.

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Long-term care insurance can be purchased either as an individual policy or part of a group plan. Many employers offer group long-term care insurance. Benefits of group plans include inexpensive premiums and no need for medical underwriting.

If you're considering purchasing coverage as an individual, be aware that the underwriting process is getting more conservative, and rejection levels are higher than they were just five years ago. Medical records are reviewed in the underwriting process, and a phone screen including a memory recall test is typically involved. When considering an individual policy, keep in mind that the premiums steadily increase after age 60.

What to Look for When Evaluating Insurers

Long-term care insurance leaves a sour taste in people's mouths because of the exit of several insurance companies from the industry and recent premium increases that have affected some policyholders. But now that insurers have factored in the impact of low interest rates on their ability to generate income to pay claims, the majority of rate increases should be over.

Look for insurers with tenure in the business, exhaustive actuarial data, solid financials, and significant business in your state.

Lastly, keep in mind that long-term care insurance is not a one-size-fits-all solution. There exist cases where it makes a lot of sense and others where it just doesn't. So do yourself and your loved ones a favor and evaluate this for your own situation.

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