May 2009 Archives

May 30, 2009

Retired & Broke: Don't Use Retirement Funds To Pay Debts

The recession has hit people of every age and income level, including retirees and those contemplating retirement. A combination of falling real estate and stock prices combined with the loss of part-time employment gigs has meant that many retirees who, eighteen months ago, felt financially secure and now find that they can't pay their credit card debts.

Let's start with what not to do. First on the "no-no" list should be invading 401(k), IRA or other retirement funds to pay credit card or most other personal debt. The reason is simple: Money in these funds is exempt by law from being grabbed by creditors to pay debt-related court judgments for the very good reason that lawmakers have gone out of their way to reserve these funds for your retirement needs. Or, put another way, if you invade your retirement funds to pay personal debt, you voluntarily hand over funds that in most instances can't otherwise be touched.

And money in retirement funds isn't the only property that's exempt from being grabbed by creditors. In most states, under "homestead laws", considerable equity in your house is also exempt from being grabbed by credit card companies or others to whom you owe personal unsecured debts. For example, in California, the homestead exemption is $150,000 for people over 65 (or 55 for many low-income residents).

In addition, many states have a long list of other exempt property that is yours to keep no matter what your debt level.

So again, the larger point is that if you are a retiree facing a true debt crisis, it's key to understand debtor protection laws before you get stampeded into making poor decisions -- one of the poorest being to take fully protected retirement funds to pay off credit card debt. For the information necessary to come up with a debt workout plan that will fit you like a glove and not a handcuff, see Nolo's Solve Your Money Troubles, by Robin Leonard & Margaret Reiter, a book that's likely to save you at least 100 times what you pay for it. Now there's the best deal you've been offered in many a day.
May 25, 2009

What Does A Good Long-Term Care Policy Look Like?

In the last few years, many insurance companies have improved their long-term care policies. But, as with any consumer product, some are better than others. Here's a list of things to keep in mind when you're looking into long-term care insurance:

  • Consider policies from good-sized, reputable companies rated AAA by Standard & Poor's or Moody's, or A+ by Best Insurance Reports. Many small companies that issue long-term care policies are poorly funded and at risk of cashing in their chips before you do, so make sure you've picked a solid insurer.
  • Be sure that the daily benefit the policy pays enough to provide decent care when combined with your Social Security and other income. For many people, this will cost at least $120-$150 per day. Also, look for a policy where the benefit amount increases with inflation. Given fast-rising costs in this area, many experts consider a 5% annual inflation escalator to be on the low side.
  • Realize that many policies limit the length of coverage to about three years, unless you choose to pay outsized premiums for unlimited coverage. Be sure you know what you're buying. Unfortunately, lots of people buy policies that cover a relatively few number of years -- precisely the period they would do better to self-insure.
  • Try to make sure you know how much premiums will cost in future years before you buy your plan. Or, put another way, decide on one of the relatively few policies that will absolutely guarantee the amount of your yearly premium. Beware of policies that will only say rates will not change with age or health -- many companies simply raise rates for all policy holders, claiming that the increase is to cover higher than expected costs.
  • Understand that policies have widely varying non-coverage periods. For example, a more expensive policy may provide that you only need be in a nursing home for 20 days before coverage kicks in; a less expensive one may require 100 days or more before the policy pays benefits. For most people, the 100-day or longer period may be worth considering if the cost is sufficiently lower.
  • Carefully read fine print regarding home health care. For people with serious medical conditions requiring round-the-clock care, home-based care can be as expensive as a nursing home. Some policies that are advertised as providing home health care simply limit the amount of care provided to an unrealistically low level, and even how much services can cost, effectively guaranteeing that an inadequate level of care will be provided by people with limited skills.
  • Just being elderly and infirm isn't enough to qualify for long-term insurance benefits, which helps explain why the majority of people living in elder communities and assisted living facilities aren't eligible for any benefits. In short, make sure you understand what medical condition will trigger the payment of benefits. Most policies won't pay unless you meet one of two main criteria: Either you're unable to perform two (or -- with the poorer policies -- three) activities of daily living, such as eating, bathing, using the toilet, moving about, and maintaining continence; or you have serious mental or cognitive impairment, such as that caused by Alzheimer's, dementia, or other disease.
  • Check the periodic ratings published by Consumer Reports magazine, which take into consideration many important issues. Back issues of the magazine, along with a comprehensive subject matter index, are available at many public libraries.
May 21, 2009

Is Long-Term Care Insurance A Good Value?

Even though it's possible to significantly reduce the chances you'll eventually need long-term institutionalized care, as discussed in this previous entry, you can't eliminate the possibility. And given the high cost of an extended stay in a nursing facility, doesn't it follow that buying insurance makes sense?

For the poor and affluent the answer is clearly no, albeit for different reasons. But for middle- income people, depending on several factors -- most importantly whether they are single or coupled -- the answer may be yes.

First, let's consider people with low to lower-middle incomes and savings levels. Given that the premium for a care policy with even mid-level benefits can cost over $1,000 annually at age 55, and upwards of $2,000 at 65, people in this group simply can't afford it.

In my view, it's better to spend the money affording a decent life now, relying on Medicaid to cover care costs later should they turn out to be necessary.

The affluent should usually say no to long-term care insurance for a different reason. Given that the majority of seniors will never enter a nursing home and of those who do, only 25% will stay more than a year, simply paying the cost out of pocket is likely to end up being less than 30 years of premiums which, of course,could otherwise be invested.

And even if an affluent person spends two or three years in a nursing facility, it won't be a financial disaster, since Social Security and other income will cover part of the cost, and receipts from the sale of the person's house or condo will easily cover the rest.

But long-term care insurance can make more sense for middle-income Americans with moderate savings, especially single people. The fact of being single is important since it raises the odds of needing long-term care. That's because, with a couple, when the first spouse begins to need help, the other often provides it at home.

And single or married, middle-income Americans with savings in the $200,000 to $400,000 range may want to purchase long-term care insurance for economic reasons. On the one hand, provided you're willing to scrimp a little. And on the other, should one or both members of a couple be unlucky enough to be in the small group who needs institutionalized care for many years, the money will be there to provide it.

In my next post, I'll discuss what kind of policy, assuming you are interested in looking into the purchase of long-term care insurance.