Thursday, January 18, 2018
Long-Term Care Insurance
Should you buy long-term care insurance? Is it even affordable at this point? If you have a policy should you continue paying on it? These are all difficult questions.
First an update: Apple computer is now saying they plan on repatriating hundred of billions of dollars under the new tax law. Apple claims they will invest this money in yet another new headquarters building, bringing their flying saucer fleet up to two. Next stop: Home planet of the lizard people! However some are questioning whether the new tax law influenced this decision or whether it was their plan all along to expand their presence in the United States. Apple is listed as the number one American company who is hoarding money offshore. So maybe it is just possible that this new tax law is having its intended effect in repatriating capital. Stay tuned.
On the other side of the spectrum, old school company General Electric, the company that basically created the entire electricity business over 100 years ago - without which Apple would never had existed - is facing hard times. There is talk of splitting up GE into a number of separate companies although some analysts question whether this is feasible, as the value of the individual companies would be less than the current stock price.
And that's saying a lot, considering GE has lost more than 40% of its value in stock price over the last year alone. And yes, I got burned on GE stock (but not their bonds) - but got out several years ago, losing only about 5% of my investment. This illustrates why stock prices and real company values are two different things. Market capitalization or "market cap" as they like to call it, is an imaginary number created by multiplying the share price times a number outstanding shares. However this doesn't necessarily represent the real value of the company if it was broken up and sold in pieces, or if it was liquidated. It's merely the perception of value based on shareholder sentiment. Think about that the next time you buy stock, particularly in this overheated market.
Anyway, during the go-go years of Jack Welch, GE expanded dramatically into the financial sector through its subsidiaries GE Capital. GE Capital is very aggressive about loaning money to people. When I put a new air conditioner on the roof of our office building on Duke Street, GE Capital offered to lease me the air conditioner for five years. At the end of lease, I paid $1 for the air conditioner. It was a pretty attractive deal, as I could write off the cost of the lease on my taxes annually, rather than try to figure out a complicated depreciation schedule for a capital improvement. It was also cheaper than trying to finance it using conventional means.
Unfortunately, GE also got into the long-term care insurance business, or at least got into it through reinsurance. GE exited this business in 2004 but still has outstanding liabilities. And they've turned out to be substantial outstanding liabilities. Americans are living longer than ever and eventually ending up in assisted living and assisted living is getting very, very expensive. Long-term care can cost well over $100,000 a year, particularly if you have some sort of esoteric illness or disease. The cost of the claims is for exceeding the amount of money they received in premiums.
Jack Welsh did okay by himself. He set up a system where they created long-term liabilities for the company and generated short-term profits. At the time, he was hailed as a genius, as GE generated record profits. But now that he is long gone, the chickens have come home to roost and it's turning out he made some very bad decisions. In a way, this parallels what happened to General Motors. They made wild promises to the UAW in terms of retirement benefits and other perks. But they didn't properly fund these things and eventually the whole thing came crashing down.
The strikes me as a great way to make money - if you have no morals or scruples whatsoever. Rather than try to steal money from people directly - which might land you in jail in short order, set up a system where you get money up front and then have to pay back long after you're dead. The people come who come after you have to clean up the mess and you've safely shuffled off the mortal coil. Just a hint for you scammers out there - it seems like a safe and legal way to make money.
In the news this morning another article relating to long-term care insurance. This article notes that the premiums for long-term care insurance are starting to go up - doubling in some instances. Long-term care insurance isn't cheap. I wrote about it before with regard to my posting on Northwestern Mutual Life. My Northwestern agent was very persuasive selling me a number of policies including three life policies - whole, adjustable, and variable as well as a term policy. He also sold us disability policies which I ended up canceling as they're very expensive.
He tried to sell us long-term care policies and that's where I drew the line. He wanted $500 a month each for both of us for long-term care when we were only in our 40s. The amount of money we would have put into such a policy would have been a staggering amount of money over time - hundreds of thousands of dollars in retirement . It's not that such a policy might not have paid off - indeed it's possible we could easily spend much more than that a long-term care should we become infirm. However in the interim, we would find ourselves unable to retire as we would not have enough money to live on.
Only about one-fifth of Americans have long term disability insurance long-term care insurance according to the article. So we will join the majority of Americans in relying on Medicaid should we need long-term care. That is to say Medicaid and the money we have accumulated. Also, we can hope that we don't need long-term care, but of course one can't really plan those sort of things in advance.
Should you get long-term care insurance? For me it was a simple calculation. Spending $1,000 a month on insurance that I might or might not need just seem too expensive. I knew for sure I would need to have money to retire on and that was something more important for me to fund. Like most Americans, I found long-term care insurance to be unaffordable.
And like with disability insurance, what you are insuring is not your long-term care but your assets. When making the pitch for the insurance, my agent pointed out that if I should have to go into long-term care, Medicaid would first insist that I liquidate all of my assets and use them to pay for my care before they would kick in government money. Thus, what you are protecting with long-term care insurance is your assets that you might be leaving to your children or other descendants.
Since I don't have any children - or if I did I would be less worried about leaving that money - I felt this was ridiculous for me to pay so much money to insure my money. Besides, as I noted before, there are other ways of protecting your assets if you go into long-term care. Medicaid trusts and other techniques are well-known for transferring assets so they're not counted to work Medicaid payments.
To me, that seems like a lot cheaper solution than paying hundreds of dollars a month on something that might never happen. Better to put those hundreds into retirement savings, which can then be used for care, and when that runs out, rely on Medicaid, or throw yourself under a bus.
If you have a long-term care policy, should you keep it up? The couple profiled in the article is facing staggering increases in their premiums. One of them had to go back to work part-time just to pay the premiums for their policy which are about $5,000 a year at this point. Again, this is a difficult question to answer. At their age, they may be aware of medical infirmities that could result in their need for long-term care. As such, maybe smart to keep the policy in force as they may be collecting on an in short order.
On the other hand if you were just starting out with a policy and the premiums start going up, you might want to think about where this is going. At one time I had over $600,000 in term life insurance - which was a good thing to have as I had a couple million dollars in mortgages to pay. When I was in my thirties term life insurance was incredibly cheap - maybe at $200 a year for all of that coverage. But as I got older and older, the premiums started to get higher and higher. Eventually it reached a point where I realized that I didn't really need the insurance anymore as I had money in the bank and that paying ever higher premiums for this coverage wasn't really a worthwhile investment. So I dropped the coverage.
Whole life policies have fixed premiums - because an excess amount is invested up front to pay the difference later on in life. I ended up converting my whole life policies (two of them, anyway) to paid-up life policies, that not only require no premiums, but increase in cash value every year and also pay a dividend. Turns out I need the money more than my potential heirs do. The remaining policy has dividends that exceed the premiums, so it is self-funding.
And that is an interesting point about whole life versus these disability and long-term care policies (as well as term life). At least with whole life, you might be able to salvage something if you later on find out you can't afford the premiums. But term, disability, and long-term care plans may evaporate like ether, once you stop making payments on them. And if premiums go up, well, they aren't very affordable, are they? And that may be one reason companies are jacking premiums right now - trying to discourage people from keeping the policies in force, as the insurance companies realize they over-extended themselves in terms of liabilities.
For life policies, insurance companies can figure out how long you will live and know down to the penny what the payout amount is. So they can figure out the premiums down to the last dollar and offer "level premium" whole life policies. But long-term care coverage is an open-ended committeemen, and has gotten a lot more expensive as time as gone on. GE and others miscalculated when they sold these policies, and the promise of level premiums turned out to be a verbal promise for some policies - it was not in the actual documents. So premiums go up as you get older - to the point where you can't afford them, and might end up dropping the policy just a few years shy of when you need it. Irony.
Similarly, the disability coverage policy that my Northwestern agent strong-armed me into buying really was unaffordable. Yes, it is possible for horrible things to happen to you at age 40 and you end up in a wheelchair for life at which point you wish you had a disability policy. On the other hand if you bankrupt yourself based on this what-if proposition, then what will support you in your retirement years if you are not disabled? For me it was a very simple question to answer - I simply could not afford the premiums on the policy and I let it lapse.
Then there's the question of the solvency of the company. An insurance policy is nothing more than a contract. And if one of the parties the contract goes bankrupt, then you may have limited recourse. In some states life insurance policies are backed up by state agencies which will pay a portion of the policy if if the company goes bankrupt. But long-term care or disability? I am not sure these are covered. And given how the market is today, I suspect these policies may drag down one or more companies - and some have already exited the market. Over 100 companies wrote long-term care coverage a few years ago. Today there are about a dozen.
I started thinking, when I let that disability policy lapse, that perhaps I was over-insured. While insurance has its place in life, you can insure yourself to the point where you are bankrupt. Sure, you should insure your big-ticket assets, provided the insurance is affordable. But if insurance skyrockets in price - should you still buy it? This is the conundrum for pre-Obamacare health insurance policies. The amount you pay into such a policy is often equal to the cost of health care. You file a claim, your rates go up, because you are sick. You are not really buying "insurance" so much as you are funneling all your health care costs through an insurance company, who is taking a cut in the proceeds.
Or take car insurance. When I was in my 20's, I got into a couple of wrecks and got a lot of tickets. My insurance was over $3,000 a year for liability and collision - on a car worth maybe $3000 on a good day! Was this a value proposition? Or should I have just bought a cheaper, paid-for car and dropped collision and comp? I eventually paid off the loan on the car and did just that (and got into a wreck the day after!). Of course, what I eventually learned to do, was to stop driving like a maniac and since then, I haven't gotten a single speeding ticket - or into a wreck, that was my fault, anyway.
I guess for me, the idea of long-term care insurance or disability insurance are just non-starters. I simply don't have an extra $10,000 to $20,000 in income per year to spend on these "what-if" propositions, which would slowly drain my bank account over time, until I could only hope to become disabled or sent to long-term care, as the only means of supporting myself. But of course, long before then, I would have dropped coverage, as it became increasingly expensive and unaffordable.
And that sort of reminds me of the old joke: "A man wants to swim across the Atlantic Ocean in order to get into the Guinness Records book. He only made it halfway across and realized he wasn't going to make it, so he swam back!"
Buying a disability or long-term care policy and paying on it for a number of years and then dropping coverage seems sort of like the same thing. Better off not to buy, if you can't afford it, than to end up in the middle of the ocean, with nothing.