Paul Ferraresi

I continue to write about the need for Long-Term Care Insurance. Here are some tidbits on the tax deductibility of the premiums and tax status of benefits.

The most efficient route for paying premiums and receiving tax free benefits is if you have your own private company. Under this scenario the premiums are tax deductible and the benefits to the recipient are tax free. You can put all the “bells and whistles” on the policy and not worry about skimping. Ah, you say … I do not have my own company. For decades I have begged my client to set up some type of business. No, you don’t need a huge business just a basic home based type. It does not matter what you do … a hobby, consulting, etc, just so long as it generates income. There are thousands of home businesses, cheap to start up, and, provide good money. In addition to buying Long-Term Care insurance through this business, you can take deductions that a “working stiff” cannot, set up a method to fund your child’s college education on a tax deductible basis and more!

I hear you … “Paul, I am more concerned about my parents and their needs for LTCi”. Well, if they have an annuity, or are considering buying one, either qualified or non qualified, then, there is relief on the way (please contact us for questions on the best annuities).

Here is some great news for annuity holders, those considering buying an annuity that will take place in less than 2 years.

A tremendous opportunity

On August 17, 2006, President Bush signed the Pension Act of 2006 into law. Specific provisions of the Act will help usher in new and exciting opportunities for annuities and long-term care planning. These provisions provide tax advantages for annuities used to fund LTC and LTC insurance costs. With many in the marketplace, many annuities are uniquely positioned to help you benefit from the Pension Protection Act.

Pension Protection Act points of Interest:

• Cash value withdrawals from non-qualified annuities used to pay for LTC expenses, of HIPAA tax-qualified LTC insurance, will no longer be considered taxable income, regardless of cost basis. (Note: the above provision takes effect January 1, 2010 and does not affect claims or withdrawals prior to December 31, 2009.)
• Qualified LTC insurance, under section 7702B of HIPAA, can now be added to annuity contracts. The law even allows for qualified LTCi to be offered to annuities issued in the past.

What this means for Annuity Holders:

• All existing and new annuity holders will benefit. An amendment will need to be filed for and offered to existing contracts, making them tax-qualified by January 1, 2010.

Benefits to Annuity policy holders:

• Any LTC claims paid from the base policy will not be taxable.

The Pension Protection Act’s focus on tax benefits for asset-based LTC solutions verifies their stature in the financial services community, and offers a tremendous opportunity for you to make a difference in your financial future.

Why do people buy long-term care insurance? There are lots of reasons. A recent policy holder survey in which current Mutual of OMAHA LTCi policy holders were asked what motivated them to purchase a policy.

The underlying basic reason was that it was helping people protect their independence and their life savings. Although the purchase of these policies is an emotional issue, here are seven common reasons people purchase LTCi.

See if any of these are the reasons you and/or your parents made the intelligent purchase.

1) They acknowledge they’re getting older and want to be prepared in case they need help. The policy holders want to maintain their independence as long as possible. They don’t want to rely on their kids to take care of them or make decisions on their behalf. They certainly don’t want to spend their life savings on LTC services.
2) They want to stay at home as long as they can. Remaining at home is a top priority for most people. No one wants to think about going to a nursing home. Instead, the policy holders said they prefer to receive the care they need in the comfort of their own homes.
3) They’ve seen what happens to people who don’t have it. Overwhelmingly, the majority of policy holders surveyed (78 percent) said they knew someone – either a friend or family member – who needed LTC services. They talked about watching these people struggle financially and seeing the physical and emotional toll it took on their families. And that was enough to make them say, “I don’t want that to happen to me”.
4) They don’t want their kids to take care of them. Many people interviewed had experience caring for a parent. These folks know how difficult it is to juggle family and work obligations while providing care for an aging relative. And that’s why they don’t want their own kids to have to care for them. People said over and over … “I don’t want to become a burden to my family”.
5) They don’t want to spend their life savings on LTC services. People know LTC services are expensive. They also know that paying for the care they need without the help of an LTCi policy could quickly deplete their life savings. And that’s not something they’re willing to risk.
6) They want to leave an inheritance for their kids. Many of the policy holders said they want to make sure they have something left to pass on to their children and grandchildren. One person said, “My long-term care policy is in my name, but it’s for the future of my children”.
7) They know it’s the smart thing to do. Many people interviewed said they view LTCi like other types of insurance.

They have automobile insurance to protect them in case of an accident, homeowner’s insurance to protect them in case of a fire and life insurance to protect their families if they die too soon. These folks know LTCi is just a smart thing to have.

One Reason Not To Buy

The survey also revealed one important reason many people almost didn’t buy a LTCi policy: they thought it was more expensive than it turned out to be. One policy holder summed it up saying, “I didn’t think I could afford long-term care insurance. But I found out it is less expensive than I thought”.

Investing in LTCi is not just through standard policies. There are innovative methods using existing or new annuities, life policies, programs that are paid up in 10 years, return of premium programs and countless other alternatives. If you or your parents are over 40 years old it is time to get serious about this. Procrastination leads to costs increasing in the future and, later you may not qualify. Ah, ‘tis better to have coverage and not need it, than, need it and not have it – you know the old … “Discipline of Regret”.

[Danger: This article may cause heart problems]

The above question continues to surface as baby boomer approach retirement. For most boomers their answer is the Las Vegas Approach. Under this approach “you’re basically asking people to roll the dice and hope for the best”.

The first step is to determine “The number”. “The number” is the withdrawal rate from a retirement portfolio that creates the highest probability of sustainability until assumed mortality. Bill Bengen’s mid-1990 research gave rise to the 4% rule. Basically, Bengen postulated that retirees can withdraw about 4% annually from their liquid asset base with a high probably that savings will last 30 years. Take out more than 4% and the odds of sustaining financial independence began to decrease. Remember the 4% rate is only one ingredient of the required seven-layer cake.

So, one approach to success it to limit yearly portfolio withdrawal rates to 3 to 4%. That equates to $3,000 to $4,000 for every $100,000 saved. I am asked if this is $3,000 per month? NO! It is $3,000 per YEAR for each $100,000.

What is a safe withdrawal approach? Well, 2% is bulletproof, 3% is probably safe, 4% is pushing it and at 5% you’re eating Alpo in your old age. If you take out 5% and you live into your 90’s, there is a 50% chance you will run out of money.

Here is where the rubber meets the road. Suppose you need $100,000 per year in after tax cash flow. This amounts to $8,333 per month, in today’s dollars, net of Social Security or pension payments. Here is what amount is needed in capital at various withdrawal rates.

Those are the facts regarding what people need. Now the sad part. A 2005 Retirement Confidence survey showed total savings and investments by age group, not including the value of the primary residence to be low. The grim results for those age 55 and older as they plan for retirement: 39% have saved less than $25,000; 12% have from $25,000-49,999; 7% have from $50,000 to $99,999; 23% from $100,000 to $249,999, and, only 19% have $250,000 or more.

Look again at the eye popping numbers chart. Even if you cut monthly income in half to $4,167 per month ($50,000 per year) not including Social Security, and a withdrawal rate of 2% to 5%, a person still needs a capital base of $2,500,000 down to $1,000,000. Hmmm, yet only 19% of those in the survey have $250,000 or above, which is only 10% of the required level.

If you have been working with a professional advisor, then, the above numbers are not a shock. If you have been reading this blog, then, past articles have informed you generally. So, what is a “body” to do?

First off, you can use some of the principles of “Missed Fortune” that we have shared with you in the past. Make sure you work with a certified TEAM member so your program is done correctly.

Next, determine the amount of monies you need for these 5 categories:

1. Survival Income: The money one has to have to make ends meet. (That is “need” not “want”)
2. Safety Income: The money needed to meet life’s unexpected turns.
3. Freedom (Fun) Income: The money needed to do things that bring enjoyment and fulfillment to life.
4. Gift Income: The money needed for people and causes that one deeply cares about.
5. Dream Income: The money needed for the things one has always dreamed of being, doing or having.

Finally, you can determine the shortage and draft out a plan for success. Please do not wait until 5 years before your planned retirement date to start. Get assistance now!!!

Here is another reality check. Assume you are in the 25% marginal tax bracket, and, in retirement spending 4% of your base net of taxes, with a 3% inflation (low estimate). This scenario will require a gross average annualized return of 9.33%. Using all past studies a mix of 60% equities and 40% bonds at a withdrawal rate of 4%, sustained virtually every 30 year period back to 1926.

Caveat; If you retired in 1987, 1991, or 2001 you took a massive hit to your portfolio, so, it may not work out if you retire when the markets plummet.
Set up a 3 year liquid fund upon retirement so you do not have to draw on your retirement assets if the markets go into a 2-3 year dive.

Need assistance- contact us-

We will force to you have discipline, so, there is no regret.

Ethical wills are not designed to take the place of your “last will and testament” or a “Living Will”. Living wills provide instructions of how you want to be treated medically at the end of your days.

Ethical wills are written to preserve family values for future generation in the form of statements of your principles and beliefs. These documents are not legally binding, but, a way to share your beliefs and memories with loved ones.

You can share your values, hopes, life’s lessons, loves and forgiveness with your family members and community. You can honor the past, capture the present and inform the future. This “values and vision statement” affords you the opportunity to leave an intellectual, spiritual or cultural legacy that can influence future generations.

There are no rules as to the structure or length of these wills. These documents are private since they do not have to go through probate. On the other hand these wills are not enforceable in a court of law.

How to set one up:

The hardest part of writing an ethical will is how to begin. There are three basic ways to write an ethical will. You can begin with an outline and list of suggestions. This is by far the easiest way to get started. Once you’ve created a rough draft, you can review and personalize it as much as you wish. Second, you can also begin with guided writing exercises. Examples: “From my grandparents, I learned …”, “From my parents, I learned …”, “From experience I learned …”, “I am most grateful for …”

The third way is to begin with a blank sheet of paper. Write down whatever is relevant about your thoughts, experiences and feelings. This is an open-ended approach.

>Some resources<

In Print:

Ethical Wills: Putting Your Values on Paper, by Barry K. Baines, MD, 2nd Edition (Da Capo Press, 2006)

Women’s Lives, Women’s Legacies: Passing Your Beliefs and Blessings to Future Generations, by Rachel Freed (Fairview Press, 2003)

The Wealth of Your Life: A Step-by-Step Guide for Creating Your Ethical Will
by Susan Turnbull (Benedict Press, 2005, $19.95)

On the Internet:

www.ethicalwill.com

www.personalhistorians.com

www.yourethicalwill.com