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What You Need to Know When Evaluating Long Term Care Insurance Protection
James Lange, CPA/Attorney
Special Guest: Tom Hall, CLU, ChFC with Pittsburgh Brokerage/Capitas Financial
Please note: Some of the events referenced in our audio archives have already passed. Please check www.retiresecure.com for an updated event schedule.
|Click to hear MP3 of this show|
- Introduction of Special Guest, Tom Hall, CLU, ChFC
- What is Long Term Care Insurance?
- The Cost of Long Term Care Insurance
- Choosing the Right Policy for You: Things to Consider
- Underwriting and Long Term Care Insurance
- Two Types of Long Term Care Insurance Plans
- The Benefits of Using Roth IRA Conversions in Your Financial Planning Strategy
Beth Bershok: We are talking smart money and thank you for joining us this evening. I’m Beth Bershok along with James Lange, CPA/Attorney, attorney, best-selling author of not one, but two editions of Retire Secure! Pay Taxes Later. And we have a guest with us tonight, Tom Hall, who is with Pittsburgh Brokerage Capitas Financial. And actually Tom is on the Board of Capitas, one of the largest firms of its kind in the country. Over 30 years of insurance experience and Tom, you started the firm what, 22 years ago?
Tom Hall: Yes.
Beth Bershok: Twenty two years ago and we are going to be talking about a very exciting new product in the insurance industry, but it has to do with long term care, so I want to start Jim and Tom at the very basics, and Tom, if you could explain, first of all, exactly how long term care insurance works.
Tom Hall: Well, there are various forms, but our office right now we’re calling it elder care because often times people think of long term care as nursing home coverage, and today the majority of the expenses incurred are not for nursing home coverage, they’re for basically home health care people who do not want to think about going to a nursing home, but they do need help in their home to live on a day-to-day basis.
Beth Bershok: And so what happens, you’re buying a policy and this ensures that when you need that policy, you will have the money to cover it.
Tom Hall: Right, what it does is, if you cannot perform two out of six activities of daily living, then the policy will engage. And also if you have cognitive problems, the policy will engage and at that point. It will reimburse you for your expenses up to a certain daily limit. And typically in Pennsylvania, the average nursing home stay, and I’m not talking home health care, is $228, and that’s fresh off the press today.
Beth Bershok: Wow, that’s brand new info.
Tom Hall: That’s daily, excuse me.
Beth Bershok: At what point in somebody’s life do they typically look at getting long term care insurance?
Tom Hall: Being 55, myself.
Beth Bershok: Did you have to think about that for a second, you don’t know how old you are?
Tom Hall: It’s hard.
Beth Bershok: Oh, go ahead.
Tom Hall: Typically, once you turn the five-O, you start exploring, although we have had claims with people in their 40s.
Beth Bershok: Now, Jim, in your practice up until this point, and we’re going to be talking about this fascinating new product, but up until this point, a lot of times you recommend just sticking with life insurance, can you explain that?
Jim Lange: Well, I personally think that, let’s assume that you have a couple, a husband and a wife. And let’s assume that there are sufficient financial resources to pay for long term care for both husband and wife, and I have quite a few clients who are pretty well fixed and when it comes down to it, they could afford to self-insure. Now many people in that situation will still feel more comfortable getting long term care insurance and they pay obviously a substantial price for that. My problem with that is, and I understand that long term care insurance like any other kind of insurance like car insurance, like home owner’s insurance, the idea is that you hope you’ll never need it but you know it’s there if you need it. But, the premiums are so substantial, that sometimes I think really, if there’s enough money for the husband and the wife for their care, then what they’re really doing is insuring their estate. If that is the case, aren’t they better off buying life insurance, which is a certainty? And that has tended to be my preference for people who, in that situation may not “need” the long term care insurance. To me, the real niche for people who really need long term care insurance, and by the way, if you’re pretty broke, then you can’t afford the premium, but to me, the sweet spot for long term care insurance, the way I think about it is, let’s say there’s usually sufficient money to pay for one coverage, or even if there isn’t…
Beth Bershok: And by one coverage, you mean either life insurance or long term care?
Jim Lange: No long term care for the husband or the wife.
Beth Bershok: Oh, for one person okay.
Jim Lange: Yeah, but the fear is all the financial resources of the couple will go to pay for the care of the first person. Then the first person, after a long term care stay either at home or in an institution dies, and then the survivor is maybe 65, 70 years old or even older, and they don’t have any money left because all the money went to pay for care. That is, to me, the greatest need for long term care and that’s the situation where I’ve been more enthusiastic. We’ll get to the alternative that we’re going to talk about tonight that I think might be a better choice for a lot of people.
Beth Bershok: Now, Tom, just a minute ago Jim said the premiums were substantial. Can we talk about that for a second and really how much would, let’s say, you mentioned the age of 55, let’s say you’re 55 and in good health and this is a yearly premium, what would you be dishing out for long term care?
Tom Hall: Well, there are quite a few riders on a long term care policy, but I’ll keep it relatively simple tonight.
Beth Bershok: Okay, just generally speaking.
Tom Hall: If you were to buy a policy that would provide $200 daily benefit for a five year benefit period, which is the average policy that’s being sold out there, and if you throw in a 5% compound interest benefit increase, the annual premium for a 55 year old with a top rated company is $3,992 a year.
Beth Bershok: Wow, that is substantial.
Tom Hall: Now if you take away the compound interest rider, the premium goes down to $1,144. The reason is, if he needs long or she needs long term care at age 75, that daily benefit will increase to about $600 a day. So you’re covering inflation, so the potential benefit to you will be over $1 million if you need long term care at age 75.
Beth Bershok: Now that number you mentioned, though, is a yearly premium.
Tom Hall: Yes.
Beth Bershok: So let’s just go with the figure you tossed out, the $3,900. So let’s say you’re 55, you get on this premium, you could potentially pay that for 20, 25 years, and if you never used it in the end, that money is just gone.
Tom Hall: If you have the genes that I have, I’m dying in my boots.
Beth Bershok: But potentially, and that I think is, Jim, what you’re saying, your objection was, is that if you have the financial means, then this money may be better spent somewhere else.
Jim Lange: And the other problem is, even if you’re willing to dish out the $3,992, this is not a fixed in stone premium. In fact, I think very recently, many people got a notice that says, guess what, your premiums are going to go up by 18%.
Beth Bershok: Actually, I have a question on that. This comes from Bob and Carol. We had sent out an e-Blast earlier today and they emailed and this actually happened to them and they have no idea what to do. I want to give the phone number, too, if you’d like to call in a question. It’s 412-333-9385. But what happened to Bob and Carol, they said that they bought long term coverage 10 years ago and they got in early to get the low premium, they thought, and they just received a notice that they are going to have an 18% premium increase, which is huge. How can you, first of all, Tom, how can a premium increase jump that high?
Tom Hall: Well, what they did, they submitted to the state how their claims were going with that particular book of business and class of business, and they got the state to agree to a premium increase to cover their claims. So when you buy a long term care policy, you always have the risk that the premium is going to increase. And in this case with several of our carriers, because we got the same notice and we’ve been dealing with this for the last couple days, they got an increase of 18%, and not only did it for one company, they did it for a couple companies, the state did.
Beth Bershok: And so Bob and Carol want to keep this policy, there’s no other choice but to pay the 18% increase.
Tom Hall: Or eliminate a rider or two.
Beth Bershok: Okay, so really they’re kind of stuck. And I have another question before we get to the solution that you guys are really excited about, but this one comes from Howard and Pam. And their question is and this really is a good question, Pam says she always wonders about the longevity of the company offering the insurance and I think that’s on a lot of people’s minds recently. She’s 56 years old, this was just the age you were talking about. She’s thinking about long term care coverage, but she said, can I trust my premiums not to get swallowed up in a black hole of bankruptcy, what would protect me if that would happen?
Tom Hall: That’s a great and timely question because there are several companies out there who are experiencing problems now. There was one major company in the state of Pennsylvania that just went into rehabilitation, they’re not insolvent they haven’t been declared. So the state, from the beginning of the year of this year, increased the limit on the state guarantee fund and extended Pennsylvania to $300,000.
Jim Lange: Now Tom, is that for life insurance, long term care or either?
Tom Hall: That’s for life insurance. I mean and long term care, I’m sorry.
Beth Bershok: So it’s for both, you would be covered if you had both.
Tom Hall: Yes.
Beth Bershok: Okay, so if Pam did buy long term care insurance and then the company, 10 years down the road, has to fold, she would be covered under the state of Pennsylvania?
Tom Hall: Right, they would come in, administer claims and pay up to $300,000. Now that’s very, very important. I met with an 86 year old who got the notice on the rehabilitation and she’s totally concerned, and she should be. I’ve been paying all these years, now what am I’m going to do? At this point, our advice is to keep the policy because the state of Pennsylvania, under the state guarantee fund, will cover her for up to $300,000 no matter what happens to the company. And to me, that’s huge and it’s also a comfort to her.
Beth Bershok: And it’s also a comfort to people who are just thinking about this now who don’t have this coverage.
Tom Hall: Yes, I would think it would be.
Beth Bershok: You keep saying the state of Pennsylvania, is it different from state to state?
Tom Hall: Every state, as you know the regulatory system, is state by state and each state has their own limit. And what’s very interesting is, there are three states where the limit is $500,000. Connecticut, Utah and Nebraska. And there’s several states where the limits only $100,000. The National Association of Insurance Commissioners have a guideline, and the state of Pennsylvania adopted that guideline, and, basically what it is, is $300,000 per person. If you move to Connecticut and you’re a resident of Connecticut, it can be $500,000 if you live in Connecticut or Utah.
Beth Bershok: What was the other state, Nebraska? I’m going to skip that one. So that is the general idea on how long term care insurance is working, or has worked up to this point. You’re paying this premium, if you never use it, bye-bye the money is gone. But there’s something that’s relatively new, and, first of all, is there a term for this new type of policy?
Tom Hall: Well, there’s a rider that you can put on a life insurance policy and there are three or four companies that are offering it right now and they have different names, but the one company we’ve been doing the majority of our business with calls it a life care rider and it’s basically a long term care rider.
Beth Bershok: So it gives you essentially benefits of both.
Tom Hall: What it is, is, it has the same definitions for the collection of the money that you would need to cover your long term care expenses, but it takes a percentage of the death benefit every month to do that, and it’s an accelerated death benefit option. So basically, you’re accelerating the payment of your death benefit early, if you qualify, up to the face amount of the policy.
Beth Bershok: And this is, you’re paying one premium?
Tom Hall: You’re paying an annual premium, it’s fixed, it’s guaranteed.
Beth Bershok: And that premium is going to stay at that rate?
Tom Hall: That premium is going to stay at that rate.
Beth Bershok: Now I know Jim has actually been doing a lot of research on this recently and you were getting kind of excited about this product for a variety of reasons.
Jim Lange: Yeah, first let me say, put in a different way, how the policy works. So let’s say for discussions sake, you buy a $200,000 or 300,000 policy, which is a life insurance policy, but during your lifetime, you need care. So let’s say during your lifetime you have this $200,000, let’s say $300,000 life insurance policy, but during your lifetime you need care, you know you qualify because of the two out of six or seven conditions like toileting and dressing yourself etc. So you need care. What you can do is, you can go to the insurance company and say, hey look, I already paid this life insurance policy, I’m interested in getting reimbursed for my long term care coverage. And the insurance company says, okay. And let’s just say for discussions sake that you need $200,000 of care during your lifetime from the time that you buy the policy until the time that you die. Fine you’re covered, it’ll be there, that isn’t the problem. Now, how the company in effect makes up for it is, when you die, rather than you getting a check for $300,000, which was the face amount of the life insurance policy, you only get a check for $100,000 because they already spent $200,000 for your care. So the way it works is, instead of wasting the premium, or I shouldn’t say wasting, but instead of spending money on a premium that may or may not bring you anything back for the family, this is something that will guarantee money comes back to the family. And if you don’t need the care, great, you get the life insurance face value when you die, but if you need the policy while you’re alive, you get whatever the terms of the policy allow for your care. And then what will happen is, it will reduce the amount of your death benefit.
Beth Bershok: Now in the example that you just used, you said $300,000 is the death benefit and then you would use, let’s say, $200,000 in care. What if you needed more care than that, what if you needed $400,000 in care?
Jim Lange: Well, then the policy would pay $300,000 and you’d have to go into your own pocket for the other $100,000.
Beth Bershok: Okay, so it only pays up to the amount of your coverage?
Jim Lange: That’s correct.
Beth Bershok: So when you’re planning that, Tom, when you’re planning the policy, you need to figure out what you potentially may use. Is that how you would put the policy together?
Tom Hall: That’s a hard thing to determine, what you’re going to use. I mean, being a male, our statistics are a lot less than a female. Females, when they go to a nursing home or whatever, end up living a lot longer than males, but you have to take a look at averages and come up with a reasonable estimate of what you feel you would need. And what we’re doing in our office, for example, people who have IRAs and are dependent upon the income in the IRA, we’re looking at these life insurance policies as a protection mechanism. Number one, when you take out the long term care benefit on a monthly basis from this policy, it’s tax-free. If you need long term care and you have to go to your IRA, it’s going to be taxable. The other thing is, at death, I know Jim uses these cascading beneficiaries, but that can be used to help pay estate taxes if you end up not needing long term care or a portion, you know what I mean, a portion of the death benefit.
Beth Bershok: So, I think that’s a key, too, that you’re taking this out tax-free.
Jim Lange: Right, on the other hand, you actually bring up a good point, Beth, and there is a legitimate, I mean, I know there are some purists out there, and some purists who probably represent long term care policies, and some long term care, and they’re tearing their hair out right now ready to lynch Tom and me. But there are some, wait no, you should have comprehensive long term care, lifetime guaranteed with all the riders and what you’re really talking about is incomplete coverage, and they’re right, this is incomplete coverage. The answer to that is, people who don’t want to spend all that money for complete coverage for long term care. So this is not really, in a way, it’s a competitor to long term care products, but it’s not trying to replace the same thing with less cost, it’s a different idea. It’s less than full coverage, like you said, if it’s a $300,000 death benefit and you need $400,000 of care, you have to go into your own pocket for $100,000. But I think that some of the benefits of not worrying about if you never need it and then all those premiums just go to the insurance company and your family gets nothing is a pretty powerful inducement to make this very interesting.
Beth Bershok: Tom, would you answer that objection the same way? The people that said no, really guys, you really should just have long term care.
Tom Hall: We have a specialist in our office and I asked her that question before I came out, and I’ve given it a lot of thought. Our office, we do 50/50, it depends on the client, it depends on the needs of the client, and we explain both options. Some people want to make sure that, no matter what, 100% of what they incur in expenses are covered by long term care and they’ll go out and pay whatever it takes to guarantee that. They may not feel they need a death benefit. Maybe they feel that they’ve taken care of their kids sufficiently already. I don’t want an estate, I just want to make sure I don’t have to go to Medicaid or be asking my kids for money. In that case, yeah, we do sell the individual quite a few policies on the individual long term care basis. But this is a hybrid, this is for a skeptic, this is for the person who feels he doesn’t want to go there, but he doesn’t want to throw his money away if he dies in his boots.
Beth Bershok: Right, so it gives you really the options of both.
Tom Hall: Right, it gives you a good rate of return on the money that you put in at average mortality. And Jim is better at explaining that than I am.
Jim Lange: That’s the part that really surprised me because I figured well before I get on the radio and talk about this product, I better do some research and see some of the objections. Some of the objections early is, hey, this really isn’t a good deal, this isn’t really a good economic deal, and yet sounds great. You pay a lower premium than you would for long term, and you have a death benefit if you ever need it and it sounds very enticing, but when you really look at the numbers behind it, it’s really not so good. So I actually did look at the numbers behind it and the numbers were pretty darn favorable and taunted a beautiful matrix on showing the cost of just long term care, showing the cost of life insurance, showing the cost of this combination product and you’re really not paying an awful lot more for this option in the big scheme of things and the rate of return is certainly a lot better than we’ve had in the last 10 years.
Beth Bershok: I actually want to talk. We need to take a quick break, but when we come back, can we talk about that the difference in cost?
Jim Lange: Sure.
Beth Bershok: Alright we’re going to talk about the difference in cost. We are with Jim Lange and Tom Hall from Capitas Financial Pittsburgh Brokerage. We are talking smart money it’s The Lange Money Hour: Where Smart Money Talks.
Beth Bershok: One of the problems with traditional long term care insurance is that you may end up paying a lot of money in premiums and never need the care. One of the problems with traditional life insurance is, you may need some of the money you’re paying in premiums for long term care. Well, now there’s a new type of insurance policy that covers you for both long term care and for life insurance. It combines the best features of both. If you ever need long term care, you’re covered up to the face value of the policy. If you never need long term care your family will still get the entire insurance paid up when you die. Plus, all the benefits of either the long term care payout or the life insurance are income tax-free. Best selling author, Jim Lange, believes that this could be the long term planning solution for many families. Find out more about this exciting new alternative by calling Jim for a free evaluation. Jim is a CPA, attorney, and licensed insurance provider in Pennsylvania. Let Jim assess your needs and recommend a course of action. Call toll free, 800-387-1129. One simple plan could guarantee your family peace of mind. Call Jim Lange’s office, toll free, 800-387-1129 for a free assessment of your insurance needs. 800-387-1129.
Beth Bershok: Thank you for joining us this evening. I’m Beth Bershok, along with Jim Lange and Tom Hall. Tom, thank you so much for taking the time to join us in the studio tonight. Tom Hall of Pittsburgh Brokerage Capitas Financial. We are talking about a hybrid product that combines long term care insurance with life insurance, giving you some benefits of both. We had a couple of email questions and I want to open the studio lines, so if I have a question for either one of these guys, 412-333-9385. We’re happy to take your questions here for the next half an hour. 412-333-9385. And before we get back to this hybrid product, I want to make a quick note. Stick around until the end of the hour, we wrap up right around 8 o’clock because Jim’s going to make a very, very special offer at the end of the hour for what we’re calling a financial physical. This is very, very cool, it’s very thorough, and it’s only for the first few people, so you’re going to want to stick around to find out how you want to get in on this at the end of the hour. Okay, the product that we’re talking about combines long term care coverage with life insurance coverage and right before we took the break, Jim you were mentioning that the rider on the life insurance policy that gives you this long term care coverage is really not that big of a bump because we were talking about long term care coverage could cost you several thousand dollars a year. Let’s look at some actual figures.
Jim Lange: Well, I’ve actually done that, and to me, it looks like you’re paying depending on your age you’re paying maybe an extra 7 to 10% over and above the cost of just plain old life insurance without the rider, and the rates of return on life insurance, I think, are excellent. So even if you’re paying just a little bit more and you have the option for long term care, it sounds like a good deal with me, Maybe Tom has another way of looking at it.
Tom Hall: I’ll make it personal. I’m 55 years old and I have kids and I want to make sure that they’re taken care of, and a certain amount of money, I want to know it’s guaranteed no matter what happens.
Beth Bershok: For your kids?
Tom Hall: For my kids. So I go out and I get an exam and I try to get the best rate I can, which may be hard, but let’s say I get a preferred rate with this insurance company and I want $250,000 of coverage. So my premium is $3,018 a year.
Beth Bershok: $3,018, okay, this is for life insurance.
Tom Hall: Payable forever. Right, it’s guaranteed by the company no matter what happens if I pay that premium, it’s totally guaranteed by contract. So I live, I die. I make it to age, there’s a miracle I make it to average mortality age 82, okay? Now my rate of return on that premium, if I were to go out on my own and get a tax-free investment, what would I have to earn on that $3,000? I’d have to earn about 7%, tax free at age 82 and I’m happy to make it.
Beth Bershok: Everybody’s happy if you make it to age 82.
Tom Hall: But if I live longer, my rate of return goes down, but I’m happy that my rate of return goes down because I’m living. But that’s not a great rate of return and it’s guaranteed by the insurance company. Now if I take it one step further, I’m also somebody who thinks I’m going to die in my boots and I say, well, what happens if I don’t and what happens if I do need long term care or home health care? I don’t want to get a nursing home, I need help to live. I want something there that I can get to tax-free, and I want to go into my retirement plan because I’m paying, and who knows what the taxes are going to be 10 years from now, or 20 years from now.
Jim Lange: I don’t think they’re going to be less.
Tom Hall: They’re not going to be less. So I say to my insurance person that I want protection so my premium, if I want a 2% long term care rider, goes from $3,018 a year to $3,251.
Beth Bershok: Okay, so it’s not a huge bump.
Tom Hall: But all that means to me is, if I need the help, I can go into that policy for up to $250,000 before I die and pull out benefits to help me out. Now my kids don’t want me to go to the nursing home, they want me to die in my boots, but my death benefit will be reduced if I should need it. And my rate of return, by the way, if I make it to age 82 will go down to about 6% because I’m only paying 7% more premium. To me, it’s worth it to do this; it gives me a sense of assurance.
Beth Bershok: Sure, and if you do have enough to take it out, we mentioned this before, which is a very interesting twist on this, it’s tax-free, so you’re taking it out tax-free as opposed to, if you have to dip into your retirement funds where you would have to be paying the taxes on it.
Tom Hall: I have the choice, I don’t have to dip into the policy, but I think I would be very foolish to use this versus a taxable asset.
Jim Lange: And that’s my big thing, I’d like to preserve IRAs and here it comes, with Roth IRAs. If you have IRAs and Roth IRAs, the last thing that you’re going to want to do is go into that and either pay the tax on the IRA distribution or lose your income tax-free growth asset, the Roth IRA. It would be much better to take it out of a policy that the only downside really is that your death benefit will be reduced.
Beth Bershok: If you have an insurance question here, 412-333-9385. I have a question on just a policy in general. Tom, let’s say you’ve been, you’re just hearing about this tonight, and say somebody has a policy with you and it’s a life insurance policy and they thought wow this sounds just great, this hybrid policy. Can they just put a rider on a policy they already have, or is this an entirely different policy they have to set up?
Tom Hall: It’s an entirely different policy, but we do do a lot of insurance reviews, and what’s happening today is, the insurance rates have come down significantly because people are living longer and longer. When we do the review, I mean people who turn my age, or at 65, they have existing life insurance and the need for that insurance sometimes has been diminished and they’re wondering why they have all those things. But what this policy could do is, you could do what they call a 1035 exchange into this type of policy if it makes sense, only if it makes sense. Have the death benefit, but at the same time, have the ability to dip into the death benefit for long term care and needs. So one of the questions we do when we do our review and collect the data.
Beth Bershok: Do you do a yearly review with your clients?
Tom Hall: Typically, I have a brokerage agency. Typically, the agents we work with do the reviews.
Beth Bershok: Alright, they do the reviews, okay. Alright, so you would have to get a whole new policy put together for this if this is an interest to you. Could you be turned down for this particular policy?
Tom Hall: That’s a very good question, and the answer, obviously, is yes. But it’s interesting when you underwrite life insurance, it’s underwritten totally different than long term care. If you have osteoarthritis or something that will cause you not to perform your daily activities and daily living, then of course it’s going to be very hard to get a long term care policy, traditional long term care with all the bells and whistles. But you could go out and buy a life insurance policy with a long term care rider, if your arthritis isn’t that severe, and be able to qualify for life insurance with the rider and not qualify for the long term care. And it can work the other way too, with heart disease you may qualify for long term care, but you may not qualify for the life insurance.
Beth Bershok: So this may also be a product that would be good for people that were turned down from long term care?
Tom Hall: It could be, but I don’t want to say that. Every situation’s different.
Beth Bershok: Every situation would be different. Is there any other piece of this that we should let listeners know?
Jim Lange: Yeah, I’m going to throw in another two cents. There’s different types of long term care policies and even different variations of this combination policy, and I personally prefer the type of policy that doesn’t question what your expenses are. They don’t require you to have receipts from a proper nursing home or a proper even nursing facility that sends people to your home. They just give you the amount that you say that is needed for care. And I think that that’s a big difference because the best care that I have seen is actually and I’m going to get myself in trouble from some of the agencies right now, but the best care that I have personally seen is not from some of the agencies that send the nurse out to yourself, but more often even just the neighborhood lady that lives down the street, a relative whether it be a spouse, or I know that there’s special rules for that. Or even somebody who doesn’t necessarily have medical training because most of the care is just basically bathing, dressing, feeding, that type of thing. I know, for example, I had a client, a really sweet little old woman who lived in Saxonburg and her children were very concerned because they live in California and there was no way that woman wanted to go into a nursing home or facility. She had all her friends in Saxonburg and everyone was very nice to her.
Beth Bershok: She wanted to stay where she was comfortable.
Jim Lange: She wanted to stay where she was comfortable. And she paid the neighbor lady who came in. And I used to bicycle from Fox Chapel and every time I did, I’d stop at her home and I always asked for something to eat and I looked at the refrigerator.
Beth Bershok: You asked her for something to eat?
Jim Lange: I did, because I wanted to make sure there was food in the refrigerator, it was good food, the refrigerator was clean, I always asked to go to the bathroom and that way I could report back to her children, yes, the bathrooms clean, it had fresh fruit, everything was in order and that was the best care that I’ve seen. So I would prefer a policy that you don’t have to show a nursing care receipt, you don’t have to be institutionalized, home care and it’s up to you how you disperse the money for the care.
Beth Bershok: So, if we’re in this long term care, let’s say we have long term care insurance. You’re saying that some policies make you give the receipt to be reimbursed, is that what’s happening?
Tom Hall: There’s two types of plans, there’s the reimbursement plan, and under the reimbursement plan you have to show the receipts that you paid it.
Beth Bershok: That you paid up front?
Tom Hall: Right, that you paid it, and you give the insurance company the receipts, and they give you the money, or if you have them administer the claim, so to speak, they will pay the vendor or the agency, directly. But they want to make sure that, and Jim has a good point, that that money has been expended. The other type of plan is the indemnity plan, and under that plan, and that’s the plan that Jim liked, they will actually, as long as you prove you can’t perform 2 out of 6 activities of daily living, or there’s a mental issue, they will pay whatever the monthly benefit is no matter what.
Beth Bershok: So you’re getting a monthly benefit in this kind of policy and then you do what you need to do with it?
Tom Hall: Right, you get the check and if you have a niece who you love and is willing to come in and take care of you you can take part of that check and give it to her, even though she’s not qualified under any agency.
Beth Bershok: Right, in the other example you need to be qualified under an agency.
Tom Hall: Correct.
Beth Bershok: Okay, so with this rider that we’re talking about, with this life insurance, with this long term care rider, are those also the two options?
Tom Hall: Well, carriers typically, there are a couple carriers who dominant in the marketplace, one is indemnity and the other one is reimbursement.
Beth Bershok: Okay, so Jim, you’re recommending the policy where you just get a monthly pay up.
Jim Lange: I like the indemnity, but of course it’s possible that the company that offers the indemnity plan will turn you down or that you’ll get a better rate, so I’m not going to just be 100% strict, no matter what but, I will say, in general, I would just like to have the money come from the insurance company and let the client expend it in a way that they think is appropriate.
Beth Bershok: Is there any kind of price difference between those policies?
Tom Hall: There’s slight price differences and also underwriting differences. One company may be a little more aggressive than the other one, and then when we underwrite it maybe we’ll submit it to both carriers, one company will come in with a rating and the other one is standard, and then at that point you say, well, for the difference in the premium, you should go with the reimbursement, or if you don’t like that approach, that’s your decision what you want to do, I would think
Jim Lange: Tom brought up a very good point and this is one of the reasons why, in my opinion, it makes sense to work with a broker. Whether it’s life insurance, or long term care, or second to die life insurance, I’ve been working with Tom for many years on this and what Tom’s office does is, they will go out and shop the policies. So I mean, I think he’s licensed with, what 200 companies, or some phenomenal number of companies. Off the top of his head…
Beth Bershok: Tom doesn’t know himself.
Jim Lange: Off the top of his head, he’ll probably know, maybe five, or eight that will most likely be the most competitive and the soundest. He will get quotes from all of them, and sometimes what happens is, these underwriters, you’d think its this really sophisticated process, computer driven, that all eight companies are going to come up with the exact same quote and the exact same health rating and that’s not what our experience has been. There have been huge variations, and since you only need to get a good rating from one company, you don’t need 7 out of 8, all you need is 1 out of 8. I’ve seen Tom save people a ton of money by doing this shopping around.
Beth Bershok: Tom, seriously, you’ve been in this business for over 30 years, how wide is the variance?
Tom Hall: It’s substantial, 100%.
Beth Bershok: 100%?
Jim Lange: Well, we had one and this was a big policy, but the difference was $50,000 a year, for five years. Now that was on a big policy and the person was prepared to pay the higher amount, and Tom and I kept saying wait, wait, wait.
Tom Hall: The problem is, sometimes it takes a little longer, the underwriting process but it’s definitely worth the wait. Our goal is to give the best value we can, and we get a charge out of doing whatever we can do that’s best for the client and for the broker.
Jim Lange: The client was so anxious, they said okay, well maybe the other policy will come in $1000, or $2000, or less, that’s okay, we don’t care, we really want it right now. Tom and I are saying no no you have to wait. And they’re like, we want it. No, no you have to wait. And anyway, now they’re a pretty happy camper, and actually the woman just came to one of my workshops and she said, boy, thank you so much, I’m just so happy that we did that.
Beth Bershok: Oh I want to share that, real quick you just mentioned workshops. We do have another one planned for August 29th. We don’t have one in July, but we have one coming up in August 29th. So just make a little note on that, we’ll be back in action on August 29th. It’s a Saturday. We’ll tell you all the details as we get closer. But you can also get them on our website which is www.retiresecure.com. I should let Tom give his website too, I’m sure Tom…
Tom Hall: It’s www.capitasfinancial.com.
Beth Bershok: 412-333-9385, if you have a question for these two. Now this hybrid product, Tom, since you’re dealing with so many companies, this hybrid product that we’ve been talking about, that combines life insurance and long term care. Is everyone offering this, or just a select few?
Tom Hall: Just a select few.
Beth Bershok: So this is not a product? Let’s say you went to an individual agent somewhere, they may not have this product available?
Tom Hall: Right, correct.
Beth Bershok: It’s possible. So, let’s say you want this product, you’re hearing the show tonight, and you’re thinking, wow, this is probably the right move for me. You should talk to your agent or your broker and say, look, this is what I want. I’m hearing about this hybrid product, can you get it for me? And they should be able to?
Tom Hall: They should, I mean, it’s kind of a specialty product, and you have to be fully aware of how it works.
Beth Bershok: Because to be honest, I just heard about this when Jim started really to research it, which was relatively recently, I had never heard of it.
Tom Hall: It’s exciting and I think the more people who learn about it, the more we’re probably it went from 20% into this product and 80% into traditional long term care, and right now, this product, we’re probably doing more of these type, of policies than traditional long term care. Now that’s not, at all, telling people that they should consider traditional long term care. In a lot of cases, it makes sense, and we in no way are recommending that, but you should get a qualified broker who’s able to explain both.
Beth Bershok: Jim, is there an instance in your own practice where you say, yes, this person is definitely a candidate for just long term care?
Jim Lange: Yeah, I think there is, and the other thing, and my big thing is, to me, all these things work together. So, for example, issues like long term care insurance, life insurance, Roth IRA conversions, what kind of Wills you’re doing, even what kind of investments. To me, it’s very hard to look at all those individually. You know, to me, it’s kind of like almost going to a doctor and saying, doctor, I have a problem with my right arm, but I want you to ignore the rest of my body. And the doctor is saying, well gee, and maybe sometimes you know people have specific training for one particular area. I know, to me, you know whether you want to call it a holistic approach, or whatever words you want to use. I like to really look at the entire picture because a lot of times, to me, for example, it would be impossible to give anybody advice on traditional insurance, long term care insurance, life insurance, without seeing their tax return, without seeing a list of assets, without getting an idea of how much they want to spend, without knowing their family situation.
Beth Bershok: Well it all really does tie together.
Jim Lange: It really does. And that’s why sometimes it helps to go to an advisor who really has some expertise in all these areas, rather than just going to somebody, and for example, I have people who I would love to see get this policy, but frankly, they just can’t afford it. You know they have to just take a chance. And then there’s other people that it would not be appropriate for. So you really do need, I think, an appropriate professional that can look at the whole picture.
Beth Bershok: And comprehensive.
Jim Lange: Yeah, and to make a recommendation.
Beth Bershok: In fact, in less than 15 minutes, we’re going to make an offer for a comprehensive physical, basically, it’s a financial physical. We’ll be telling you more about that coming up so stick around to the end of the hour because this will be available for a few people at the end of the hour. It is The Lange Money Hour: Where Smart Money Talks.
Beth Bershok: Talking smart money and we’re taking a look at some insurance products tonight. I’m Beth Bershok, along with Jim Lange, and our special guest in the studio tonight, Tom Hall, of Pittsburgh Brokerage Capitas Financial. We’ve been talking most of the hour about a hybrid product that combines life insurance and long term care insurance, and it’s essentially the way you two describe it, it’s a life insurance policy with this long term rider. But how long have you guys been working together, Tom and Jim?
Tom Hall: It’s been so long I can’t remember.
Beth Bershok: It’s all blending together, isn’t it, Tom? Well, I’m sure that you’ve seen this in Jim’s book Retire Secure Pay Taxes Later. He is a big proponent of using life insurance as part of your whole retirement planning and one of the things, Jim, that you like to do is second-to-die life insurance. It’s in the book, can you explain exactly how that works?
Jim Lange: Yeah, now this is going to be for people who have enough money to take care of each other, and have money left over. Let’s say that you have a situation where a husband and wife either, because of a pension, or because there’s substantial assets, have enough money, and actually more than enough money, to take care of themselves, and they’re interested in preserving money for their children and grandchildren. And again, I’ll save the discussion of Roth IRA conversions for another day, because I like to do that, too.
Beth Bershok: But we have never had a show, The Lange Money Hour: Where Smart Money Talks, there has never been a show where we have not mentioned Roth IRA conversions.
Jim Lange: Well, one of the nice things about Roth IRA conversions is, that it doesn’t cost you purchasing power, it will actually build purchasing power. But let’s say that you are interested in preserving wealth for the next generation, or even the next two generations. One of the products that I am a fan of, and I’ve actually been a fan of this since I gave talks on this since 1986, way before I was ever licensed to sell life insurance, so I’ve always believed in this product. This particular product, you pay a premium every year between the time you purchased the premium, and until not only just you die, but you and your spouse die. And the policy doesn’t pay until you’re both gone, and assuming it’s set up right, it will be income tax-free, it will be estate tax free, it will be inheritance tax-free and the numbers that I’ve run on it are so favorable, that a lot of times even using a 7% rate of return, I’m tax-free that the break even point is you have to live until age 98 in order for this policy not to pay. So I think it’s one terrific method of transferring money to the next generation. One other thing, the one other caveat, though, that I would say is as exciting as this second-to-die policy is, and this is where Tom has actually saved people a lot of money, having different quotes from different companies. But I don’t want it to be such a big percentage of your gifting budget because that’s ultimately what it is, it’s a variation of a gift. I do believe in 529 plans, which is giving money for the education of your, typically, grandchildren. I also believe in just making regular plain old gifts to your kids, here’s $12,000, here’s $13,000. But I also believe that the second to die life insurance policy is a wonderful way to transfer wealth.
Beth Bershok: Tom, is that something that you see a lot of in your practice?
Tom Hall: Yes, we do, and it’s, as you know, the financial times right now are pretty turbulent, and we’re seeing more and more insurance reviews because companies are having issues from a financial standpoint for various reasons, and we haven’t seen too many rate increases because, as I mentioned earlier, people are living longer and longer. But we are starting to see that in the term insurance area, and also in the second-to-die area, where premiums and death benefits were guaranteed, we’re seeing companies take those guarantees off.
Beth Bershok: Are you kidding? So what you’re saying is, you could have purchased a policy sometime ago?
Tom Hall: No, once you purchase it, it’s contractual.
Beth Bershok: Oh, okay, so that’s not going to change.
Tom Hall: They’re taking out the contractual guarantees…
Beth Bershok: So if you purchased them now, that would be the case?
Tom Hall: Some companies, obviously, we’re not going to those companies if that is, indeed, an important consideration, which for a majority, it is.
Beth Bershok: I would say sure.
Jim Lange: And the other thing I would say, working with Tom, is the types of policies that both Tom and I like are 100% guarantee, no wiggle room, no you get a letter seven years from now saying, oh gee, the investment didn’t do as well as we thought, you’re going to have to pay premiums for six more years than we anticipated. This is a guaranteed product, you pay the premium. When you and your spouse die, they get the death benefit. And right now, the people that we have sold this to are pretty darn happy because, rather than watch their money go down by 30-40%, they know the family has guaranteed this amount for them after they’re gone.
Beth Bershok: And that’s something you can split between your heirs?
Tom Hall: That’s correct. With the market being what it is, people are now looking to life insurance as a way to get back the investment that they had a year ago. We’re actually seeing people take some of their dividends to buy second-to-die life insurance, equal with what the investment was worth last year, so they know they’re going to leave that much to their heirs. We’ve never seen times like this before, and as you know, the estate tax thing is kind of up in the air, and this is a perfect time for a review and people’s income has gone down.
Beth Bershok: So people are using it a little bit differently now, they’re using it more as a guaranteed payout for their heirs.
Tom Hall: It’s something that you can put away and not worry about like everything else today.
Jim Lange: And the other thing that we do, and again we combine different strategies, is, if we have a second-to-die policy that is going to go to the children, and one of the ideas is, that means the kids won’t have to go into the IRAs or the Roth IRAs for their income because they’re going to have this after tax dollars that can leave more money tax deferred, and the Roth, tax-free. And sometimes what we’re doing is we’re disclaiming money to grandchildren. So we’re getting Roth IRAs and Roth IRA conversions eventually going to grandchildren. So we’re having literally 70, 80 years of income tax-free growth, but the children are still provided for with the second-to-die life insurance.
Beth Bershok: So everybody is covered.
Jim Lange: Yeah, by cutting the pie wisely, you actually make a much bigger pie.
Beth Bershok: So, it’s a strategy for passing money onto your heirs. Now I know, Jim, you also use insurance as a way to protect your retirement assets. So let’s say you left an IRA to your children, this would cover, say taxes. If you had a life insurance policy, they could cover the tax on that without having to take it out of their inheritance.
Jim Lange: And not only children, but one of our first shows, Ed Slott came on and he talked about how income taxes are likely to go up and I think he’s right. And Ed was actually a proponent of actually having life insurance on the IRA owner, and that way, the surviving spouse could have after tax dollars from the proceeds of the life insurance and could preserve the IRA and not have to go into it. Maybe they keep it for their lifetime, maybe they say, well I don’t need a certain portion, and it can go to children or grandchildren after the first death, but the idea of creating a pool of tax-free dollars is very powerful and Ed’s a big proponent of it.
Tom Hall: I have a great idea, you could use it to convert to a Roth IRA.
Beth Bershok: There you go, he had to say that, he felt compelled to bring up Roth IRAs.
Jim Lange: Actually he’s right.
Beth Bershok: See, he has read, he’s read every word of your book. The book, by the way, is called Retire Secure Pay Taxes Later. If you don’t have a copy by the way, please go to our website which is www.retiresecure.com and there’s a link you can just click on the link and you can purchase that book. Now we actually only have a few minutes left so I want to take a minute to thank Tom. Thank you so much for joining us tonight with all of these different strategies. What it really sounds like is, you need a good review periodically, because there are some new products, the economy has certainly changed in the past couple of years.
Tom Hall: And I have to mention another thing, too. A lot of people have invested in variable annuities and that market’s kind of in a state of turmoil right now, and there’s so many options that get complicated, and life insurance can be an effective method of managing that. I just wanted to mention it because it seems to be a topic that warrants a thorough review, knowing what’s going on with those, because the market has come down, there’s some contractual guarantees, they’re in policies, but there are a lot of different options.
Beth Bershok: So, you really should have a review. Please give your website again Tom.
Tom Hall: www.capitasfinancial.com.
Beth Bershok: Okay, we were talking about a financial physical earlier and this is the offer that we’re going to make, and this is really incredible, so I’m just going to suggest that you grab the phone and get ready to call the number that I’m going to give because Jim is offering, what he’s calling a financial physical, to the first five people that call in and request this. This is extremely thorough. I’m going to go through the details in a moment, but, Jim, are you also going to offer this to the Sunday listeners?
Jim Lange: Yes.
Beth Bershok: So we’re going to do five for tonight, Wednesday night. We rerun this show The Lange Money Hour: Where Smart Money Talks on Sunday morning from 9 until 10. So, if you’re listening on Sunday morning, you can also call, leave the message and we will call you on Monday. So, part of a financial physical and we were talking about how all this interacts, you can’t just handle one piece. When you have clients come in, you want to look at all their information. What do their Wills say, what kind of insurance coverage do they have, what’s in their retirement fund? So to get a good financial physical, this is what Jim will be offering. A review of your insurance coverage, and that’s what we’ve been talking about for the past hour. A look at estate planning. A look at your retirement planning. Income tax planning, we have some great tax people on staff. Investments. Roth IRA conversion analysis. And explain this one, Jim, you just call it, make sure that you’re not going to run out of money.
Jim Lange: Well, I think I had, today, somebody who was just spending way, way too much, relative to what they had, and they start talking about all these subtle points. And I said wait, wait, wait before we talk about any subtle points, Roth IRA conversions, Will or anything else, we have to talk about your spending because he was spending too much and sometimes right now, people don’t know. And I’ve had the other way, I’ve had a client, she was just worried sick about the economy and she stopped doing anything before she went to these adult classes, and she was involved in these activities, and she stopped doing everything, and she came in to see me, and she was all freaked out, and I said no, you have more than enough money to pay everything that you want.
Beth Bershok: So, you’re going to take a look at the whole package?
Jim Lange: Take a look at what is affordable and what isn’t.
Beth Bershok: I’m going to give the phone number, which is 412-521-2732. The first five people that call and request this financial physical, 412-521-2732, you can dial my extension, which is 219 and I will get you in for this whole financial physical. And thank you so much for joining us. We are back in two weeks with one of the world’s leading retirement experts, Natalie Choate. Please check the website www.retiresecure.com, it’s The Lange Money Hour: Where Smart Money Talks.