Thanksgiving Inspiration

Imagine packing your belongings in a trunk, taking your spouse by the hand, and crossing a rickety wooden gangplank onto a small wooden ship in the port of Plymouth, England.

It’s the fall of 1620, and you join 100 other passengers—mostly families—who will spend two months crossing the ocean in dank, cramped quarters, subsisting on moldy bread and foul water and enduring daily bouts of seasickness.

Your destination: an untamed land on the other side of the Atlantic where you hope providence will smile on you as you live, work, and worship according to your own conscience.

For most of us, Thanksgiving goes by in a blur of family, friends, holiday preparations, and a table of traditional dishes. And we often imagine the Pilgrims in much the same way: dining on roast turkey, squash, and corn along with their new Indian friends. There’s some truth to that image. About 50 Pilgrims celebrated the harvest of 1621, feasting for three days with some 90 native people, including Chief Massasoit of the Wampanoag.

But the true story of the Pilgrims lies in what happened between boarding their little ship in England and inviting their Indian neighbors to celebrate with them a little more than a year later. What the Pilgrims achieved was nothing short of incredible. They were not seasoned explorers or soldiers. They were a band of regular folk: tailors, printers, farmers, and shoemakers, with no reference point for establishing a settlement in a hostile new land. Yet guided by the local Wampanoags, they survived and eventually thrived.

Whether you’re a Mayflower descendant or a member of a more recent immigrant family, the Pilgrims’ story is one that inspires. Here are just a few of its lessons, gleaned from the vivid book Mayflower: A Story of Courage, Community, and War, by Nathaniel Philbrick. This Thanksgiving, why not reflect on your own life’s challenges and how you can tap the hardy Pilgrim spirit inside you?

Decide what is important. For some Pilgrims, like William Brewster, settling in the New World was an opportunity to escape persecution in England and find religious freedom. For others, such as Myles Standish, a military man hired by the Pilgrims for protection, the voyage to the new world was a paid assignment and an unprecedented opportunity for adventure. Perhaps now is a good time to take stock of your own life. What is the driving force behind your life’s voyage? Why do you do what you do? Do you need to make a series of small changes, or is it time for a big one?

Believe in something. Religion is an important part of the Pilgrims’ story. Their faith (and a conveniently portentous comet in the skies above Europe) helped them decide to sell their houses and possessions and sail 3,000 miles across the sea. Faith in themselves—not to mention some help from their native neighbors, but we’ll get to that—allowed them to endure interminable winters, starvation, and disease. Today, even though we may enjoy central heating, microwave snacks, and advanced health care, it remains important to cultivate a source of inner strength. For some, it may come through prayer, meditation, or the wisdom of an author. Others find strength in a team or a worthy cause. No matter what, decide where your true beliefs lie and use them as a source of inspiration.

Recover from mistakes (even scary ones). We’re all afraid of making mistakes. But that fear didn’t stop the Pilgrims. They set sail later than they had planned. Instead of reaching the land they had contracted for in Virginia, they anchored in Massachusetts. They were hundreds of miles off course and found themselves facing a frigid northeastern winter. Most groups would curse their bad luck and consider giving up. But when such things happened to the devout Pilgrims, they viewed it, in the words of Governor William Bradford, as “a correction bestowed by God.” They accepted the things they couldn’t change; instead of resisting unforeseen conditions, they adapted to them by working a little harder still. How do you respond to setbacks? Do you tend to feel sorry for yourself, or do you look at them as testing your higher purpose, and forge ahead?

Weather hardships. That first harrowing winter, half the Pilgrims died. Three hundred and seventy-five years later, we may live in a vastly different technological world, but these kinds of elemental human hardships still cannot be escaped. You may have to surmount the death of a partner, or weather depression, or, like advisors who faced hurricane Katrina, survive the destruction of your office. The Pilgrims were a small group who relied on one another and their Indian allies through tough times. Family, friends, a mastermind group, and a plan can all help you stay positive in a negative world.

Find your own Squanto. The tribes of North American Indians had their own intergroup rivalries, friendships, and conflicts to manage when the Pilgrims showed up. They viewed the arriving ships from Europe with ambivalence: the newcomers evoked a mixture of interest and and mistrust. The settlers brought with them threats such as disease and competition for resources, but they also brought tools, muskets, and other things that could give a tribe leverage against longtime native foes. Squanto, a Wampanoag who had spent nine years living in England, was uniquely positioned to interact with the Pilgrims by acting as a go-between with Chief Massasoit. Their group allied with the Pilgrims, showing the unskilled band the best places to find fish and game. Had it not been for Squanto, none of the Pilgrims may have survived that first harsh winter. If you are a rookie, or a veteran looking to break into a new niche, you need to find someone who knows the ropes, a mentor who can advise you on the lay of the land and help you build your skills and tap into your strengths.

Write your own compact. Since they didn’t have a legal right to settle in Massachusetts, the Pilgrims decided they had better be clear among themselves about what they were doing. They created their own government, drawing up the Mayflower compact. The Pilgrims knew the importance of turning thoughts into practice by first putting them into written words. And so did Chief Massasoit, who signed a peace treaty with the Pilgrims in 1621 that was never broken and allowed the groups to enjoy a peaceful coexistence even when those around them were warring. What is it that you need to get in writing? A mission statement, partnership agreement and business plan are key documents advisors can rely on to help realize their commitment to themselves and others.

Become more self-reliant. The Pilgrims cast off reliance on the king, their old government, and society. They believed God would help them, but only if they helped themselves. The Pilgrims had a work ethic we could all benefit from imitating. If you wanted a house, you chopped down trees and built one. If you needed clothes, you spun your own thread and sewed your own garments. If you wanted to eat, you pulled clams from the cold muck, patiently tended to growing corn, or hunted turkey, squirrel, or deer. And on the rare occasion you had some downtime, there was no Internet, TV, or John Grisham audio books, so you read the Bible. What do you think a Pilgrim would say about your daily regimen? If it could stand some more discipline, think about incorporating an exercise program and a good diet. Create momentum by establishing your own morning success ritual and a more systematic prospecting regimen.

Be bold. The Pilgrims demonstrated a boldness more intense than most of us may ever need to muster. They set sail with a dream to found a colony, a goal some deemed a fool’s errand. Many had tried unsuccessfully before them. Up until that time the only English settlement that had not failed was Jamestown. And that settlement had suffered terrible attrition, losing 3,000 out of 3,600 colonists in three years. You don’t have to set off for distant shores to jump out of your comfort zone. Challenge yourself to go cold walking in some uncharted territory, unleash your inner Pilgrim’s work ethic, and learn how to survive in tough conditions. You may not set foot on a new continent, but you’ll certainly uncover new territory within yourself.

Bubble Bursting

In today’s world of financial crisis, one after another, and the pace of change in the economy, investors must look for new and innovative ways to balance the risk/reward relationship in their portfolios. Wherever you choose to look — at the economy and jobs, the public schools, the budget deficits, the nonstop warfare overseas — you’ll see a country in sad shape. 

The wreckage from the recession and the nation’s mindlessly destructive policies in the years leading up to the recession is all around us.

The bubbles that have yet to burst are the following: bond bubble, dollar bubble, U.S. Government debt bubble and, eventually, a gold bubble.

Bubbles burst for a reason and don’t re-inflate for a very long time. The stock market bubble burst in 1929, ushering in the Great Depression, and investors were not made whole as a result of the market’s losses until 1954, 25 years later.

I’m sure that when risk tolerance was explained to investors in 1928, they had no idea of the level of risk they were exposing their life savings to at the time.

To discover one of the reasons the stock market bubble will not re-inflate to 14,000 is to consider what pushed it there to begin with. The 77-million-strong baby boomers were in their prime spending years in the 1990s, on a spending spree the likes our country had never before experienced.

All that demand created a supply shortage in housing and allowed companies of all types to raise prices, thus, driving our markets higher. Seventy percent of our GDP is made up of consumer spending. Now, here we are in 2010, and the baby boomers are 20 years older. They are past their peak spending years. They are downsizing empty nesters that are fearful about their future and savings like never before.

We’ve been taught that over periods of 10 years or more, the market always goes up. Well, if that were ever true, it no longer is. Consider the Dow, which stood at 7,487 on November 13, 1997, and then was again at 7,486 on March 18, 2009, almost 12 years later.

When the market drops by 50 percent on your $100,000, taking it to $50,000, you need not a 50 percent gain but a 100 percent gain just to break even.

Remember that the Dow was at 14,000 points just over three years ago. Today, it’s at 10,000. As we continue to adjust to the new normal, there are additional bubbles that have not yet burst that, upon doing so, will cause the market to drop further. Not just drop lower, but also stay lower for many years to come. I believe that if you are in your 50s or older, you cannot afford to ride the market down this time, because it’s not coming back.

There isn’t another baby boom generation that’s waiting in the wings ready to buy, buy, buy to help re-inflate the bursting bubbles of real estate and the stock market by driving prices up. When you recognize we are now in the new normal — which is still adjusting to new lower pricing — then you will realize the next time the market declines, it’s not only not coming back to its current levels quickly, it may not come back in our lifetime. That adds up to risk that many do not realize they are taking especially new retirees.

Often people that use CD interest as a supplement for their retirement income, find that it simply doesn’t cover all their needs. If they dip into the principal, then the interest is lower and finally they experience a growing shortage every month.   If you want a steady income for your golden years that helps to support all the fun you never had time for before you retired, then a retirement annuity may be just the item you need.   A retirement annuity allows you to maintain the same income level regardless of the fluctuations in the prevailing interest rate.

The concept of combining the security of a guaranteed return with the allure of participating in the booming stock market. Voila: Equity-indexed annuities!  Fixed indexed annuities offer consumers what could be described as the best of both worlds: a market-driven investment with potentially attractive returns, plus a guaranteed minimum return.

Fixed indexed annuities offer a minimum interest rate (typically between 1% and 3%), while also having the potential to participate in a portion of the markets upside growth.  While it would seem investing in the stock market might be a better option, it’s also riskier. Equity-indexed annuities are designed to offer a safety net — that guaranteed minimum return.

A bird in the hand is worth two in the bush.  I’ve never had a client in my 38-year practice say to me, “I’m so disappointed you’ve never lost any of the money I gave you.” We have averaged returns in the 6 percent to 8 percent range without risk to our nest eggs. That’s why we have happy clients!

Index annuities have the potential of giving the investor growth potential that is linked to various market indices such as the S&P 500, EAFE, Corp. Bond Index, and others, without any risk to the investor’s principal.

If you  may think you can do better by taking on the risk of the market. You should ask yourself to remember two things: 

• Gains are locked in, the 6 percent to 8 percent average is always on all the money. No losses  to principal. You never have to waste years making up for losses that can’t happen to begin with.  
• Second, the Dow stood at 66 points in 1900 and at 11,497 by the year 2000 — 100 years of performance that resulted in a 5.3 percent annual compounded return; not 8 percent or 10 percent or greater as some would think.

When you buy an indexed annuity you own an insurance contract. You are not buying shares of any stock or index.  An indexed annuity is different from other fixed annuities because of the way it credits interest to your annuity’s value. Indexed annuities credit interest using a formula based on changes in the index to which the annuity is linked.

The formula decides how the additional interest, if any, is calculated and credited. How much additional interest you get and when you get it depends on the features of your particular indexed annuity.

Your equity-indexed annuity, like other fixed annuities also promises to pay a minimum interest rate. The rate that will be applied will not be less than this minimum guaranteed rate even if the index-linked interest rate is lower. The value of your index annuity also will not drop below a guaranteed minimum.

In the case of premature death, your beneficiaries have the accumulated funds within your indexed annuity available to them, with most companies and may avoid the expense, delay and publicity of probate.

Most indexed annuities provide you with opportunities to withdraw funds at any time (subject to applicable surrender charges). Most index annuity contracts allow some form penalty-free withdrawals after the first contract anniversary. Some indexed annuities also have available certain riders which increase liquidity in the event of confinement to a nursing home or if diagnosed with a terminal illness.

Tax deferred indexed annuities provide you with a guaranteed income within a tax-deferred indexed annuity. You have the ability to choose from several different income options, including payments for a specified number of years or income for life, no matter how long you live. With non-qualified (non-IRA, 401k) plans, a portion of each annuity income payment represents return of premium which is not taxed, thereby reducing your tax liability from your indexed annuity income payments.

Insurance companies cover their costs for equity-indexed annuities by investing the premiums they collect. Companies typically buy coupon bonds to cover the guaranteed minimum return, and call options to cover market appreciation. It’s a delicate balance — one which doesn’t offer the company any guarantee it’ll make any money. Companies often use interest-rate caps to cover their bases. 

With these retirement savings and income products, an insurance company invests most of the principal in bonds to ensure the policy will generate a small annual return but the insurer uses a small portion of the premium to buy options in a stock market index, primarily the S&P 500 index. Options that are exercised can result in additional interest credited to a policy, potentially more than an investor might achieve through other fixed-income investments.

How good an investment are equity-indexed annuities? If you had bought one just before the collapse of the stock market instead of investing in the stock market itself, you would be very happy right now!

Our products allow you to participate in the market, but it’s done in such a way so as to never place their life’s work at risk. None of us can be young again and go back and earn it all over, should it be lost.

Medicare Advantage and MediGap Information

What You Need to Know About Medicare Advantage Plans

Medicare Open Enrollment for 2010 starts on 15th November and ends on the 31st of December. During this six week period, if you receive Medicare or are now eligible to join, then you can review plans and health/drug coverage. This could give many seniors access to additional benefits and/or could allow them to make sure that they have the right coverage in place at the best available cost.

What is Medicare Open Enrollment?

The cost and coverage offered by Medicare plans change every year. During the Open Enrollment period you can choose a plan or review and change your existing coverage (i.e. health and prescription drug plans) for the coming year. This applies to those that currently have an existing Medicare plan and those that have just qualified to claim benefits.

Private companies contract with Medicare to deliver services

Health plans that contract with Medicare are paid a monthly amount by Medicare for each beneficiary enrolled in their plan. The amount varies by area. One plan whose seminar I attended receives $550 per month for each enrollee it signs up.

This is big business for Medicare Advantage (MA) plans. They all hope, of course, that their participants won’t need the $6,600 (or whatever) in medical services each year and that they’ll be able to pocket the difference along with beneficiaries’ monthly premiums, if any.

In return, MA plans provide all Medicare-approved services under Parts A and B, plus some supplemental services such as dental and vision. Many of them also provide drug coverage under Part D. Costs and benefits vary by plan and by region. About 25% of all Medicare beneficiaries receive care through a MA plan.

These plans have been around since the 1970s. The Balanced Budget Act of 1997 named them Medicare+Choice, and the Medicare Modernization Act of 2003 renamed them Medicare Advantage plans. They are sometimes referred to as Part C.

In recent years, Medicare has paid these plans more per enrollee than the cost of care for beneficiaries in the original, fee-for-service, Medicare Part A and B program, the rationale being that they would provide extra services to keep people healthy.

In 2010, payments to MA plans averaged 109% of fee-for-service costs. However, the Affordable Care Act of 2010 will be reducing federal payments to MA plans going forward, bringing them closer to the average costs of care under the fee-for-service Medicare program. This is creating a healthy consolidation in the industry, with the least profitable plans merging or going out of business.

Medicare for healthy people

I would like to use my wife and an example.  She is a health plan’s dream.  She leads an extremely healthy lifestyle, takes no prescription drugs, is never sick, and her only doctor visits in recent years have been to the naturopath, the urgent care clinic for a sinus infection, and the dentist.

Because she is still working part-time, she currently has an individual policy with a high deductible, for which she pays about $400 per month. When she goes on Medicare, she will pay $115.40 per month for her Medicare Part B premium, unless she earns more than $85,000, in which case her premium could be anywhere from $161.50 to $299.90, depending on her earnings.

But Medicare Parts A and B won’t be enough. Even though she takes no drugs at present, she is obligated to sign up for Part D—at an average cost of about $32 per month—or, alternatively, go into a Medicare Advantage plan that includes drug coverage. If she doesn’t do either, she will be slapped with a penalty on her Part D premiums when she finally gets around to signing up. And the longer she delays, the higher the penalty will be.

Also, the original Medicare does not have an out-of-pocket lifetime limit. If she were to need a bypass operation or cancer treatment—extremely unlikely in her case, but catastrophic events are why we have health insurance, after all—the 20% coinsurance could put a significant dent in her retirement savings.

Although she could broaden her coverage with a Medigap policy and a separate Part D plan (Medigap policies no longer cover drugs), we are looking at Medicare Advantage plans that include drug coverage. Premiums for MA plans are generally lower than for Medigap policies, although cost-sharing is sometimes higher.

However, my healthy wife won’t have to worry so much about cost-sharing, because she rarely goes to the doctor. Starting in 2011, all MA plans will be required to limit beneficiaries’ out-of-pocket expenses to no more than $6,700; about half of all plans will have limits of $3,400 or less.

Comparing plans

In helping my wife choose a Medicare Advantage plan, I gave her two resources. One is the 2011 “Medicare and You” handbook, which explains the basics of Medicare and the updates for 2011. This is an introduction to the Medicare maze and is surprisingly clear and easy to read.

However, the first 130 pages of the 134-page handbook focus on what Medicare pays. It is not until you get to page 131 that you discover what you have to pay, such as the $1,132 deductible for hospital stays under Part A and the 20% coinsurance amount for doctor services under Part B (after paying the $162 deductible).

I scoured the benefits publication to see if her nutritional counseling with her naturopath or her dental care would be covered by Medicare. Nope. She’s on her own there, unless we can find an MA plan that covers them.

The next resource I gave her was the Medicare Plan Finder. To use this online tool, we simply entered her zip code, answered a couple of easy questions, and up popped a list of all the Medicare Advantage plans in her area.

Fortunately, she lives in a metropolitan area and has a pool of 24 plans to choose from. Clients in rural areas aren’t so lucky. They either have no access to MA plans or the premiums are prohibitively expensive. The availability of MA plans is one of the things pre-retirees should think about before choosing a retirement location.

Right away, I could see a flaw in the plan comparisons. First, the plans were ranked low to high by “Estimated Annual Health and Drug Costs,” which ranged from $3,450 to $5,850, including drug costs of more than $1,000 a year for all plans. My wife doesn’t take any drugs! So I see that we will need to dig into each plan’s cost and benefit formulas to get an idea of what her actual expenditures are likely to be.

The key to choosing an MA plan is to estimate her health care usage during the coming year and find a plan with the right combination of low premiums and reasonable co-payments so that her total out-of-pocket costs will be low while still affording her quality care if she needs it.

For many people, drug costs represent much of their health care costs. But she doesn’t anticipate taking any drugs during the coming year, so she doesn’t need to pay for extensive drug coverage. If that changes, she can always sign up for a different plan next year.

Fortunately, one important improvement in Medicare in 2011 is free preventive screening services. This is provided to all Medicare beneficiaries, with or without a MA plan. My wife will be able to get one physical exam, a mammogram, a bone density test, a blood lipid panel, a colonoscopy, and immunizations at no charge.

With her high-deductible plan, she had been paying for most of these services out of pocket (or going without). I know that one of the first things she will do when her Medicare eligibility starts is find a primary care doctor and go in for all her screenings.

And it is at this point that the Medicare Advantage plan search goes beyond the financial analysis. I won’t be able to choose her doctor for her, but whatever plan she chooses should give her access to providers that meet her needs. Unfortunately, several of the low-cost plans in her area have limited provider networks. If she wants a broader selection of quality providers, she may have to pay more.

Adding up the costs

After extensively reviewing all the available plans, I am narrowing her choices down to a low-cost plan and a high-cost plan. The low-cost plan has a limited provider network, but zero premiums for both health care and drugs.

Preventive dental (cleaning, X-rays, exam) is available for around $19 per month; comprehensive dental coverage (fillings, etc.) costs $32 per month. However, the coverage limit for dental services is $1,000. An optional fitness plan, which includes classes and membership at established fitness centers, costs an additional $13 per month. The out-of-pocket limit for health care services including drugs is $4,700. The naturopath isn’t included.

The high-cost plan offer several plans, one of which provides 12 visits a year to a naturopath or other alternative provider, as well as fitness classes. The premium is $210 per month and includes drug coverage. An optional dental plan costs $49 per month; it has a $100 deductible and provides maximum coverage of $1,500 per year. The entire plan (excluding dental) has no deductible and an out-of-pocket limit of $1,000. And she will be sure to find a good doctor, because the network is extensive.

But is it worth the cost? That’s something she will have to decide for herself. We may have to go back to the drawing board and choose a middle-of-the-road plan that gives her the coverage she needs at a lower cost.

We may also look at Medigap policies, which would allow her to see any doctor anywhere who takes Medicare; this could be important if she gets sick while visiting her daughter in California. I will also tell her that if she signs up for a Medigap policy now, during her initial enrollment period, they have to take her.

But if she were to develop a chronic disease and apply for a Medigap policy at a later date—say her Medicare Advantage plan drastically changed its terms or shut down entirely—she may not be accepted by a Medigap insurer. These are among the myriad what-if questions everyone must ask when choosing a supplement to basic Medicare.

In comparing the two MA plans, and given my wife’s focus on fitness and alternative care, the high-cost plan may save her money in the long run. Her total monthly premium, including dental insurance, which she doesn’t have now, will range from $374 to $559, depending on her income, which will determine her Part B premium.

Actually, there’s a two-year lag in reporting, so her 2009 income will determine her 2011 Part B premium. All she has to do is pull out her 2009 tax return and see what her adjusted gross income was. If it was less than $85,000, her Part B premiums will be $115.40 in 2011. I

f it’s more, she’ll pay more. (Only current Social Security recipients fall under the “hold harmless” provision that caps their Part B premium at this year’s $96.40 owing to the 0% Social Security COLA. People new to Medicare and those with high incomes will pay more.) The Centers for Medicare and Medicaid Services just announced 2011 premiums last Thursday.

If she only goes in for screenings and doesn’t get sick, she should have no additional out-of-pocket costs. So her annual health care cost, for MA premiums plus the $100 deductible for dental care, will range from $4,588 to $6,808.

A sinus infection will cost her a modest $10 co-pay plus $4 for a generic antibiotic. Pre-Medicare, she’s been paying about $4,800 in premiums plus out-of-pocket costs for the naturopath, the dentist, yoga classes, and the occasional sinus infection, since her costs never exceed the deductible.

The low-cost plan would cost her $1,385 to $3,599 in Part B premiums, plus $624 for dental and fitness, plus a $100 deductible for dental, for a total annual cost of $2,109 to $4,323. She will have to pay for the naturopath out of pocket. And if she requires surgery or some other high-cost treatment, she could be out-of-pocket as much as $4,700, vs. $1,000 for the high-cost plan.

Choosing a plan will require her to think about the kind of care she is likely to need and also what she might need, and how much risk she is willing to assume. Would she rather have lower monthly premiums and higher out-of-pocket costs, or higher monthly premiums and lower out-of-pocket costs?

Finally, her decision might come down to which provider network she thinks will give her the best quality care. She may need to shop for doctors before she shops for health plans.

One year at a time

Choosing an MA plan has become a year-by-year exercise, since contract terms can change dramatically based on a health plan’s claims experience and negotiations with Medicare and their health care providers.

The MA plan in my area raised its premium from zero to $92 because of poor claims experience. It also lost its contract with the only hospital in town because they were unable to agree on terms. If this plan’s members are paying attention, they are now out shopping for another plan, rather than staying with a program that has completely changed the rules on them.

All current MA members recently received a packet of information describing their plan’s new terms for 2011. They should read it carefully and, if the plan has raised its prices or changed its terms, consider shopping for a new plan between Nov. 15 and Dec. 31. This is the annual enrollment period for MA plans.

The contract period is Jan. 1 through Dec. 31, 2011. During this time the plan may not change its terms and members may not bail out of the plan, except during the Medicare Advantage Disenrollment Period, (MADP) from Jan. 1 to Feb. 14, 2011.

This period is only for disenrolling from a MA plan. If they want to sign up for a new MA plan, they will have to wait until the next general enrollment period next year, which changes to Oct. 15-Dec. 7, 2011.

Anyone going back onto original Medicare during the MADP may sign up for a drug plan. They may also sign up for a Medigap policy, but coverage is not guaranteed. In most cases the only time a person can be assured of getting a Medigap policy is during the initial enrollment period when he or she first becomes eligible for Medicare; otherwise, a health history questionnaire must be filled out, and coverage could be denied. The only condition that would disqualify a person from joining an MA plan is end-stage renal disease; other pre-existing conditions do not matter.

What I learned from this time-consuming and somewhat exasperating exercise is that initial Medicare eligibility is just the beginning of a long and lengthy search for the right health care plan.

Unlike the original Medicare Parts A and B plus a drug plan plus a Medigap policy, Medicare Advantage plans cover it all, limiting out-of-pocket costs within a comprehensive health care delivery system that focuses on wellness.

But there are so many variations in services and costs among the plans that it is critical to anticipate the type and amount of health care that will be needed and choose a plan based on those criteria. And then prepare to start all over again next year, because everything could change.

You can visit the Medicare website to learn more about plan costs and coverage in your local area. The telephone help-line (1-800-MEDICARE) also offers a 24hr information service that may be useful. The National Council on Aging (NCOA) has an online tool, MyMedicareMatters, that can help you learn more about your options and any benefits for which you may be eligible

Risk Of Keeping Your Long Term Care Policies

Last week MetLife announced that it was no longer going to sell long-term care insurance. The company said that it would continue to service the policies of its current 600,000 insured individuals, but it wouldn’t sell any new ones.

The major insurance companies are stuck with a ticking time bomb, with tons of policies that they wrote with no cap to the risk.

Think of all those unlimited benefit plans… written 10 to 15 years ago. Think how cheap those policies were. 

It appears that no one understood this product when it came out, and it looks like the actuaries still don’t understand it.

While long-term care insurance is an important retirement planning hedge against being old and needing full time care, the companies that sell it haven’t been very good at making this product, a comfortable and reassuring purchase.

Substantial price increases on current policy holders are not unusual. Over the past five years, practically all major players in the long-term care insurance market have raised premiums as much as 25 percent.

A MetLife spokeswoman said that the company actually had not anticipated the costs. “While we are sensitive to any rate increase that impacts our policyholders, assumptions used to initially price many long-term care insurance products have changed,” Karen Eldred said in a statement. She added that the company misjudged interest rates, life expectancy and the number of people who would drop their policies.”

The increasing longevity over the years causes us to see an increasing number of Alzheimer’s cases. This has been coupled with the fact that the market in health care and long-term care doesn’t work to keep costs and prices in line with inflation.

There are too many unknowns even from companies that are longtime sellers of life insurance.  In order to raise rates, insurers have to get state approval, but if they can make a good business case — costs are up and profits are down — the state insurance commissions almost always approve.

The rate increases due to unexpected claims and lower than expected lapse rates doesn’t mean the regulators didn’t know what they were doing. It meant that this is a new product that no one properly understood. This wouldn’t be the first time regulators got caught with their pants down.

A report by California Insurance Commissioner Steve Poizner blames the increases on a number of factors including low initial pricing and loose medical underwriting, as well as policyholders living longer than expected and suffering more disabilities.

He said when insurers predicted how much money it would take to cover claims and costs, they guessed poorly, low-balling the cost side and overestimating their return on investments. Insurers also predicted that more people who bought policies would drop them than actually have been doing so. When people buy one of these policies, they wisely hold onto them.

And now we are at the point where we either have rate changes on both new and old business, or some carriers exiting the business altogether. Along with the stock market follies of the past ten years, two major events happened that turned the LTC world upside down.

1. Somewhere around 2006, the number one claim for LTC went from stroke (somewhat easy to model for an actuary) to dementia and related illnesses (extremely difficult to model) and

2. The unprecedented rise in health care costs, which by some measures is outpacing inflation by 2-3%. When you factor in the difficulties of the equity market and combine the other 2 issues, it becomes difficult for a company that writes a significant amount of LTC insurance to price their product appropriately

If you are considering buying long-term care insurance, it is especially important to consider these factors before you commit your retirement dollars:

• Is the insurance company in sound financial shape? While it’s hard to tell in a world where the largest insurance company in the world had to be bailed out by the U.S. government, generally, bigger is better, as well as a long history of financial stability.
• Will the policy remain affordable even with increases? If you’re stretched to the outer limits when you buy the policy, your finances may not get any better. Perhaps, you should explore other options.
• What happens if you get 10 or 15 years into the policy and can’t pay the bill? Is there a provision that allows you to freeze the policy and accept lower benefits? Could you extend the waiting period — go from 90 days to 180 days and save a substantial sum?
• Should you pay off the premium quickly? There are plans that allow you to pay off the premium in one or two lump sums. For some people with current high incomes or a financial windfall that might be the right choice.