Newsletter: December 2008

The Third Circuit Court of Appeals upholds a community spouse’s purchase of an actuarially sound annuity that converts excess resources into protected income. When her husband entered a nursing home in August 2005, Josephine James purchased a $250,000 single premium immediate irrevocable annuity. The actuarially sound annuity included an endorsement that “this Contract may not be surrendered, transferred, collaterally assigned, or returned for a return of the premium paid. This Contract is irrevocable and has no cash surrender value. An Owner may not amend this Contract or change any designation under this Contract.”

The purchase of the annuity, combined with the purchase of an automobile, reduced the couple’s resources to within Medicaid resource eligibility limits. But, when Mr. James subsequently applied for Medicaid, his application was denied. The Pennsylvania Department of Public Welfare (DPW) took the position that Mrs. James’s annuity was an available resource because her right to receive income from it could be sold by her. In support of this position, DPW eventually produced a declaration from a finance company that expressed interest in purchasing the payments from Mrs. James’s annuity for $185,000.

Mr. James asked a U.S. district court for a restraining order preventing the state from denying him Medicaid benefits. In March 2006, the U.S. District Court for the Middle District of Pennsylvania granted the restraining order and later granted Mr. James’s request for an injunction permanently enjoining the state from denying him Medicaid benefits based on his purchase of the annuity. DPW appealed.

Relying on Medicaid law and Supplemental Security Income (SSI) regulations, the U.S. Court of Appeals for the Third Circuit finds that DPW cannot treat Mrs. James’s annuity as an available resource. The court holds that in determining whether an annuity may be treated as a resource a state cannot use a methodology that is more restrictive than that used by SSI.

Under 42 U.S.C. § 1396a(a)(10)(C)(i)(III), the court writes, “the Department can not treat as available resources any assets that the SSI regulations would not treat as available resources.”

The court notes that although the power to liquidate property makes it available under SSI regulations, the SSI Program Operations Manual System (POMS) makes it clear that the “power to liquidate” is not simply the de facto ability to accomplish a change in ownership of an asset, but must also include the power to do so without incurring legal liability. POMS SI 01110.115.

Since Mrs. James lacks the legal power to change ownership in her annuity without breaching the annuity contract, the annuity cannot be treated as an available resource, the court concludes.

For any of you who have heard me speak on the issue, I have always stated that DPW was in violation of federal law on the issue. What does this mean for consumers? I am not sure. There are distinguishing facts that may not make the James decision applicable in every spousal annuity matter.

More importantly DPW has chosen to take the same position even as James and other cases have come down against them.

Most clients do not want to take the risk nor pay their attorney many thousands of dollars to take the case to Court and DPW has more resources than most of our clients. However, it is certainly a step in the right direction.

Senator Max Baucus (D-MT), chairman of the Senate Finance Committee, has presented the first Democratic health proposal since President-elect Barack Obama’s victory. Aimed at ensuring that all Americans can access affordable coverage, the plan would create a nationwide insurance pool called the Health Insurance Exchange for those who do not have health care coverage.

While the Exchange is being created, the Baucus plan would make health care coverage immediately available to Americans aged 55 to 64 through a Medicare buy-in, and it would begin to phase-out the current two-year waiting period for Medicare coverage for individuals with disabilities.

The plan would also address overpayments to private insurers in the Medicare Advantage program and provide every American living below the poverty level with access to Medicaid. The Baucus plan outlines options for shifting the focus of long-term care from institutional care to services provided in the home and community.

The 89-page health care blueprint, “A Call To Action: Health Reform 2009,” presents in broad outline Baucus’s proposals for reform. The Health Insurance Exchange would be a marketplace where Americans could compare and purchase the plans of their choice. Private insurers offering coverage through the Exchange would be precluded from discrimination based on pre-existing conditions.

Once coverage is made affordable, all Americans would be required to have health care insurance, according to the plan. This revives a debate during the Democratic primaries, in which Sen. Hillary Clinton favored such a mandate and Sen. Obama did not. Baucus said that only a mandate could ensure people didn’t wait until they were ill to buy health insurance, forcing up the price for everyone.

Baucus states that his plan “is not intended to be a legislative proposal,” but rather a “next step” in reforming the nation’s health care system. He will hold hearings on the plan to receive feedback, with the first hearing scheduled for November 19th. Baucus says he intends to push Congress to overhaul the health care system during the first six months of next year.

For more on the Baucus plan and a link to the plan’s full text, go to: http://finance.senate.gov/healthreform2009/home.html (The plan’s long-term care provisions begin on page 78.)

Baucus Health Care Plan Would Give Near-Elderly Access to Medicare

Senator Max Baucus (D-MT), chairman of the Senate Finance Committee, has presented the first Democratic health proposal since President-elect Barack Obama’s victory. Aimed at ensuring that all Americans can access affordable coverage, the plan would create a nationwide insurance pool called the Health Insurance Exchange for those who do not have health care coverage.

While the Exchange is being created, the Baucus plan would make health care coverage immediately available to Americans aged 55 to 64 through a Medicare buy-in, and it would begin to phase-out the current two-year waiting period for Medicare coverage for individuals with disabilities.

The plan would also address overpayments to private insurers in the Medicare Advantage program and provide every American living below the poverty level with access to Medicaid. The Baucus plan outlines options for shifting the focus of long-term care from institutional care to services provided in the home and community.

The 89-page health care blueprint, “A Call To Action: Health Reform 2009,” presents in broad outline Baucus’s proposals for reform. The Health Insurance Exchange would be a marketplace where Americans could compare and purchase the plans of their choice. Private insurers offering coverage through the Exchange would be precluded from discrimination based on preexisting conditions.

Once coverage is made affordable, all Americans would be required to have health care insurance, according to the plan. This revives a debate during the Democratic primaries, in which Sen. Hillary Clinton favored such a mandate and Sen. Obama did not. Baucus said that only a mandate could ensure people didn’t wait until they were ill to buy health insurance, forcing up the price for everyone.

Baucus states that his plan “is not intended to be a legislative proposal,” but rather a “next step” in reforming the nation’s health care system. He will hold hearings on the plan to receive feedback, with the first hearing scheduled for November 19th. Baucus says he intends to push Congress to overhaul the health care system during the first six months of next year.

For more on the Baucus plan and a link to the plan’s full text, go to: http://finance.senate.gov/healthreform2009/home.html (The plan’s long-term care provisions begin on page 78.)

How Retirees Can Ease Pain of Market Rout

Turbulent markets are devastating for new retirees, since early losses can cripple the ability of a portfolio to generate enough income for decades to come. But retirees who flee from stocks to the relative safety of bonds and cash risk missing out on the historically higher average returns generated by stocks once they recover.

In most cases, there’s a better route for retirees to follow: Give yourself a pay cut by withdrawing a little less today and continuing to take out less over the next several years. According to a new analysis by Baltimore-based financial-services firm T. Rowe Price Group Inc., this approach can help make a damaged portfolio still last a lifetime.

Typically, retirees are advised to withdraw no more than 4% of their portfolios’ value in the first year of retirement, and then bump up that sum each year, typically in 3% increments, to keep pace with inflation. If you retired with $1 million in savings, for example, you could withdraw $40,000 in year one, $41,200 in year two and so forth, without running much risk of depleting your nest egg in your lifetime. In fact, that approach would provide an 89% chance of sustaining an income stream for at least three decades, according to T. Rowe Price research, which simulated 10,000 potential market scenarios.

But what if you retired last year and your investments are suddenly worth $800,000 instead of $1 million? Unless you change your withdrawal strategy, your odds of running out of money rise sharply.

Even if the market manages a tepid recovery — for example, gaining an average 4% to 6% a year over the next five years — a retiree with a 20% loss would increase the risk of running out of money early by following the traditional withdrawal rate. Doing so would leave the retiree with a 49% chance of depleting a portfolio invested 55% in stocks and 45% in bonds, the T. Rowe Price model finds.

If your portfolio took a 30% loss, the news is much more grim: You’d have a 79% chance of running out of money prematurely if you continued a traditional withdrawal strategy.

So what can you do to make your savings last when a downturn hits your nest egg? The easiest fix is to simply quit giving yourself a cost-of-living raise for the next five years. In other words, if you’re on track to take out $41,200 this year, stay at $40,000 instead. This would give you a 75% chance of sustaining your savings for 30 years, assuming a 20% loss followed by a slow recovery, according to T. Rowe Price.

But a 75% chance is not enough assurance for many people. What would you need to do to get back to a 9-in-10 chance of making your money last? Assuming you had experienced a 20% loss, you could still take withdrawals of almost 4%. But you would need to take them from your new, lower balance — not from the original nest egg. So, rather than taking 4% of $1 million, you would need to scale back to taking 3.9% of $800,000. Doing so would give you only a $31,000 annual income, but would also allow you to increase your payments each year by 3%.

If you’d rather take a bit more money up front and forgo the inflation adjustment for several years, you could make an annual 4.4% withdrawal for each of the next five years, or $35,000 on an $800,000 portfolio. Other retirees are forgoing retirement-savings withdrawals altogether.

The point is that taking less now while the account is down or finding alternative sources of income (for younger healthier retirees) can do a lot to avoid catastrophe later.

Medicare’s annual open enrollment is from November 15th to December 31, 2008

Plans Change. People Change. Shop and Compare.

Each year plans change what they cost and what they cover. Now is the time for people with Medicare to review the changes being made by their current plan and compare it to others to make sure it still meets their needs. Those who don’t have prescription drug coverage can also enroll in a drug plan during open enrollment.

All people with Medicare should:

• Review the 2009 costs for their current drug and health plan. (Look at premium, co-pays and deductibles);

• Compare the cost and coverage to other plans in their area. (Check to see if the plan covers their medicines, works with their pharmacy and doctors, and covers the services they need);

• Choose a plan that meets their needs.

Medicare’s website has many helpful tools, and . . . .

Medicare Part D Plan Finders

Reminder: Part D Plan Finders may help detangle the enrollment mess.

It’s Part D enrollment season, and the options available to beneficiaries are, well, myriad. Plan finders purport to assist in finding the best plan for each potential enrollee. Here are a few links to Part D online plan finding-tools. I suggest putting information into at least a couple of these, to see if they produce the same recommendation (put them in your browser).

CMS:

http://www.medicare.gov/MPDPF/Public/Include/DataSection/Questions/MPDPFIntro.asp?version=default&browser=Firefox|3|Windows+Vista&language=English&defaultstatus=0&pagelist=

Home&ViewType=Public&PDPYear=2009&MAPDYear=2009&MPDPF_MPPF_Integrate=N

Medicare Part D Dot Com:

http://www.medicare-partd.com PartDSearchPDPMedicarePartDPlanFinder.php

Destination RX:

http://www.drx.com/medicare-partd/compare/default.aspx

CVS Plan Finder:

https://cvs.planprescriber.com/mapd/client/156894/web/index.jsp?groupid=156894

LIHEAP

PA. Low Income Heating Assistance Program has funds available for people who are having difficulty with keeping warm in the winter.

Please check:

http://www.dpw.state.pa.us/ServicesPrograms/LIHEAP/

For application and details.

Long-Term Care Insurance Mistakes

In an attempt to hold down your long-term-care insurance premiums, you might cut some corners that could cost you a lot of money in the long run. Avoid these five common mistakes:

1. Relying on average benefit amounts.

The first decision you need to make when buying long-term care insurance is how big a daily benefit you need. If you rely solely on the national average, you could fall short of the cost of care in your city — or you could end up buying too large a benefit and skimping on other parts of your coverage.

For example, the average daily cost of a private room in a nursing home is $203 across the country, according to the MetLife Mature Market Institute. But the average daily cost is $135 in Birmingham, Ala., and $330 in San Francisco.

The average hourly rate for a home health aide varies just as much: It’s $13 in Birmingham and $21 in San Francisco. To figure out how much coverage you need, check out prices for facilities in your area you wouldn’t mind using. Then figure out how much of the bill you could shoulder yourself.

2. Skimping on the waiting period.

You can lower your premiums by choosing a longer waiting period before benefits kick in (called the “elimination period” in insurance jargon). But too long a waiting period can cost you.

For a John Hancock policy with a $200 daily benefit, a three-year benefit period and a 30-day waiting period, a 55-year-old would pay $2,430 per year. Extending the waiting period to 60 days lowers the price to $2,227. A 90-day waiting period drops it to $2,025; 180 days to $1,822, and 365 days to $1,620. But a longer waiting period means you’ll need to pay the bills yourself before benefits kick in. At an average daily rate of $200, that translates into a 6,000 bill with a 180-day waiting period, and $73,000 for a 365-day waiting period. And that’s just in today’s dollars. Your expenses will be much higher when you consider the future cost of care. If costs continue to rise by about 5% per year, that daily bill could rise to $677 in 25 years — which means you’d pay $122,000 with a 180-day waiting period and nearly $250,000 with a 365-day waiting period. Those bills make saving $200 — or even $400 — per year in premiums seem like small change.

Bottom line: Most people should consider a 60-day or 90-day waiting period, which keeps premiums manageable but limits out-of-pocket costs.

3. Picking the wrong type of inflation protection.

It’s essential to have some kind of inflation adjustment. A policy with a $200 daily benefit will barely make a dent in the bills if care costs $677 per day when you finally need it, leaving you with $73,000 to cover an annual bill of nearly $250,000.

The best inflation-protection coverage automatically increases your benefit amount by 5% compounded annually, keeping pace with the rising cost of care. Such policies are pricey, often doubling the cost of coverage, but your premiums will remain the same even as the benefit amount increases.

Policies with future-purchase options, which allow you to buy additional coverage over time without medical screening, can start out costing half as much as policies that automatically increase your benefit amount. But such policies soon wind up being much more expensive. That’s because the increased benefits are generally priced at your age when you buy the extra coverage — and not how old you were when you first bought the policy.

A study by Legacy Services, an independent insurance agency specializing in long-term care insurance, illustrates the problem. If a 47-year-old man buys long-term care coverage with a $150 daily benefit, three-year benefit period and 90-day waiting period, he can expect to pay $827 per year for a policy with automatic 5% compound inflation protection and just $347 per year for a policy with future-purchase options. But if he increases the benefit amount by 5% per year, the policy with the future-purchase options will cost $1,158 per year by the time he is 65 years old, versus a stable $827 for the automatic 5% policy-although both would provide the same $364 in daily benefits.

The difference is even larger as he gets older. By age 80, when he’s more likely to need care, the FPO policy will cost $7,811 per year, and the inflation-protection policy still will cost $827, with both policies providing $756 in daily benefits. You could choose not to exercise some of your future-purchase options, but then you might fall far short of your needs and have to make up the difference from savings.

4. Assuming group coverage is the best deal.

You might think that if you work for a big employer that you’re getting a special deal when you buy a long-term care policy. But you could find a much better deal on your own. In fact, group policies tend to cost healthy, married people 20% to 40% more than if they’d bought individual policies with the same coverage.

One reason is that many group policies offer coverage to all employees regardless of health (called “guaranteed issue”). This can be a great deal if you have medical problems. But it also means that healthy people end up subsidizing less healthy people, which boosts the cost for everyone.

Individual policies usually offer big discounts to people in good health. Plus, many group policies don’t offer spousal discounts (which can run as high as 40% with some individual policies) and special benefits, such as shared-care coverage, which allows spouses to pool their benefit periods. And some groups offer only policies with future-purchase options, and not 5% compound inflation protection. Your best bet: Before buying coverage at work, compare the group policy with individual policies available from the major players.

5. Working with the wrong company.

A lot of people are afraid to buy long-term care insurance because they’ve heard horror stories about people whose premiums jumped by double digits at exactly the worst time — after they’d retired and could ill afford the price hike.

Although there’s no guarantee that your long-term care rates won’t rise, state insurance commissioners have made it tougher for insurers to lowball rates to get customers and later raise rates when policyholders are too old to go elsewhere. And some insurers with pricing problems have left the long-term care business.

Still, many big companies have never increased premiums for current policyholders. It’s a good idea to stick with such companies, which know the business and have been stable in the past — especially because it may be decades before you need the policy and it’s tough to switch companies when you’re older and have developed medical problems. It’s best to work with a broker who deals with several companies and knows the policy nuances.

Our firm has access to LTC polices from the following companies: Genworth, John Hancock, Lincoln

National, MedAmerica, MetLife, Mutual of Omaha,

Prudential, UNUM.

Paperless World Can Leave Heirs In the Dark

As people increasingly go “paperless” — using the online features of banks and brokerages to manage their accounts — it’s complicating the process of helping your heirs sort out your finances once you’re gone.

The problem: If you don’t keep careful records, your family might not even know where to start looking for accounts. In a worst-case scenario, some assets may never be found.

But at the same time, you don’t want to recklessly list all your private financial-account passwords somewhere for a bad guy to find. That would be an invitation to theft.

There are several smart steps to take to build a roadmap to your assets. The five key components: information about your assets, names of advisers, details about safe-deposit boxes, your estate-planning documents, and a few other important documents.

For starters, provide details about banking and brokerage accounts, insurance policies, real-estate and retirement plans, and list account numbers.

Explain where to find your will, trust, power of attorney and other estate documents. If you have a safe-deposit box, give the bank’s name and address, and where you keep the keys. If you have a life-insurance policy, provide the name and phone number of the agent, and a copy of the policy or its number.

Consider listing all the people your heirs will need to contact, including lawyers, accountants, executors or guardians you’ve named to care for any minor children.

Here’s what not to include: Your passwords to online accounts. Listing all your passwords in one place — no matter where it’s stored — is risky. And anyway, your heirs won’t need them. For instance, with some assets like bank accounts, heirs can sometimes gain access by showing a copy of a death certificate and proof of designated beneficiaries.

Another important, but often overlooked, item to include: computer passwords, if you keep back copies of potentially important financial paperwork (like old tax returns) on your PC.

Your financial planner or estate-planning attorney can provide additional guidance in putting together a file meeting your particular needs.

Lastly, think carefully about how to store the list. Heirs need to be able to locate it when needed (and you need to be able to update it with a minimum of hassle) but it shouldn’t be generally accessible. One option: a fire-resistant home safe, where you should also be keeping, say, your passport or other items you may need to access more quickly than things in a safe-deposit box.You might also give a copy to your lawyer to keep with other estate-planning documents.

As a general rule, don’t keep a copy on your computer. But if it is kept there, make sure your computer is as safe as possible from hackers, and is password-protected.

After all, you can’t take it with you — but you wouldn’t want someone else to take it from you.

Real Estate and Mortgages

Lately with the market making daily gains and drops in excess of 4% it is almost impossible to give guidance in a monthly newsletter. You can see daily interest rate swings for a standard mortgage of close to .5%. Rates have been hovering in the 5.875-6.875 range for the last several months. As of December 4 however, due to recent actions by the Federal Government, standard mortgage rates have fallen to the mid 5% range. Those are historically low rates and homeowners with higher mortgage rates should consider refinancing.

The big problem is getting a mortgage. Credit score requirements are about 40-50 points higher than last year for an A credit mortgage at the lowest rates. I think in the next few months things will loosen up somewhat but regardless, you never know unless you try.