The Basics of Long-Term Care Insurance

Thinking about the need and the costs of long-term care is enough to make anyone uncomfortable. But while it’s a difficult subject to talk about, it’s also a topic that often generates lots of questions and misunderstanding.

Consider this: The average cost of nursing home care in the United States now exceeds $70,000 per year, with wide ranging variations from state to state.*

Who Pays?

For the most part, those who need long-term care are left to foot the bill on their own. Neither Medicare, nor Medicare supplemental coverage (“Medigap”), nor standard health insurance policies cover long-term care unless you are impoverished. That’s why long-term care insurance is so important. Since premium costs are based on your age and health at the time of purchase, the younger and healthier you are when you purchase a policy, the lower the premium you’re apt to pay during the life of the plan.

As you evaluate long-term care insurance, keep the following variables in mind:

  • Coverage Parameters. Policies will differ in the types of services they support. Be sure to choose a policy that best meets your particular needs.
  • Benefits Payout. How much does the policy pay per day for care in a particular setting? How does the policy pay out? (e.g., a fixed daily amount, as reimbursement for the cost of care up to a daily maximum?) Does the policy have a maximum lifetime limit?
  • Eligibility. Does the policy use certain “triggers” to determine benefits eligibility, such as the formal diagnosis of an illness or disability? What is the maximum issue age for the policy?
  • Women May Need More. Longer life spans for women may signal the need for additional coverage.

Finally, keep in mind that most long-term care policies sold today are federally tax-qualified, which means premiums paid and out-of-pocket expenses are deductible. Also, long-term care benefits received are not taxed as income up to certain limits.

*Source: AARP, 2007.

© 2010 Standard & Poor’s Financial Communications. All rights reserved.

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The Rules of Responsible Financial Parenting

Today, many families are concerned about the potentially adverse effect of wealth on the financial values of their younger generations. The goals that many affluent parents and grandparents have set for their children or grandchildren reflect core values, an honest work ethic, and a desire to “give something back” to the greater community.

The skills and knowledge needed to help children adhere to these values should be developed early in life and continue well into adulthood. The following strategies can assist older family members in becoming positive financial role models.

Start early— According to recent research, parents can start talking to children about money by age three. Between four and five, you can explain the importance of good spending habits, and by age six or seven, you can help children open a bank savings account. By the time children reach their mid-teens, they should start seeking after-school and summer employment.

Support education — Personal finance education helps instill such pragmatic money management skills as setting a budget, balancing a checkbook, understanding the role of debt/credit, and developing strategies for funding college. Encourage your child’s school to offer personal finance as an elective “life skills” course, send your teen to a community college/adult education class, or tap the many educational resources on the Internet.

Lead by example — Your children will learn their most valuable lessons about money from the examples you set. A few simple rules: Enjoy the fruits of your labor — but don’t go overboard. Set a healthy example regarding credit/debt. Pay bills on time. Save and review your savings plan on a regular basis. Above all, be consistent. Grandparents can be especially effective role models by following these suggestions.

Practice incentive planning — To ensure that important life goals remain at the forefront of your children’s/heirs’ priorities throughout their lifetimes, incorporate the use of incentives in your estate plan. What exactly is an incentive trust? It is an estate planning tool that allows you to reward desired behavior or impose appropriate penalties for undesirable activities. It also provides a way to address the needs of beneficiaries who require special assistance. Common themes guiding incentive trusts are education, moral and family values, and business/vocational choices, as well as charitable and religious opportunities.

Encourage philanthropy — Wealthy families often use philanthropy to convey the message that their success has been the result of hard work and good fortune and that success comes with the responsibility to give something back. If you want to ensure future generations of volunteers and donors, you must teach children how to give of their time, their skills, and their money. Once children understand the scope of their contributions, philanthropy becomes a real and prominent part of their lives.

© 2010 Standard & Poor’s Financial Communications. All rights reserved.

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A Retirement Reality Check

If you have already retired or if you can count the number of years until retirement on your fingers then please heed this friendly warning: Unless you’re already making the most of your current retirement planning strategies, then it may be difficult to lay the groundwork for a financially secure future.

Don’t just take my word for it, though. Look at the numbers: The median income in households of Americans who are at least 65 years old is under $25,000, whereas the median household income for Americans under 65 is more than double that amount.*

Is your portfolio on a course that’s destined to lead to a retirement income shortfall? Consider these strategies that can help improve your long-term outlook.

During Your Working Years?
Determine an appropriate time frame for applying for Social Security benefits. If you plan to apply before your so-called “full retirement age,” then you can expect to receive lower monthly benefits. Delaying your application could increase your benefits. Detailed information about your specific situation is available in the Social Security Statement mailed to you each year about three months before your birthday. Contact Social Security at least three months before retirement to apply for benefits.

When You Reach Retirement?
Make arrangements for your retirement account distribution strategies. If you participate in a workplace retirement plan, contact your employer’s human resources office to learn what withdrawal options are available to you. Once you have that information handy, you’ll need to decide whether to begin withdrawing money from your taxable accounts first or from tax-deferred accounts first. Keep in mind that the IRS requires most retirement savers to begin taking withdrawals known as required minimum distributions (RMDs) from employer-sponsored retirement accounts and traditional IRAs after reaching age 70½. If you don’t take your RMDs, you could be forced to pay substantial tax penalties. RMD rules recently became less complex, but it’s still important that you understand them and implement an appropriate distribution strategy.

All Retirement Investors?
Review your post-retirement medical insurance needs. For example, you might want to think about purchasing coverage to supplement Medicare benefits. If you have made all eligible contributions to other qualified plans, then you may also want to consider funding an annuity now in order to receive a guaranteed income stream later in life.** Your retirement security is very important. A smart first step to keeping your retirement strategies on track is to contact a qualified financial professional.

*Source: AARP, August 2005.
**Fixed annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Gains from tax deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59½ are subject to 10% IRS penalty tax and surrender charges apply. Guarantees are based on the claims paying ability of the issuing insurance company.

© 2010 Standard & Poor’s Financial Communications. All rights reserved


Now That You’re Retired, Maximize Your Retirement Income

Although much of the last decade has been an exception, historically, stock returns have outpaced inflation by the widest margin and have provided the strongest returns over the long term.

Those long-awaited golden years have arrived, and you’re enjoying a well-deserved retirement. You’ve saved and invested wisely to provide a financial cushion. Where do you go from here?

Factor in Inflation
You may want to start by considering the impact of inflation. With longer life expectancies, the need to finance ongoing living expenses, and the requirement to take annual distributions from retirement accounts, you’ll want to be sure your returns exceed the rising cost of living. Even at a moderate 3% rate, inflation can substantially cut the purchasing power of your savings over 20 years. A balanced portfolio of investments to maximize security while building needed profitability may be crucial to your financial well-being.

Keep Stocks Working for You
Many people believe that retirement investing means allocating everything to investments that present little risk to principal, such as money market accounts or certificates of deposit. While the vast majority of these investments historically have not lost value, you should also consider the risk that long-term returns may not keep pace with inflation. Historically, stock returns have generally outpaced inflation by the widest margin and have provided the strongest returns over the long term. Depending on your risk tolerance, you may want to consider keeping a portion of your portfolio invested in stocks and stock mutual funds throughout your retirement.1

A Focus on Yield
Along with some stock investments, a significant portion of your principal will likely be invested in fixed income investments to provide a consistent stream of income. How much risk (maturity and credit risk) you need to take in these investments depends in part on how much income you need.2

Government bonds of varying maturities and coupon rates typically are available to match your projected cash flow needs. You can buy bonds maturing (meaning principal will be repaid) in one, two, and three years based on your expected cash needs in those years. You’ll earn the stated rate of interest and likely have little risk of loss of principal, since you shouldn’t need to sell the bonds before the scheduled due date. The rest of your bond portfolio may be invested in higher-yielding, longer-term investments.

Your Retirement Distribution
For many people, retirement is also a time to elect required minimum distributions (RMDs) from company pension and retirement savings plans, IRAs, or annuities. Because these distributions often involve complex analysis of income and tax scenarios, it’s wise to consult your financial advisor.

Currently, withdrawals from traditional IRAs must begin no later than April 1 following the year you turn 70 1/2. After that, you must make annual withdrawals by December 31 each year.

If you have substantial assets that generate more income each year than you spend, consider sheltering some of your investments in an annuity. Your investment earnings will grow and compound tax deferred until withdrawal, when they are taxed as ordinary income. Because annuities may impose fees and surrender charges, study them closely to determine whether they are appropriate for you.

When building a portfolio that is appropriate for your particular circumstances, and decidinghow much should be allocated to each asset class, consider your risk tolerance and your need for income versus growth. Your financial advisor can help you find the right balance.

1 Share prices may fall in value as well as increase, and there is no assurance that the full value of an investment in stocks can ever be recovered.

2 Bond values are not guaranteed. A bond’s market price may vary significantly from face value. Investors may receive the face value or redemption value of a bond only if it is held to maturity or call date. High-yield bonds present greater risk of default.

General risks inherent to investments in stocks include the fluctuation of market prices and dividend, loss of principal, market price at sell may be more or less than initial cost and potential illiquidity of the investment in a falling market.

Any performance information discussed with represent past performance. Past performance does not guarantee future results. Investment return and principal value will fluctuate so that investors’ shares, when redeemed, will be more or less than their original cost.

© 2010 Standard & Poor’s Financial Communications. All rights reserved.
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