It sure seems as if the year continues to rush by, and the past few weeks in particular have been busy. On a personal note, Jennifer and I got engaged earlier this month, and the phone (or more specifically Jennifer's cell phone) hasn't stopped ringing since.
The past few weeks were busy professionally as well, as I traveled to Chicago to meet with my NAPFA MIX Group. The MIX group is a group of planners who meet to share information on how they run their respective practices. Aside from giving me a great excuse to travel to Chicago, one of my favorite cities, my participation in the group will allow us to continue to add value to what we do for you.
In terms of this month's newsletter, you'll find a continuation of the article on the value of diversification. Additionally, long term care insurance has been in the news of late, so I thought an article providing an overview of long term care insurance would be timely.
As always, I hope you find this newsletter useful and feel free to forward it on to anyone you believe would find it valuable.
Micah Porter, CFA
|Long Term Care Insurance
By Micah Porter, CFA
Long term care insurance is a complex product, and the complexity only increases when one attempts to understand how long term care insurance interacts with Medicare and Medicaid. In this article, we outline the basics of long-term care insurance as well as what is typically covered by Medicare and Medicaid.
Whether or not to purchase long term care is one of the questions we frequently encounter. Typically, the client asking the question is not completely clear on the purpose of long term care, nor what it covers versus what Medicare and Medicaid is meant to cover. The relatively high premiums associated with long term care only make the decision more difficult.
Long term care insurance can cover the cost of a variety of services, from skilled care to assistance with basic activities of daily living, (ADLs). The type of help covered depends on the policy, but in general it can range from an in-home caregiver to an assisted living center. Typically, health insurance does not cover these costs, nor does Medicare or Medicaid (more on those programs in a bit). In many instances, those needing such assistance are older and have a solid base of assets, and long term care insurance allows them to avoid depleting their assets. For those with lesser assets, long term care insurance might allow them to receive in-home care or simply receive quality care that they might otherwise not be able to afford.
If you are considering a long term care insurance policy, we'd recommend that you start by looking at the following factors:
- Monthly benefit - ensure the benefit is sufficient to cover the typical cost of a nursing home or in-home care in your community.
- Elimination period - the elimination period is the amount of time that must pass before the policy begins paying out. The longer the elimination period, the lower the cost of the policy.
- Benefit period - the longer the benefit period, the greater the amount of coverage.
- ADLs - examine the number of ADLs the policy lists and how many you need help with to qualify for benefits. The more ADLs covered, and the fewer needed to qualify for benefits, the easier it is to receive payment from the policy.
Beyond the above factors, there are a number of other features offered on these policies. Among the most important to examine are the inflation riders as well as the shared care and survivorship protection of premium riders. Further, make sure you understand specifically what the policy will cover in terms of in-home care and assisted living. Lastly, we always examine the financial ratings of the policy issuer to ensure they are on a sound financial footing.
So how does long term care insurance mesh with Medicare and Medicaid? Medicare is typically meant to cover "medically necessary" or skilled care. More specifically, in order to qualify for Medicare payment of any long term care bills, the following conditions must be met:
- A hospital stay of three consecutive days (not counting the day of discharge from the hospital)
- Admission to a nursing facility within 30 days of discharge for the same illness for which you were hospitalized
Receive skilled care only; and
- Certification by a medical professional that you need skilled nursing or rehabilitative services daily.
The other governmental program that provides some assistance is Medicaid. However, Medicaid is a joint program between the Federal and State governments designed to provide assistance to the poor. Thus, before Medicaid would provide any coverage, there are tests to ensure that neither the assets nor the income of the applicant exceed Medicaid limits, which are generally low. Further, not all institutions accept Medicaid coverage, so choices under this program are limited.
It's clear that Medicare and Medicaid will only fund long term care expenses in very limited circumstances. Long term care insurance does fill the gap in providing coverage in a broader range of circumstances. Policies are not inexpensive, and annual premiums in excess of $2,000 are not at all unusual. Some of our clients choose to purchase policies, while others elect to self-fund potential long term care costs.
Whether or not you need long term care insurance is a complex question. However, we have the tools and information necessary to run an analysis and if you'd like us to revisit this issue with you, please let us know.
|What if this downturn is different?
By Micah Porter, CFA
From time-to-time, some market pundit will make the case for a coming Depression. They'll highlight a malady or list of maladies that ail the U.S. economy, and explain why the likely outcome is a Depression not unlike what occurred in the 1930's. If we accept the worst-case scenario and assume that they are right, how would client portfolios fare?
For clients still contributing to their portfolio, the downturn would offer the chance to snap up some real long-term bargains. Even clients not adding additional funds to their portfolio would benefit as active fund managers searched for greater relative stock bargains during the downturn. But how about the portfolio and time to recover? The idea behind setting aside cash and a CD ladder for those of you with regular portfolio cash needs is driven by the idea that this approach will allow you to ride out a market downturn. Thus, it's interesting to see what would have occurred to portfolio value during the worst downturn in the last century.
To conduct this analysis, we began in September 1929 as this was the month the market downturn began. We continued through January 1945 when the S&P 500 finally recovered it's value. Measuring the return of a diversified portfolio was a bit tricky, as most of the indices we now use weren't in place at that time. Therefore, we chose to use a 50/50 mix of a long-term U.S. Government bond index and a long-term U.S. corporate bond index to serve as a proxy for the overall bond market. A 60/40 portfolio was considered to be 60% in the S&P 500 and 40% in this fixed income index, a 50/50 portfolio was evenly split between the two, and so on.
With this in place, we then examined the question of how long each portfolio took to recover its value by looking at the value of $1 invested in September 1929 and determining when that $1 recovered its value. The results are in the graph below:
What this chart demonstrates, not surprisingly, is the greater the allocation to bonds, the sooner the portfolio recovered from the downturn. The above graph is a bit of an eye chart, so the chart to the right demonstrates how quickly each portfolio recovered its value. One thing that is striking is the impact that just a small exposure to bonds provides - the aggressive portfolio recovered more than twice as quickly as the S&P 500 alone, even though only 20% of the holdings are in bonds.
When we construct portfolios, the ideal is to have one year's worth of cash set aside in the money market along with a CD ladder covering at least three to four years worth of cash needs. If we take this ideal portfolio - one year's worth of money market and four years worth of CDs and assume a balanced distribution, we see that even during an event as severe as the Great Depression, the client would be able to weather much of the downturn through using a combination of money market and proceeds from maturing CDs.
The recovery of portfolio value in this case would take a bit longer, but this would be partially offset by the fact that this was a disinflationary period - a 1932 dollar purchased more than a 1929 dollar. Regardless of these complicating factors, this example still provides a good illustration of the impact of portfolio allocation on overall portfolio risk.