Preparing For Long Term Care

Need and Cost of Long-Term Care

With the average life span of Americans continuing to grow, the likelihood that one will need long term care can also be expected to increase. Today monthly nursing home costs average $5,900 a month or around $60,000 to $70,000 a year, or more. While long-term care services at home may be significantly less costly, these still average around $1,600 a month.

You can view a table of average nursing home care costs by state at www.getfinancialadvice.com/Nursing-home-costs-2008.html but keep in mind that costs can vary greatly even within a city and you may not know where you will be living when you need long term care.

Long-Term Care Insurance

A long-term care (LTC) policy may help you cover the cost of long-term care, allow you to retain greater independence, and provide relief to your children from the economic, physical, and emotional stresses associated with caring for an aged and/or ill parent. However, a LTC policy can be somewhat complicated. Below are some questions you will want to ask if you are thinking about purhasing a policy.

1. Services Covered
   In addition to skilled nursing home stays does the policy cover assisted living, adult day care, in-home care, or a combination of these services?
2. Benefit Amount
   What is the maximum cost per day that the policy will cover and for how long? Is there a maximum lifetime limit?
3. Eligibility
   How does the policy define eligibility? Generally a health practitioner such as a doctor, nurse, or a social worker must declare one eligible for long-term care assistance. The policy definition of benefit eligibility however will stipulate how much assistance must be necesary for someone to qualify for the benefit. Usually one will qualify if they cannot do two or more activities of daily living, such as bathing, dressing, toileting, eating and moving in and out of a bed or chair, however the qualification may differ depending upon what levels of care are provided for in the policy. A cognitive impairment such as Alzheimer’s disease may also qualify one for long-term care.
4. Length of Benefit and Waiting Period
   Usually the length of benefit and the waiting period are chosen by the policy owner when purchasing the policy and will determine the cost of the policy. Generally, 3 to 5 years is the common choice, for length of benefit, although if you are concerned about Alzheimer’s or other dementia you may consider greater coverage. A 60 day waiting period before benefits begin is also the standard, however you may select a longer or shorter waiting period or even no waiting period although this may increase your premium significantly.
5. Insurer
   Who is the insurer and how is rated? Make sure the insurer is licensed to sell LTC insurance in your state and that it has a strong financial rating and a good reputation of service.
6. Tax-Qualified
   Is the policy tax-qualified? If so, then you may be able to take the premiums off as a deductible on your taxes?

   In my next blog, we’ll take a look at the cost of LTC insurance and look a little more at some of the options available.

Rebuilding Your Nest Egg – Part 6

Small Employers Consider A Defined Benefit Plan

You may be familiar with the dire state of many pension funds in the recent past and currently. In fact, an Examiner review of federal actuarial reports shows almost half of the nation’s 20 largest unions have pension funds that federal law classifies as “endangered” or in “critical” condition due to being underfunded. Nevertheless, if you are a small business owner, there are good reasons to consider a pension plan as a component of your overall plan for retirement. Consider the following…

What Is A Defined Benefit Plan?

Unlike Defined Contribution (DC) Plans (IRAs, 401Ks, etc.), in which the amount of the contributions is predetermined annually, but the final benefit amount is unknown; Defined Benefit (DB) plans define the monthly benefit to be received by the plan participant while the amount necessary to be contributed by the company to meet the set goal of the plan would have to be redetermined each year.

The benefit is determined according to a formula based on the recipient’s salary and years of service. For instance, a plan formula that provides a monthly pension at age 65 equal to 1.5 percent for each year of service multiplied by the monthly average of a participant’s highest three years of compensation would provide a participant with 10 years of service, a monthly pension equal to 15 percent of the monthly average of the participant’s highest three years of compensation.

Benefits to Employee

• Benefits may not be reduced as a result of investment performance.
• Older employees may not be discriminated against but may receive favored treatment. Their accrued benefit must be equal to or greater than that of any other similarly situated employee.
• Benefits are usually higher than those from a defined contribution plan.
• Contributions are made by employer.

Advantages and Disadvantages to Employer

• A substantially greater deduction to taxable income is possible since contributions up to $195,000 per employee may be made, whereas DC plan limits are $49,000 or 100 percent of income.
• Unlike DC plans forfeited benefits are not distributed among the plan participants but may be used to reduce future contributions by the employer.
• DB plans are more complicated to administer than DC plans, requiring an actuary and advisor.
• Benefits of DB plans are guaranteed (to a limit) by the government through the Pension Benefit Guaranty Corporation (PBGC).
• Although more complex, due to their efficiency, they actually provide “the same retirement income at nearly half the cost”, according to the National Institute for Retirement Security.

Types Of Pension Plans (DB Plans)

Two basic types of defined benefit plans are the Traditional Pension Plan and the Cash Balance Pension Plan. Traditional Pension Plans define the employee’s promised benefit in terms of an amount to be paid monthly from retirement through the life of the employee. Cash Balance Pension Plans however, present the benefits as a stated account balance similar to that of a 401(k).

Who Should Have A DB Plan?

Defined Benefit Plans are especially appealing to self-employed or small business owners, age 45 or older, whose companies are well established, with consistently high taxable income, and few employees who are significantly younger or lower paid.

Considerations

As many have learned during this recession, no retirement plan is completely “fullproof”. There is always risk involved, whether it is risk of loss from the market, or from the failure of commercial or government institutions. No one can completely guarantee, that a particular bank, or insurance company, or even that federal government safeguards such as Social Security, will be able to provide the funds sufficient to care for you comfortably in retirement.

This does not mean however, that you should abandon all hope of saving for retirement. Those who do prepare and save for retirement are far more likely to be better off than if they had not saved. Instead minimize your risk and consider the suggestions below when putting together a retirement plan.

• Spread your risk over different investments.
• If possible, make use of both a defined contribution and defined benefit plan guaranteed by different institutions.
• Examine your tax obligation and consider the benefits of triple-compounding through qualified plans.
• Consult with a financial advisor.

Rebuilding Your Nest Egg – Part 5

Profit Sharing Plans

There are two basic types of Profit Sharing Plans:

1. Cash or Bonus Plans, whereby the employee receives cash at the end of the year and is taxed on the amount at the same time, and
2. Qualified Deferred Profit Sharing Plans which deposit funds into separate employee accounts to be distributed and taxed at a future date.

Profit Sharing Plans are often used in conjunction with 401(k) plans.

Benefits to The Employer:

1. The employer is not obligated every year, to contribute a set amount or any amount, as long as the contributions are generally significant and recurring.
2. The employer can limit which employees are eligible to receive benefits, based on months in service, age, or coverage in a union plan.
3. The employer can limit how much certain employees may receive based upon rank or salary level.
4. Investment risks lie completely with the employee.
5. Contributions are tax deductible by the company, up to 25 percent of covered payroll. (Although an employer is limited to contributing only up to 15 percent of covered payroll, if in a prior year the employer only contributed 5 percent, the employer would be allowed to contribute an additional 10 percent to the current year’s 15 percent).
6. Vesting allows the employer to reward employees who devote years to the company while penalizing those who terminate early, enabling the employer to retain the most experienced workers.
7. If an employee leaves before completing a vesting schedule, the employer has the option of using the forfeited funds to reduce future allocations of profit or may divide the amount among the accounts of the remaining employees.

Benefits to the Employees:

1. All contributions are made by the employer.
2. Employees do not presently pay taxes on the contributions.
3. Generally, the employee may have an IRA in addition to the profit sharing plan.
4. Participants may borrow from the plan if the plan permits.

Allocation of Benefits

Four common plans for allocation of benefits are:

• Non-Integrated Plans – All employees’ benefits are in direct proportion to participant compensation. For instance, all employees receive x percent of their compensation.
• Integrated Plans – participants with compensation in excess of the plan"s wage base can receive proportionally higher contributions than participants with lower annual compensation.
• Age Weighted Plans – Provides higher benefits to older employees according to how many years remain until retirement.
• New Comparability Plans – Allows the employer to allocate different percentages of benefits based on classifications, i.e., executive, administration, skilled laborer, unskilled laborer, etc.

As you can see Profit Sharing Plans provide great flexibility to employers. These plans are especially popular with companies having few owners or one, employers whose owners or key employees are significantly older than the rest of the workers, or where the objective is to provide the maximum benefits to executives and higher compensated employees while minimizing benefit costs to rank and file workers.

Rebuilding Your Nest Egg – Part 4

So, we know that contributions both to IRAs and 401(k)s are usually pre-tax dollars, but these plans may also be set up to take post-tax dollars, termed Roth contributions. Since Roth contributions are taxed before their deposit into the account and included in gross income, distributions at retirement are not taxed and contributions cannot be deducted on your tax return.

In the case of Roth 401(k)s, (or 403(b) plans) a separate designated Roth account is set up to receive the contributions that the employee designates as Roth contributions. Only elective contributions may be designated as Roth contributions. Employer contributions are still deposited into the employees pre-tax 401(k) account. All limitations and regulations that apply to the pre-tax 401(k) plan also apply to the Roth contributions.

IRAs – Individual Retirement Accounts or Individual Retirement Annuities
An Individual Retirement Account is an IRS approved trustee or custodial account (set up by a bank, federally insured credit union, savings and loan association, or other approved entity). An Individual Retirement Annuity is purchased from an insurance company. Both require that distributions begin by April 1st of the year following the year you turn 70 1/2. Contributions of more than the deductible amount ($5,000 for 2010 or $6,000 if you are over 50 years of age) or more than your taxable income cannot be accepted, except in the case of rollover contributions or employer contributions to a SEP-IRA. Also deductions begin to be phased out if your Adjusted Gross Income is between $89,000 and $109,000 for those Married Filing Jointly and $55,000 to $65,000 for those filing Single or Head of Household.

For more information on IRAs see Rebuilding Your Nest Egg – Parts 1 and 2.

Profit Sharing Plans
A Profit Sharing Plan is a defined contribution plan under which the plan may provide, or the employer may determine, annually, a fixed amount (for example $10,000) that will be contributed to the plan (out of profits or otherwise). Then a formula is applied to the amount to determine the portion that will be allocated to each plan participant. Contributions need not be a specific percentage of profits and they need not be made every year, as long as they are “recurring and substantial.” Profits are not required in order to make a contribution.

Up to 25% of covered payroll can be contributed and deducted by the employer. Plan contributions are normally based on total compensation; e.g., base salary, bonuses, overtime, etc. The maximum compensation recognized in 2009 and 2010 is $245,000. Since the employer already contributes to the employee’s Social Security retirement benefit, these contributions can be integrated into the allocation formula of the plan. The allocation of contributions to a participant’s account from all of the employer’s plans may not exceed the lesser of 100% of includable compensation or $49,000 per year.

In Part 5, we will look at the benefits and disadvantages of profit sharing plans both to the employer and employee and when in particular are these plans recommended.

Rebuilding Your Nest Egg – Part 3

Now let’s take a look at the different 401(k) plans available today.

There are basically 3 types of 401(k)s and an automatic 401(k) feature that may be applied to any of these.

Traditional 401(k)
With a traditional 401(k) plan the employer decides whether or not the company will contribute to the plan and may contribute a percentage of each employee’s compensation to the employee’s account (called a nonelective contribution), or may match the amount employees decide to contribute (within the limits of current law) or may do both. The employer may also have the flexibility of changing the amount of nonelective contributions each year, according to business conditions.
If the employer does contribute to the plan a vesting schedule may be applied for employer contributions.
These plans are subject to annual nondiscrimination testing to ensure that the amount of contributions made on behalf of rank-and-file employees is proportional to contributions made on behalf of owners and managers.

Safe Harbor 401(k)

Under a safe harbor plan, the employer must match each eligible employee’s contribution, dollar-for-dollar, up to 3 percent of the employee’s compensation, and 50 cents on the dollar for the employee’s contribution that exceeds 3 percent, but not 5 percent, of the employee’s compensation or may make a nonelective contribution equal to 3 percent of compensation to each eligible employee’s account.
All employer contributions are 100% vested and the plans are not subject to annual nondiscrimination testing.

SIMPLE 401(k)

Employer contributions to a SIMPLE 401(k) plan are limited to either a dollar-for-dollar matching contribution, up to 3 percent of pay; or a nonelective contribution of 2 percent of pay for each eligible employee.
No other employer contributions can be made to a SIMPLE 401(k) plan, and employees cannot participate in any other retirement plan of the employer. All employer contributions are 100% vested and the plans are not subject to annual nondiscrimination testing.

For a plan to qualify as an Automatic 401(k) the following conditions must be true.

• Initial automatic employee contribution must be at least 3 percent of compensation. If initial employee contributions are less than 6 percent they must be set to automatically increase so that, by the fifth year, employee contribution is at least 6 percent of compensation.
• Employee contributions are limited to $16,500 for 2009 and 2010 with an additional catch up contributions allowed of $5,500 for participants 50 and over.
• Employer contributions must be at least a matching contribution, up to 1 percent of pay and a 50 percent match for all salary deferrals above 1 percent but no more than 6 percent of compensation; or a nonelective contribution of 3 percent of pay to all participants.

In part 4 of our series we will examine Roth plans, Profit Sharing Plans and the New Comparability Profit Sharing Plan.

Rebuilding Your Nest Egg – Part 2

Part one of this series addressed a type of Defined Contribution Plan (DCP) created particularly for individuals and small business owners – IRAs or Individual Retirement Accounts. Now we’ll discuss another Defined Contribution Plan which is probably the most widely known, 401(k) plans.

A 401(k) Plan is a plan set up by an employer which allows employees to defer a portion of their salary, before taxes, to a retirement account. As with IRAs, the funds and interest on the funds, accrue untaxed until distributed upon retirement.

There are some major differences however, some of which are listed below:

• With an IRA all contributions are 100 percent vested, however some 401(k) plans may use a vesting schedule, meaning that employer contributions belong to the employee only after a specified number of years.
• A 401(k) allows greater access to funds by permitting the employee to take loans from the funds which must be paid back.
• In 2009 and 2010, employee contributions are limited to $16,500 annually with an additional $5,000 allowed if participant is over 50, while IRAs are limited to $11,500 with an allowed catch-up contribution of $2,500.
• 401(k) plans may be subject to annual nondiscrimination testing to ensure that the amount of contributions made on behalf of rank-and-file employees is proportional to contributions made on behalf of owners and managers.
• IRAs are easier to set up and operate and do not require filing an annual return.

Our next segment will discuss the different types of 401(k) plans.

Rebuilding Your Nest Egg – For Small Business Owners

As the economy improves (think positive) small businesses should be looking again to provide employees with benefits that will ensure their best workers are with them for a long time to come. Health insurance aside the benefits most workers are anxious for are retirement benefits. However, for small business owners choosing and implementing the best retirement plan for the business can be a complicated and time consuming project, so for the next few blogs I will address some of the options available for retirement, the basics you need to know, as a small business owner, and advantages and disadvantages you may want to consider.

First we’ll discuss qualified plans, that is, plans which by definition qualify for tax-preferred treatment by the federal government, usually in the way of tax deductions or credits. When comparing the way in which benefits are determined, there are basically two groups, Defined Contribution Plans and Defined Benefit Plans.

With Defined Contribution Plans the benefit received by the participant depends upon the account balance of the participant when the funds are distributed and the plan itself defines the how contributions are made to the participant’s account.

One class of Defined Contribution Plans is Individual Retirement Accounts or IRAs. IRAs enjoy the following features:

• Easy to set up and operate,
• No annual return required,
• Annual nondiscrimination testing not required, and
• Immediate vesting of all contributions.

Discrimination testing ensures that the amount of contributions made on behalf of rank-and-file employees is proportional to contributions made on behalf of owners and managers, while vesting refers to employee ownership of the contributions. If contributions are 100% vested, the full amount is accessible to the employee (minus of course taxes due and a 10% penalty if withdrawn before retirement age). If employer contributions are vested according to a vesting schedule then if the employee terminates employment before completing a set number of years (according to the vesting schedule) the employee forfeits a portion of the employer’s contributions to the account. The forfeited amounts are then divided up among the remaining accounts.

A Simplified Employee Pension Plan (SEP) is an IRA that allows employers the option from year to year to make contributions on a tax-favored basis to IRAs of their employees. The employee must set up the IRA to accept the employer’s contributions and all eligible employees must participate in the plan, including part-time employees, seasonal employees, and employees who die or terminate employment during the year.
Sole proprietors, partnerships, and corporations, including S corporations, can set up SEPs. Administrative costs are low and employer may be eligible for a tax credit of up to $500 per year for each of the first 3 years for the cost of starting the plan.

The SIMPLE SEP has the same features as the SEP IRA except the employer must make either matching contributions or contribute 2% of each employee’s compensation. Also the plan must be offered to all employees who have earned income of at least $5,000 in any prior 2 years, and are reasonably expected to earn at least $5,000 in the current year.

In my next blog, we’ll discuss 401(k)s.

When Term Life Insurance Is the Better Choice

You know you need life insurance, but how do you know which one is right for you?

Here are just a few scenarios when term life insurance may be the better choice…

1. You want to pay as little as possible while ensuring that your family may stay in the same home without the expense of mortgage payments.
   • Buy a Decreasing Term Life policy otherwise known as Mortgage Insurance.

     As the amount due on your home decreases so does the benefit amount payable by the policy. (Not to be confused with PMI which is mortgage protection for the mortgage company in case you default on your mortgage. This is usually required if you owe more than 80% of the value of your home.)

     Note: Decreasing Term refers to the decreasing benefit amount not to the payments. Most policies are offered on a level-premium basis.

2. You want to make sure your family is taken care of until your children have finished college.
   • Buy a Level Term Policy or just Term Policy. This is usually offered for periods that are multiples of 10. It offers a level benefit for the term of the policy.
3. You can’t afford whole life and just want enough coverage until you can afford a permanent policy.
   • Get a short-term policy and if possible one that includes the Option to Renew or the Option to Convert or both. These options will increase your premium but they also ensure that you cannot be turned down from continuing your policy in the future even if you are uninsurable.

     This does not however prevent the insurance company from increasing your premiums nor does it limit the premium amount that may be charged, although the company may not charge you any more than they charge everyone else in your age group.

4. You have other means of saving and just want to pay for life insurance only.
   • Purchase a term policy that should be long enough to cover you for your entire life.
5. You want a certain benefit amount and coverage now but cannot afford the premiums of a level-premium policy. However you expect to earn more in the future.
   • Buy a 10-year renewable term policy that may be renewed every 10 years. Your premiums will increase every 10 years according to your age but you will have enjoyed a higher amount of coverage in your early years then you could normally afford.

Auto insurance quote – Explore your options online

Are you exploring different options to get an affordable auto insurance quote?You can navigate the websites of different auto insurance carriers to compare quotes. Almost all the good companies have their own websites where you can get a quote. The forms take only a couple of minutes to complete and will ask you to provide needed details about your car. Once you are done, wait for your instant online auto insurance quote.

If you repeat the same process for a few of the websites, you can get insurance quotes that can be compared. Settle for the one that will not only give you your money’s worth but will offer adequate coverage too. Often consumers look for cheap auto insurance coverage, but what they fail to realize is that a cheap auto insurance quote may not give you the protection or the compensation you look forward to in the event of an emergency.

A majority of states have made it mandatory for you to have a compulsory minimum coverage. If you are shopping around for a low auto insurance quote, make sure your coverage is adequate. It doesn’t make sense to buy a policy that will not suffice in the time of need. The money you save on your insurance premium will be drained out in the event of an emergency if you are not adequately equipped.

Once you settle for a vehicle insurance quote, there are different ways in which you can make your automobile insurance premiums affordable. Some of the methods are given below –

Maintain a good driving record
Avoid speeding or other traffic violations that can add points to your license and increase your premium.

Drive a car that isn’t expensive
Expensive cars cost more to repair and therefore carry a higher risk to the insurance company. So, if you drive a luxury car or a sports car, even one that has a high safety rating, your premiums will usually be higher than those of a cheaper model.

Do you live in a crime prone area?
If you reside in an area where incidence of criminal activities is high, be prepared to shell out more cash.

Maintain a good credit score
If your credit score is good, you are looked upon as a financially responsible person. It is assumed that you will be just as responsible in your driving habits, so, you are more likely to receive an auto insurance rate to match.

The reason why there are more chances of getting an affordable auto insurance quote online, as opposed to by other means is due to the fact that overhead costs are lower for insurance purchased online, thereby allowing you to pay lower and more affordable premiums for your vehicle insurance.

Health Insurance Increased 94%

There is an old joke about life insurance. The agent tells the client “For someone your age, the yearly premium on a $5,000 policy is $8,000”.

Apparently, the old joke has become new. Health insurance, as we all know, is skyrocketing, but some know that better than others. For instance, Victoria Collier of the San Francisco Chronicle reported that one 59 year old man in San Francisco is facing a 38 percent increase in his monthly premiums. That is on top of the 41 percent increase he received last year, bringing his total increase to 94 percent in one year. Anthem Blue Cross stated the increase was due to fewer people in the health insurance pool, increasing medical costs, and a bad economy.

Working for an insurance broker, I am licensed with multiple insurance providers so we can offer policies with all the major carriers. So I know from experience that all medical insurance companies have had to raise their rates due to increasing health care costs. However, I know of only one that has consistently offered lower rates for the same quantity and quality of health care coverage.

There is a reason they can do this, and it’s not magic, and yes, they are for profit. In fact, they are a Fortune 500 company. It’s simply that they have been offering life insurance for individuals and individuals only for over 100 years. It is the one thing they do and they do it well.

Of course, they do not guarantee coverage for everyone but you may be surprised. Get a quote, then shop around. Compare policies and networks.

Check it out for yourself and let me know how it turns out, for the good or for the bad.