According to the latest census, there are now just under 39.5 million persons age 65 and over in the United States, and another 10.7 million age 60-64. Yet according to an insurance data-gathering organization called LIMRA, only about seven million of those have long-term care insurance coverage.
As you probably know, long-term care--or LTC as it is known to professionals--is any insurance coverage that pays for the costs of a stay in a nursing home or for someone to provide care and assistance in your home if you (or a parent, or loved one) should ever become unable to care for yourself. It has been estimated that roughly two-thirds of all 65-year-olds will, at some point in their lives, need this kind of care. About half are expected to require more than 90 days of skilled nursing care. The odds are one in ten that a person will be in need of care for three years, and another ten percent will need care for five years or longer.
For the unlucky minority, the costs can be significant. One state-by-state database shows that the average nursing home cost across the nation is $71,000 a year, or $195 a day, but these costs vary dramatically depending on the actual facility you're looking at, from just under $50,000 up to (gulp) $200,000 annually.
The AARP estimates that some two-thirds of all of today's nursing home residents pay for their care with money from Medicaid, the national health insurance program for persons with low incomes. There is, in fact, a thriving cottage industry in the legal community offering tips on how to impoverish an elderly loved one in order to qualify for government assistance. The problem is that many facilities limit the number of beds they offer to Medicaid recipients, which means that the genuinely impoverished--and those who have maneuvered themselves into impoverishment--may not be able to get the best care.
Another government program is on the way, although some are already questioning its long-term solvency. The recently-passed health care law created something called the Community Living Assistance Services and Supports program, otherwise known as CLASS. CLASS will be available through employers. It will collect monthly premiums, and after five years, participating employees will be covered and receive benefits if they need care, whether they're in their 20s recovering from a snowboarding accident or in their 90s dealing with Parkinson's disease.
However, recent reports in the Washington Post and the New York Times suggest that the program, which is due to open either late next year or in 2013, may not actually be solvent unless younger people sign up for what has generally been regarded as middle-age (or later) insurance. The Center for Retirement Research at Boston College has estimated that if fewer than one percent of participants in the CLASS plan are under age 40, then the program would need to charge $312 a month to make the program actuarially sound. At that price, it might be hard to get people to sign up.
If the government is worried about funding long-term care expenses, than you probably should be too. But how would you know whether to self-insure or buy coverage?
As it happens, an article in a recent issue of Financial Planning magazine offers a rough way to weigh the costs against the potential benefits. The article assumed that there is a 20% chance of needing one year of care, and a 10% chance that you'll spend three years or more in a nursing home or in your own home under the care of a skilled nurse. You could either buy a policy at age 55 with premiums of $3,400 a year or roll the roulette wheel and take the risk of incurring long-term care costs of $57,000 a year in current dollars. The analysis assumes that you (or a loved one) will live to age 85, and the care costs will tend to occur late in life.
Bringing all the various costs back to present-day dollars, the analysis says that you have a 60% percent chance of never needing to make a claim and, therefore, losing all your premiums--a present value cost of $60,000. You have a 20% chance that you'll stay in a facility for just one year, which means that if you bought the insurance, you would still come out behind about $12,000, on a present value basis.
You have an additional 10% chance of staying in a nursing facility for three years, in which case your insurance purchase would result in an $85,000 savings--again in present value dollars. And if you are among the one in ten who requires five years of care, then your insurance purchase would result in a $183,000 gain.
There is one additional factor to this equation. If you self-insure long-term care costs, that money would typically be set aside in safe fixed income investments which currently (you may have already noticed this) offer little return. If you buy insurance, that money could be redeployed into a more broadly-diversified investment portfolio, where the returns (no guarantee, of course) are expected to be higher, based on historical numbers.
And, depending on your preferences, there may be one more factor to consider. LTC insurance is sometimes referred to as "nursing home avoidance" insurance, because unlike Medicaid, LTC policies will typically cover some or all of the costs for home care, allowing you to sleep in your own bed during your period of convalescence. CLASS is also projected to pay for home care, but the first benefits won't be given out until 2017 at the earliest.
Like all insurance, this is a premium you would pay and hope it never results in a claim. Many will achieve that happy result. But millions of others are someday going to wish they hadn't rolled the dice on one of the costliest potential consequences of getting older. More people should at least be talking about whether they want coverage--either for themselves, or for their parents, or both.
Sources:
LTC popularity and need analysis: http://www.financial-planning.com/fp_issues/2011_9/is-long-term-care-insurance-worth-it-2674824-1.html
Census figures: http://en.wikipedia.org/wiki/Demographics_of_the_United_States
http://www.censusscope.org/us/chart_age.html
AARP: http://assets.aarp.org/external_sites/caregiving/options/nursing_home_costs.html
Nursing home costs by state: http://www.prepsmart.com/long-term-care-costsbystate.html
Explanation of CLASS: http://newoldage.blogs.nytimes.com/2010/03/24/a-new-long-term-care-insurance-program/
http://www.nytimes.com/2011/04/30/your-money/health-insurance/30money.html?pagewanted=all
http://www.washingtonpost.com/politics/ap-exclusive-warnings-ignored-on-new-long-term-care-programs-bankruptcy-risks/2011/09/14/gIQA7yDPSK_story.html
Friday, September 30, 2011
Tuesday, September 13, 2011
ASSESSING THE AMERICAN JOBS ACT
Will Congress pass it? What difference could it potentially make?
On September 8, President Obama announced a new plan to improve the economy – the $447 billion American Jobs Act, a sequel of sorts to his past economic stimulus proposals. His announced goal: job creation without new taxation.
While the President took some sharp jabs at Republicans in his speech to Congress (“I know that some of you have sworn oaths to never raise any taxes on anyone for as long as you live”), early indications are that the bill will have noticeable bipartisan support.1
What’s in this bill? The AJA would try to boost the economy through seven different tactics – extensions and expansions of tax breaks, and infusions of federal dollars.
1. The current payroll tax holiday would be extended through the end of 2012.
2. The payroll tax would fall to 3.1% - not only for workers, but also for businesses with payrolls of $5 million or less.
3. Companies could get a tax credit as large as $4,000 for hiring the long-term unemployed (people who have been out of work for at least 6 months).
4. Long-term jobless benefits would again be extended.
5. $80 billion of federal money would be assigned to new infrastructure projects (highways, bridges and schools).
6. Businesses could expense 100% of their investments in 2012, just as they have been able to do in 2011.
7. Additional federal money would be given to struggling state and local governments to help them avoid layoffs of first responders and teachers.2,3
How could this all be funded without new taxes? President Obama claims the effort can be paid for as a byproduct of his plan to reduce the federal deficit (a plan he will discuss in greater detail in a September 19 speech).1,4
The bill isn’t set in stone yet. The AJA goes to the House for a vote this week, and though the House Republican leadership likes the essence of the plan, it may seek major alterations.
In a jointly authored statement issued on September 9, House Speaker John Boehner (R-OH), House Majority Leader Eric Cantor (R-VA), Majority Whip Kevin McCarthy (R-CA) and Conference Chairman Jeb Hensarling (R-TX) said the plan “merits consideration”, but they also hoped that the President’s ideas were not offered “as an all-or-nothing proposition, but rather in anticipation that the Congress may also have equally as effective proposals to offer for consideration.”4
Indeed, Republicans have had an alternative plan in the works for a while - the so-called Plan for America’s Job Creators - which centers on tax reduction, decreased non-defense discretionary spending and less costly industry regulations to stimulate private-sector job growth. There isn’t much support for it among Democrats.
What do economists think the AJA could accomplish? Some think the economy would get some short-term relief if it became law. Others see an upcoming object lesson in failed Keynesian economics.
• Moody’s Analytics chief economist Mark Zandi is big on the bill – he believes it could add 2% to GDP, cut 1% off the jobless rate, and create 1.9 million jobs in an economy “on the edge of recession”.
• University of Pennsylvania Wharton School of Business professor Susan Wachter thinks the payroll tax reductions alone could generate 1 million jobs and expand the economy by 1%.
• At Pimco, Mohamed El-Erian calls it a “credible program that is focused on the right structural areas.”
• Unicredit’s Harm Bandholz thinks the AJA could “add up to 2 percentage points to growth in the coming year.”
• “Bottom line: not a lot of bang for the buck here,” states Tom Porcelli of RBC Capital Markets, who feels that the economic impact of the infrastructure investments will likely be “fairly modest … the red tape and politics involved in allocating these funds makes the implementation a long and drawn-out process.”
• The Heritage Foundation’s J.D. Foster sees “a bunch of retread policy ideas that two years after they were first tried managed to create an arithmetic novelty – exactly zero job growth in August. In total, the President is calling for more new spending on proven policies that are proven failures.”5,6
As the economy is in such a low gear, you may see Democrats and Republicans support the bill with newfound unity or at least tolerance. While America can’t reach across the Atlantic and fix the Eurozone crisis hampering world stocks, this envisioned stimulus could help our economy make some small strides.
Citations.
1 - advisorone.com/2011/09/09/obama-chides-congress-as-he-urges-passage-of-jobs [9/9/11]
2 - montoyaregistry.com/Financial-Market.aspx?financial-market=maxxing-out-your-ira&category=1 [9/9/11]
3 - money.msn.com/business-news/article.aspx?feed=AP&date=20110909&id=14243169 [9/9/11]
4 - latimes.com/news/politics/la-pn-house-jobs-plan-20110909,0,2297315.story [9/9/11]
5 - usatoday.com/money/economy/story/2011-09-09/obama-jobs-plan-economists/50336434/1 [9/9/11]
6 - blogs.wsj.com/economics/2011/09/09/more-economists-react-gauging-impact-of-obama-jobs-proposal/ [9/9/11]
6 - blogs.wsj.com/economics/2011/09/09/more-economists-react-gauging-impact-of-obama-jobs-proposal/ [9/9/11]
On September 8, President Obama announced a new plan to improve the economy – the $447 billion American Jobs Act, a sequel of sorts to his past economic stimulus proposals. His announced goal: job creation without new taxation.
While the President took some sharp jabs at Republicans in his speech to Congress (“I know that some of you have sworn oaths to never raise any taxes on anyone for as long as you live”), early indications are that the bill will have noticeable bipartisan support.1
What’s in this bill? The AJA would try to boost the economy through seven different tactics – extensions and expansions of tax breaks, and infusions of federal dollars.
1. The current payroll tax holiday would be extended through the end of 2012.
2. The payroll tax would fall to 3.1% - not only for workers, but also for businesses with payrolls of $5 million or less.
3. Companies could get a tax credit as large as $4,000 for hiring the long-term unemployed (people who have been out of work for at least 6 months).
4. Long-term jobless benefits would again be extended.
5. $80 billion of federal money would be assigned to new infrastructure projects (highways, bridges and schools).
6. Businesses could expense 100% of their investments in 2012, just as they have been able to do in 2011.
7. Additional federal money would be given to struggling state and local governments to help them avoid layoffs of first responders and teachers.2,3
How could this all be funded without new taxes? President Obama claims the effort can be paid for as a byproduct of his plan to reduce the federal deficit (a plan he will discuss in greater detail in a September 19 speech).1,4
The bill isn’t set in stone yet. The AJA goes to the House for a vote this week, and though the House Republican leadership likes the essence of the plan, it may seek major alterations.
In a jointly authored statement issued on September 9, House Speaker John Boehner (R-OH), House Majority Leader Eric Cantor (R-VA), Majority Whip Kevin McCarthy (R-CA) and Conference Chairman Jeb Hensarling (R-TX) said the plan “merits consideration”, but they also hoped that the President’s ideas were not offered “as an all-or-nothing proposition, but rather in anticipation that the Congress may also have equally as effective proposals to offer for consideration.”4
Indeed, Republicans have had an alternative plan in the works for a while - the so-called Plan for America’s Job Creators - which centers on tax reduction, decreased non-defense discretionary spending and less costly industry regulations to stimulate private-sector job growth. There isn’t much support for it among Democrats.
What do economists think the AJA could accomplish? Some think the economy would get some short-term relief if it became law. Others see an upcoming object lesson in failed Keynesian economics.
• Moody’s Analytics chief economist Mark Zandi is big on the bill – he believes it could add 2% to GDP, cut 1% off the jobless rate, and create 1.9 million jobs in an economy “on the edge of recession”.
• University of Pennsylvania Wharton School of Business professor Susan Wachter thinks the payroll tax reductions alone could generate 1 million jobs and expand the economy by 1%.
• At Pimco, Mohamed El-Erian calls it a “credible program that is focused on the right structural areas.”
• Unicredit’s Harm Bandholz thinks the AJA could “add up to 2 percentage points to growth in the coming year.”
• “Bottom line: not a lot of bang for the buck here,” states Tom Porcelli of RBC Capital Markets, who feels that the economic impact of the infrastructure investments will likely be “fairly modest … the red tape and politics involved in allocating these funds makes the implementation a long and drawn-out process.”
• The Heritage Foundation’s J.D. Foster sees “a bunch of retread policy ideas that two years after they were first tried managed to create an arithmetic novelty – exactly zero job growth in August. In total, the President is calling for more new spending on proven policies that are proven failures.”5,6
As the economy is in such a low gear, you may see Democrats and Republicans support the bill with newfound unity or at least tolerance. While America can’t reach across the Atlantic and fix the Eurozone crisis hampering world stocks, this envisioned stimulus could help our economy make some small strides.
Citations.
1 - advisorone.com/2011/09/09/obama-chides-congress-as-he-urges-passage-of-jobs [9/9/11]
2 - montoyaregistry.com/Financial-Market.aspx?financial-market=maxxing-out-your-ira&category=1 [9/9/11]
3 - money.msn.com/business-news/article.aspx?feed=AP&date=20110909&id=14243169 [9/9/11]
4 - latimes.com/news/politics/la-pn-house-jobs-plan-20110909,0,2297315.story [9/9/11]
5 - usatoday.com/money/economy/story/2011-09-09/obama-jobs-plan-economists/50336434/1 [9/9/11]
6 - blogs.wsj.com/economics/2011/09/09/more-economists-react-gauging-impact-of-obama-jobs-proposal/ [9/9/11]
6 - blogs.wsj.com/economics/2011/09/09/more-economists-react-gauging-impact-of-obama-jobs-proposal/ [9/9/11]
Thursday, September 8, 2011
A Prime Time To Refinance
On August 18, rates on 15-year FRMs were averaging 3.36%. Freddie Mac reported the lowest interest rates in at least 50 years in its August 18 Primary Mortgage Market Survey. In fact, it noted record lows across the board. Rates on conventional 30-year home loans were averaging 4.15% on August 18. (The last time 30-year mortgage rates were this minimal was during a stretch in 1950-51 when FHA-backed 30-year FRMs averaged 4.08%.) Average interest rates for 5/1-year ARMs and 1-year ARMs were respectively at 3.08% and 2.86% in the August 18 survey.1,2
You can chalk these new lows up to skidding Treasury yields. In fact, the yield on the 10-year note actually dipped below 2% for a moment on August 18.3
Those able to refinance are seizing the moment. The Mortgage Bankers Association reported that refi applications rose by 30% in the week ending August 5 to the highest level seen so far in 2011.4
If you can do it, keep your long-term goals in mind. Years ago, a refi came down to one factor: if you could knock a couple of percentage points off your interest rate, you did it. Today, it’s a bit more complex. There are three aspects to consider: a) how much you can save per month, b) lender points and fees, and c) how long you intend to live in your home.
Let’s say a refi frees up $150 for you each month. Sounds great, right? It isn’t so great if the mortgage company tacks on a point up front (think $1,500-5,000, depending on the amount of your loan) and a few hundred dollars in fees. If you’re only going to stay in that home for a few more years, that refi is hardly worth it.
If you plan to live in your home for many years, then it’s a different story; you may be poised for substantial savings. This is a simple example, of course. If you are moving from a 30-year loan to a 15-year loan or vice versa, or if you are among those getting out of “ARMs way” and refinancing into a fixed-rate mortgage, you’ve got more variables to think about.
How long will rates stay this low? It is truly hard to say; recent history has illustrated that. On April 10, 2010, a New York Times headline blared: “Interest Rates Have Nowhere to Go but Up”. At that time, the average rate for a 30-year fixed mortgage was 5.31%. Look where it is now.5
Could rates go even lower? If 10-year Treasury yields were to fall even further, that could happen. While the Federal Reserve wants to refrain from QE3, it could again print money and buy Treasuries to cheapen the dollar and help the stock market.
However, the Consumer Price Index rose 0.5% in July – the biggest increase since March - with annualized inflation running at 3.6%. The Fed’s informal inflation target is 2%, so a gap like that would seem to preclude a QE3.
Of course, the Fed has pledged to keep near-zero interest rates in place into 2013 on the expectation that inflation will decline – half of the 0.5% jump in the July CPI could be traced to the rise in retail gasoline prices.6
Through the years, bond investors have often gauged interest rates on conventional home loans by adding about 1.7% to the current percentage yield of the 10-year note. On August 17, Dow Jones Newswires polled bond dealers to get a consensus forecast for the 10-year Treasury yield; they expect yields to end 2011 at 2.5%. Some fund managers and strategists feel that benchmark Treasury yields could end the year under 2.0%. These forecasts imply rates on 30-year FRMs of anywhere from 3.6-4.2% by around New Year’s Eve.7
Interest rates will move north at some point, so a window of opportunity beckons – and no one really knows how long it will stay open.
Think before you make a move. Before you get out that pen and sign anything, talk about your options for refinancing with a qualified mortgage specialist, and talk to your financial consultant to see how your choice to refinance relates to your overall financial situation.
Citations
1 - freddiemac.com/pmms/ [8/18/11]
2 - kentucky.com/2011/08/18/1850034/mortgage-rates-fall-to-lowest.html [8/18/11]
3 - bloomberg.com/news/2011-08-18/u-s-mortgage-rates-fall-to-lowest-in-at-least-50-years-freddie-mac-says.html [8/18/11]
4 - usatoday.com/money/economy/housing/2011-08-11-mortgage-rates-low_n.htm [8/11/11]
5 - nytimes.com/2010/04/11/business/economy/11rates.html [4/11/10]
6 - online.wsj.com/article/SB10001424053111903639404576516054025747710.html [8/18/11]
7 - online.wsj.com/article/BT-CO-20110818-715221.html [8/18/11]
You can chalk these new lows up to skidding Treasury yields. In fact, the yield on the 10-year note actually dipped below 2% for a moment on August 18.3
Those able to refinance are seizing the moment. The Mortgage Bankers Association reported that refi applications rose by 30% in the week ending August 5 to the highest level seen so far in 2011.4
If you can do it, keep your long-term goals in mind. Years ago, a refi came down to one factor: if you could knock a couple of percentage points off your interest rate, you did it. Today, it’s a bit more complex. There are three aspects to consider: a) how much you can save per month, b) lender points and fees, and c) how long you intend to live in your home.
Let’s say a refi frees up $150 for you each month. Sounds great, right? It isn’t so great if the mortgage company tacks on a point up front (think $1,500-5,000, depending on the amount of your loan) and a few hundred dollars in fees. If you’re only going to stay in that home for a few more years, that refi is hardly worth it.
If you plan to live in your home for many years, then it’s a different story; you may be poised for substantial savings. This is a simple example, of course. If you are moving from a 30-year loan to a 15-year loan or vice versa, or if you are among those getting out of “ARMs way” and refinancing into a fixed-rate mortgage, you’ve got more variables to think about.
How long will rates stay this low? It is truly hard to say; recent history has illustrated that. On April 10, 2010, a New York Times headline blared: “Interest Rates Have Nowhere to Go but Up”. At that time, the average rate for a 30-year fixed mortgage was 5.31%. Look where it is now.5
Could rates go even lower? If 10-year Treasury yields were to fall even further, that could happen. While the Federal Reserve wants to refrain from QE3, it could again print money and buy Treasuries to cheapen the dollar and help the stock market.
However, the Consumer Price Index rose 0.5% in July – the biggest increase since March - with annualized inflation running at 3.6%. The Fed’s informal inflation target is 2%, so a gap like that would seem to preclude a QE3.
Of course, the Fed has pledged to keep near-zero interest rates in place into 2013 on the expectation that inflation will decline – half of the 0.5% jump in the July CPI could be traced to the rise in retail gasoline prices.6
Through the years, bond investors have often gauged interest rates on conventional home loans by adding about 1.7% to the current percentage yield of the 10-year note. On August 17, Dow Jones Newswires polled bond dealers to get a consensus forecast for the 10-year Treasury yield; they expect yields to end 2011 at 2.5%. Some fund managers and strategists feel that benchmark Treasury yields could end the year under 2.0%. These forecasts imply rates on 30-year FRMs of anywhere from 3.6-4.2% by around New Year’s Eve.7
Interest rates will move north at some point, so a window of opportunity beckons – and no one really knows how long it will stay open.
Think before you make a move. Before you get out that pen and sign anything, talk about your options for refinancing with a qualified mortgage specialist, and talk to your financial consultant to see how your choice to refinance relates to your overall financial situation.
Citations
1 - freddiemac.com/pmms/ [8/18/11]
2 - kentucky.com/2011/08/18/1850034/mortgage-rates-fall-to-lowest.html [8/18/11]
3 - bloomberg.com/news/2011-08-18/u-s-mortgage-rates-fall-to-lowest-in-at-least-50-years-freddie-mac-says.html [8/18/11]
4 - usatoday.com/money/economy/housing/2011-08-11-mortgage-rates-low_n.htm [8/11/11]
5 - nytimes.com/2010/04/11/business/economy/11rates.html [4/11/10]
6 - online.wsj.com/article/SB10001424053111903639404576516054025747710.html [8/18/11]
7 - online.wsj.com/article/BT-CO-20110818-715221.html [8/18/11]
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