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Although the vast majority of us will never attain the wealth we dream of, those that have are not necessarily different than we are. The question is: can we avoid the same mistakes that these folks make or are we destined to make the same errors? The baseline between rich and not-so-rich is arbitrary, often blurred by a number such as $200,000 in income and a million dollars in assets. protecting those riches does not always come with more knowledge of how to protect that wealth, nor are those that advise the wealthy necessarily steering them in the right direction.
Long-term care insurance information is designed to protect assets from the debilitating effects of health issues, something the majority of us will face as we age in one form or another. The outcome of those challenges, which can be costly can quickly change not only your personal balance sheet but your retirement plan. Can we learn from the wealthy?
A recent article in the publication National Underwriters written by Philip Davis suggest that we can. Mr. Davis, President of Corporate Compensation Plans Inc. explores the trend among the rich to attempt to self-insure by suggesting that few of these affluent folks have purchased long-term care insurance. He finds this decision, often suggested by those that give paid advice and financial counsel to these people as a disaster waiting to happen.
He writes: "The result of their ill-conceived suggestion not to buy LTC insurance: their clients are exposed to the potential of million-dollar costs that can decimate their incomes, shred their assets, and impose severe financial and emotional consequences on their families." The complexity of this product is often cited as the reason it is not offered to this group, despite the fact that it may do more good than harm.
He suggests three reasons for this lack of asset protection. Mr. Davis believes that the inability to demonstrate the potential outcomes of not buying LTC insurance, lead many of these trusted advisers to embrace the concept that because the rich have assets, the cost of LTC insurance is not worth considering. These advisers suggest that the need for LTC insurance is simply not worth the cost.
The alternative - selling assets to cover the potential costs of this sort of care, Mr. Davis illustrates may do more harm than good. Once assets are liquidated, not only are they no longer inheritable but the potential earnings on those assets, an appreciation that can come in numerous forms, disappears creating a loss that goes beyond the sale. (This is the same argument I and others have been making as people liquidate their 401(k)s in times of emergency. The loss of what those dollars could have returned is never recovered, adding to the overall lose of a bad decision.)
This decision, it turns out, is a double edged sword. Mr. Davis writes: "For example, at 5% interest, in 15 years nearly $1 million of investment earnings would have been lost, in addition to the $1 million principal. In 30 years, nearly $3 million of earnings would be lost." Why, he asks, would they do this when they could get all of the money paid into a policy like this when they die - if they never use it, the money paid out by the policy is tax free -whereas the sale of assets is not, and there are tax incentives to purchasing this type of policy?
While he holds the advisers responsible, coming short of calling them unethical, even suggesting that they may have violated their fiduciary responsibility to their clients, there may be something for us to learn from the decisions these folks have made.
Mr. Davis refers to the problem as being one of complexity. Is it possible to briefly explain what this product is? Let's begin with the tax incentives. According to David Baer and Ellen O'Brien of the AARP Public Policy Institute, tax incentives can help with the decision on whether or not to purchase this sort of policy. Unfortunately, the tax breaks that could be received by the wealthy do not trickle down to the less-than-wealthy group with enough effectiveness to sway you to purchase the product. The federal government and some states see the tax credit as a sort of savings in advance but have the dollar caps set so high as to miss the people who may need the help the most.
The costs for taking care of someone is more than just assets lost for the individual who has the medical problem; it is also the potential earnings loss for the caregiver. It is believed that one in four people will be faced with the difficult decision of what to do should a loved one need extended care. According to a study done over a decade ago by MetLife, the cost of caregiving on the caregiver was averaging at around $500k in lost wages, $67k in lost retirement contributions and $25k in Social Security benefits.
That study focused on the costs to the person giving the care. "Working caregivers who juggle work and caregiving responsibilities make many workplace adjustments, such as coming in late or leaving early, reducing their work schedules or dropping out of the workforce entirely," said Sandra Timmermann, Ed.D., director of the MetLife Mature Market Institute.
But businesses are also impacted by this problem as well. A 2002 study by the "MetLife Mature Market Institute (MMI) reports that the cost to U.S. business due to lost productivity of working caregivers is $17.1 billion to $33.6 billion per year."
In addition to the study's main findings, the MMI also reports that for all levels of caregivers:
- Of the 2.4% of employees who leave the workforce entirely to be caregivers (200,000 men and 184,000 women), the cost to replace them is $6.6 billion.
- Absenteeism, reported by the majority of caregiving employees, costs $5 billion, while partial absenteeism, affecting virtually all working caregivers, accounts for nearly $2 billion in losses.
- Workday interruptions, at least one hour per week per caregiver, cost $6.3 billion.
- Having a crisis that requires attention during the workday is experienced by 60% of employed caregivers and costs $3.8 billion.
- Other lost productivity costs include: costs for supervision ($1.8 billion), costs associated with unpaid leave ($3.4 billion) and those resulting from a reduction from full to part-time status ($4.8 billion).
