As a light-hearted example of how chilling the healthcare crisis has become in this country, the Wall Street Journal’s center column (where else?) today probed the growing importance of a good health plan in the overall matrimonial criteria hierarchy for those seeking potential mates. Right up there with looks, money, and personality, coverage the newly-wedded can quickly cleave unto is getting to be the right stuff, and prominently featured by the canny in personals ads. It is sad that such a thing is becoming such an economic driver, a clear warning sign of trouble ahead. Not only will the insurance companies quickly catch on and move to block the marry-for-coverage set, but spiraling medical costs and the consequent shrinking supply of affordable coverage – coupled with the huge demand for health care about to hit as the baby boom retires and ages – will bring the issue to a probably bloody head in the very near future.
Category Archives: Insurance
Don’t prepay long term care premiums
A fundamental tenant of prudent cash management: getting money sooner is better than later, while the reverse is true when it comes to paying. Lately long term care products have been priced with “one-pay” or “limited pay,” premium plans, giving you the privilege of what looks like paying more, sooner, to avoid paying much more, later. Agents – whose commissions are a function of premiums, the bigger the premium, the more they may get paid – may present enticing reasons to pay more now. Don’t fall for it, and pay premiums for long term care slow, as you go. Why? Lots of reasons. You could probably earn more on the extra money elsewhere. You may die and not need the insurance, but your spouse or children might need the extra money. The insurance company might go out of business, taking your money with it. And so much will probably change in both the insurance and health care industries over the rest of your life, that what looks like a “once and done” solution to long term care will probably get creaky after awhile, and you may want to augment or just replace the darn old thing. Keeping as much cash in your pocket for as long as you can gives you more options.
Reinventing annuities: the “personal pension,” or new clothes for an old horse
Annuities – a type of life insurance designed to take a large premium and pay part of it back over a lifetime hoped by insurance companies to be shorter than the purchaser does – have been around a long, long time, and a perennially-profitable mainstay of the life insurance business. Recently assailed by allegations of abusive sales practices, low interest rates, and sporadic regulatory crackdowns, annuities seem to be on the verge of a renaissance of sorts, as big life insurance companies as major manufacturers are dusting off the old actuarial tables, putting a shiny spin on the old concept, and marketing it as a “Personal Pension” feature to be bundled into 401(k)’s and the like. The premise is to dump in dollars now, in exchange for a vow of lifetime income, a pitch particularly appealing in an age of disappearing corporate pensions, and the (understandable) erosion of faith in government pensions like Social Security. As always, these products are complicated beyond the ken of most consumers and pitchmen, and sport many hidden costs, catches, and other pitfalls. The major downside, beyond high costs, is that locking in promises during a period of historically low interest rates presents big risks of inflation consuming the promised paychecks. That, and the fact that you must trust an insurance company to deliver in decades on a promise that may outlive its corporate life expectancy. The upside? If you live longer than you or they expect – a distinct possibility given longevity trends – you stand a chance of collecting long after your otherwise-deployed funds may have run out. Tread carefully. The prudent may wait a few years to see how well these newly-clad old ponies run, and how well they breed.
Variable annuities’ sales plunge – do investors finally get it?
Net dollars invested into variable annuities dropped nearly 50% in 2005 over the prior year, in what I hope is a sign that investors are finally wising up to the oppressive taxation, numbing complexity, and crushing costs associated with most of these products. Such annuities essentially wrap mutual funds inside (often-unneeded) life insurance, and expose investors to taxation at levels as high as 300%+ over those for more straightforward investments. Often pushed by armies of salespeople lured by big commissions, widespread instances of abusive sales practices have sparked crackdowns across the country.
You bet your death
In the latest twist in the quest to profit from death insurance on strangers, hedge funds and others have concocted “investor initiated life insurance,” where one looking to profit will pony up premiums (loaned to the insured at interest) for new insurance for two years, after which the insured (assuming they’ve survived) may: pay off the loan, keep the policy, and continuing paying the premiums, or sell the policy off to repay, or just give it to the lender. The profit motive for the legions of prospective insureds? If they die during the two years, their loved ones get the death benefit, less the loan and interest, of course. Seems to me this deal is most attractive to those not expected to live long, just the sort of lives an “investor” would be most interested in. The State of New York and others have cried foul, questioning insurable interest, that pesky doctrine that forbids the gamble of human lives, and requires a legitimate reason (such as being dependant on the insured’s income for support, like a daddy) to buy life insurance. That be as it may, don’t expect much less slavering from the “investors,” or those paid big commissions to hunt for them.
Health Savings Accounts’ Sticky Wickets
The expansion of the HSA contribution limits recently proposed by President Bush is at first blush an appealing stab at helping Americans shoulder crushing care costs with a bit of tax relief, but one I think must be ultimately overwhelmed by thorny complexity and numbing rules. At the core, the concept makes tax-deductible out-of-pocket costs otherwise disallowed by the itemized deduction rules, or lost to the standard deduction. Actually making this happen with HSA’s requires getting a qualifying health policy offered by one’s employer, negotiating with care providers who want to get paid more, now, and not reveal the discounted pricing they give insurers, coordinating contribution limits year-to-year, dealing with insurance companies and banks which offer the products and accounts but don’t yet seem to really understand them, and complying with yet-fuzzy rules as to what, exactly, are eligible expenses, and with which the IRS is sure to make audit-hay sooner or later. This is a good idea, but one I fear many will find too much bother to actually use.
Medicaid Alert
Medicaid, that welfare-heath-care-system-of-last-indigent-resort turned nursing-home-plan of even-the-well-heeled, is getting harder to get for those with yet a few nickels in the piggy. Proposed new rules effective February will cap the (currently unlimited) home value that can be sheltered, as well as expand from 3 to 5 the years asset transfers intended to force impoverishment can be dragged back by the government to pay for care. Those looking to bleed themselves try so as to prove destitute should strop the scalpel and find a good elder care attorney (many with expanded hours right now), right quick. Beats paying for long term care insurance, right? Look for this trend to worsen as Medicaid, along with Social Security, Medicare, and other paragons of the FDR-LBJ era, go increasingly bust.
The new law of life after death
You can’t take it with you, but can you come back and get it? Increasing numbers of those with at least enough smarts to assemble fortunes are betting technology will find a way for them to leap back from the long-dead, and they want their money waiting for them. The cryonics movement, growing but still with at least a few cracks in its frozen pot, has ushered in the era of the personal revival trust, some administered by no less than the likes of Wachovia, wherewith one may leave one’s money to oneself, hundreds or perhaps thousands of years hence. This emerging area is sure to spawn all matter of delicious debate, such as do the newly undead have to pay the life insurance death benefit back? One such “cryonaut” quoted in today’s WSJ expects to wake up “the richest man in the world,” what with the wonder of time and compound interest. Yes, but will you be able to find the Internet – or the light switch – in the brave new world, Rip?
Requiem for overpriced annuities?
Requiem for overpriced annuities? Variable annuities (along with other varieties like fixed, and its oft-poisonous cousin, equity indexed), still-enormously popular despite perennial professionals’ warnings of high cost, high-to-insufferable commissions, poor disclosure and sneaky and oppressive taxation, appear to finally be dragged, kicking and screaming, to a leveler-field marketplace. Recent regulations changes and states’ actions to curb abuses, and reluctantly-improved pricing by major commercial issuers to pace low-cost leaders like Vanguard, TIAA-CREF and Fidelity. The perplexing popularity of such an oppressive product is easily grasped when one considers the lofty commissions paid to armies of salesmen to push the product, the commission model still being the most likely way private clients get investment “advice.” The funeral march may be premature, but the band at last is warming up. Even still, even “cheap” annuities have a lot to dis-recommend them, like high taxes and life insurance costs, which drag down returns. Sip carefully.
NAPFA Rising
NAPFA Rising A quiet revolution has been occurring amongst the financial planning community over the last several years, manifested in the National Associating of Personal Financial Advisors (NAPFA), a tiny but influential and growing organization, and holder of the Fee Only™ trademark, which pretty much summarizes their zealous dedication to objectivity. Their approach is very much in contrast to the dwarfing Financial Planning Association (FPA, which grew out of the old Certified Financial Planner’s association) which espouses lofty ethics but endorses compensation schemes (mostly commissions) that would allow Solomon’s own moral compass to wander. If you’re looking for a planner, they are worth a look at napfa.org…though I would still insist (at the very least) on a CFP® credential, which is not a requirement of NAPFA membership.