I have previously written about long term care, noting the first step is to look at your entire financial situation and assess what the impact of a long term care need would be. Once a model for your complete financial situation is set up, it's straight forward to test a variety of long term care scenarios, with and without long term care insurance. Let's be clear here, I see many instances where people are reasonably prepared to address this without insurance. I'll use the abbreviation of LTC for long term care for brevity.

There are three conventional approaches to providing LTC insurance.

• Traditional LTC insurance is focused solely on long term care needs. It's similar to many other insurance products you likely have, such as home insurance. If an event occurs, it provides coverage up to the limits of the policy. If you never have a need, just like your home insurance, it is an expense that we were willing to incur to mitigate the risk of a bad event.
  
• A Life insurance policy with LTC rider serves dual purposes. The life insurance policy provides a death benefit, just as you would expect. The LTC rider, an enhancement to the policy, provides the option to draw down the death benefit for LTC needs. It also expands the amount of money that the insurance company will provide for LTC needs by a multiplying factor, such as 2 or 3 times. (e.g. a $100,000 policy may provide up to $200,000 or $300,000 for LTC expenses)
  
• A Fixed indexed annuity with LTC rider is another example of insurance serving two roles. In this case you would fund a fixed income annuity, which would have a LTC rider as an enhancement to the annuity. This would enable you to draw down the annuity value for LTC needs. This product also commonly includes a multiplier of 2 or 3x the amount funded for the annuity to meet LTC expenses.
  

Separately, I wanted to mention one other alternative that, while not designed to provide LTC coverage, addresses an area that often leads to a need for long term care. This product is commonly termed a Critical Illness policy. Basically, a critical illness policy pays you a benefit when you are diagnosed with a covered critical illness. These are commonly cancer, heart attack, and stroke. In each of these cases, these events often trigger the need for long term care. The point is that this policy provides a cash benefit just when it's likely that we need money for this care. We need to acknowledge that it's only in those circumstances where the illness is covered. Importantly, that usually precludes cognitive impairments such as Alzheimer.

There are many aspects to consider for each of these alternatives, but its not overwhelming. It helps to get advice from someone knowledgeable. Though, I caution you that there are sales reps that have a (self) interest to make the exploration of these options complicated or threatening. I don't. If you have a question, call or email me.

There's a lot to know about reverse mortgages, and accordingly there's a lot of misunderstanding about them. I won't try to explain all there is to know, but I did want to make you aware that there are some very good reasons why you might consider looking into this further.

Let's dispense with a few items that we need to understand. First, you need to be at least 62 years old to qualify for a reverse mortgage. Second, you don't need to own your home free and clear (you might still have a mortgage outstanding). Third, you are not selling your home to anyone. You own it, period. All you're doing is borrowing money from someone. In the future when you do sell your home, the loan will be repaid from the proceeds. (IMPORTANT NOTE: you will never go underwater on the loan. If the proceeds from the sale don't cover the loan, that's tough luck for the lender. There's no recourse).

Why would someone want a reverse mortgage? Here's one short answer; it may be the largest asset you own and you could have a lot of equity (money) sitting there which you need. And, you want to keep living in your home. A reverse mortgage can provide you access to your equity as lump sum, a monthly sum, or as a line of credit to be used whenever.

What's the downside? First, its a mortgage and you will need to pay closing costs. These are normally rolled into the “mortgage” so you don't have out of pocket costs. Second, you will need to pay insurance, in the form of an interest rate, for this loan (just like you would pay a private mortgage insurance fee (PMI) for a regular mortgage with little or no money down. And third, you need to remember that as you spend the money, you're.... spending your money! So its not to be spent frivolously.

Here's what I want to tell you. There are situations where a reverse mortgage can be a huge benefit in your retirement. It can be the reason you have a successful retirement income. I know there's a lot of old information and stories about the abuses of reverse mortgages that you may hear. What's great is that the federal government actually heard them, and has done something about it.

As I said the beginning, there's a lot to know about reverse mortgages. I have a pretty good understanding on these, and who can benefit from them. Feel free to give me a call if you want to discuss this. (ps. I don't sell or provide reverse mortgages. Like everything I write about, it's not to sell you something).

You might have recently read about the jump in LTC insurance premiums for the Federal Government LTC program. The increase, which will take effect in November will average 83%, but could go up as high as 126%. This is not a product that is subsidized by the Government. Federal employees pay the full charge to John Hancock (the LTC insurance provider). The price increase adjusts for changing trends in morbidity (how sick we are) and mortality (how long we live) rates, as well as expected return on investments. Want to know one of the effects of extremely low interest rates? Insurance companies rely on interest rate earnings to meet future claims. The unprecedented low rates are killing insurance companies.

These price increases are alarming for retirees. This isn't a one time expense. These are premiums that must be paid every year you are alive. Furthermore, this doesn't mean that LTC premiums can't go up in the future.

What do you do? Here's the the first thing you do. You conduct a comprehensive analysis of your retirement income, assets, and expenses, and evaluate the impact of long term care expenses in a variety of scenarios. Every person should have one goal, to be reasonably prepared to address a long term care situation without running out of money. Its especially important for a couple to consider that one spouse can not exhaust their resources for long term care expenses and leave the second spouse destitute (or significantly degrade their lifestyle).

I think many people are unsure what long term care looks like. What kind of expenses are incurred. How care is provided. I've talked to some of you that have experience in this through providing care to your parents. I have this experience for my mom. Long term care is not a bogeyman. It's just another type of healthcare expense that needs to be factored into our retirement planning.

One of the big unknowns for most of us is how much money do we need to cover healthcare costs in retirement. Fidelity Investments estimates around $260,000 on average for a 65 year old couple during retirement. The Employee Benefit Research Institute has studied this question and offers more clarity than Fidelity's estimate. They found that prescription drug expenses will play a big role in determining the total expenses. A couple with lower drug expenses might need $158,000, while a couple with high drug expenses might need $392,000. These estimates typically include insurance premiums and out of pocket expenses. Importantly, they do not include expenses for long term care.

The reality of healthcare expenses for each of us is going to be affected by a couple of factors. One is whether you are a man or woman. Another is whether we have a healthy lifestyle. And finally, whether we encounter a major medical situation such as cancer, parkinsons, ms, or others.

The important thing is to factor a reasonable estimate for healthcare expenses in our retirement planning. Even though this will be just an estimate, and one that is projected out for perhaps 30 years, it's better to have evaluated some expense then blithely assume everything will be normal.

Next article: long term care expenses.