Cost effective implementation of Long Term Care insurance

Long Term Care (LTC) decisions form a critical part of all retirement plans. That said, we can’t properly address individual LTC needs until a retirement plan is designed and participants are able to quantify the aspect of Long Term Care they will fund. If LTC insurance is part of their ideal LTC plan then we must identify the best policy and the most cost effective way to pay for it. This article is intended to review LTC and layout how a business can help pay for LTC insurance in a cost effective manner.

(1) Long Term Care – a review
Long-term care ( is a range of services and supports needed to meet personal care which is not included in healthcare. About 2/3 of the population will need LTC after age 65 (and 1/3 before 65). Of those reaching age 65, 70% will need LTC or assistance with activities important to life. LTC includes everything from social services, physical and emotional support, finances, housing, a myriad of legal decisions, family interaction and social dynamics. LTC should include all assistance with tasks that will allow for productive, engaged and enthusiastic daily life. It should include assistance with routine tasks such as housework, money management, taking medication, shopping, traveling, caring for pets, responding to emergencies (these are known as Instrumental ADLs) and NOT just the “basic” Activities of Daily Living (ADLs, such as assistance with bathing or eating).

Currently, 80% of all LTC needs provided in the home are supported by unpaid family, friends or neighbors. The average support needed in the home is about 20 hours per week. Fortunately, as services develop, we find an increase in community support services. These include adult care services, transportation services, and home care that is round the clock or as needed.

If you require or prefer the use of LTC services provided by an institution or facility you will need to investigate Assisted Living, board and care homes, or Continuing Care retirement communities, not just nursing homes.

(2) What is LTC insurance?
LTC insurance is a contract to pay premiums every year for care you may need in the future. It will pay out an agreed daily amount for your care only if you are unable to do a certain number of Activities of Daily Living (ADLs). These are the basic ADLs (includes bathing, eating and dressing). LTC insurance is not usually available if there are pre-existing conditions. Benefits are provided for a set number of years of care based on a daily dollar amount dependent on local costs and total maximum benefits (these are usually capped at around $350K). But how many years of LTC will be needed is unique to the individual, though we have past indications that males need at least 2 and females 4 years. Three years is the standard, but we know that 20% of those over 65 years will need ADL assistance for longer than 5 years. For these reasons we recommend this insurance purchase be made based on your retirement plan.

Naturally, LTC insurance premiums are less expensive for the young (and healthy) but starting early will cost more over time and is not advisable if your personal cash flow can’t support this expense throughout your life.

(3) Best ways to pay for LTC insurance
How do we pay for LTC insurance if we think it fits within our retirement plan? It should be clear that healthcare or Medicare (except for very short periods of time and only in specific emergency situations) do not cover LTC costs. On the other hand, Medicaid does cover LTC but has very strict requirements to qualify. If you are fortunate to qualify, LTC coverage is provided by the Older American Act (OAA) and Department of Veteran Affairs.

The most common way to pay for basic LTC needs is through insurance or out of the personal or family budget. Other ways include a reverse mortgage, annuities, other assets, and income from a dedicated source (such as rental income).

LTC insurance premium costs are based on your age, your location, your wishes for level and amount of care. The premiums are not usually a burden on a yearly basis but they take a toll over time. These premiums must remain in effect for life. Additionally, policy premiums today can increase by more than inflation (over the last year we’ve seen 18% to 90%[!] increases in premiums for existing policies).

Long Term Care Purchasing Options

There are at least 2 ways to pay for a new LTC insurance policy – as an individual or as a business. The advantage of an individual LTC insurance policy is that it is based on your needs and can be tailored to you. The advantage of a business LTC insurance plan is that it can be paid by the business and therefore tax deductible. If you are the business owner it can also be tailored to your wishes (see the chart below assembled by Aikapa).

LTC insurance premiums are supposed to be deductible but we find that most of our clients with high AGI (Adjusted Gross Income) and low medical expenses are not able to deduct their premiums on their annual IRS tax filings (Schedule A has a 10% AGI floor). In addition, the deduction is also limited to age specific maximums (see table below) regardless of actual cost for the purchased LTC insurance policy. To help you understand the implications I’ll outline at LTC insurance for three separate age scenarios (ages 55, 61, and 71):

Currently a basic 3-year policy with $150 benefit per day would have an annual premium of around $2,100 at age 55, $2,900 at age 61, and $6,900 at age 71 (quotes may differ given different assumptions and are likely to be lower for males and couples but may be higher or not available based on health history).

Long Term Care Deductible Limits

To help understand how tax deductions actually work if buying this insurance individually, I’ll use the three LTC examples outlined above: To allow for this comparison, I’ve assumed that the cost of the above three policies are the only tax deductible medical expense. This is important because the deductibility is dependent on exceeding a 10% floor based on AGI. Anyone with an AGI (i.e. number at the bottom of the first page of your 1040 IRS filing) of more than $60K would not be able to deduct their LTC premium under any of these scenarios unless there were other deductible medical expenses. Most of our clients that purchase an individual policy are not able to deduct premiums. In retirement deductible medical expenses rise and then some of these premiums are tax-deductible.

On the other hand, the same insurance policy purchased by a business provides tax deduction of LTC insurance premiums up to age limits and may even cover the entire premium (see below for details).

Sole Proprietors, Partnerships, S Corporations, and LLCs can provide owners and spouses with LTC premium tax-deductions that are only limited by age specific maximums (see above table – which shows that at a business can pay up to $1,530 for an owner’s (aged 51-60) LTC premium tax-free). If we look at the same three examples AND purchase the policy using one of these firms the tax deduction in 2017 for the 55 year old would be $1,530 (less than the cost for a base policy of $2,100), the 61 year old would have their premium fully paid tax-free (since their premium of $2,900 is less than the maximum limit of $4,090 for her age group), and the 71 year-old would pay no tax on $5,110 (though premium total was $6,900).

C Corporation and non-profits may cover LTC insurance premiums  for owners or members tax-free (without age limits mentioned above).

Using the same three examples AND having the C Corporation or the nonprofit pay for the premiums, then the entire LTC insurance premium for all age groups would be tax-free.

In summary, Long Term Care planning involves much more than just buying a LTC insurance policy. It encompasses consideration of a myriad of integrated services and support that should be aligned with your wishes both early and later in life. LTC insurance is one way to cover basic ADLs. Before making a purchase of LTC insurance you must have calculated what you wish to cover yourself and what will be paid for by insurance benefits. It is more cost effective if LTC insurance is provided by an employer (with no cost to you) and even better if you are the employer. As the employer you can design a policy that best fits your plan and offers tax-free premiums.

Edi Alvarez, CFP®

Medicare—Surprising facts and critical changes

The goal in retirement (or financial independence after age 65) is to be able to support our lifestyle using accumulated assets, Social Security and Medicare. It has become evident that Social Security and Medicare had to change to continue to sustain future retirees. The loss of the Social Security ‘file and suspend’ strategy for anyone who is not 66 by the end of April, 2016 has received a lot of media attention. Yet, major changes in Medicare have garnered much less publicity although no less important to retirement planning.

From our retirement planning vantage point, we believe the new Medicare changes will add a significant wrinkle to what is a already a very fine balance between distributions from portfolios, income tax liability, and funding our client’s ideal retirement lifestyle.

This short educational article outlines a few surprising (even shocking) facts that everyone should know about Medicare. For more details (particularly those approaching 63 or are two years from switching to Medicare from employer plans), I recommend that you read, in detail, the annually released official US Government Medicare Handbook. The 2016 version of this booklet is available at

  • Medicare Alphabet Soup (A, B, C, D) are not all free – The 2.9% current premium paid to Medicare on your earnings while employed only provides for free Medicare Part A coverage. Part A only covers hospital insurance, not comprehensive health insurance. Medicare Part A participation, however, does provide access to the other Parts that, when taken together, can constitute a comprehensive health insurance plan able to meet specific needs. Part B is basic medical insurance. When combined with Part A it is termed “Original Medicare.” A and B combined isn’t enough to cover everything you’ll need. Part D is a premium paid for drug insurance. It is incredibly complex as specific drugs fall in and out of favor within each plan. On the other hand, Part C is an integrated health plan that usually includes Part A, B, and D. It is often called “Medicare Advantage.” Finally, you may encounter Medigap coverage (which has its own alphabet soup) to cover areas missed by Medicare A, B, C or D.
  • Basic Costs: Average costs are difficult to estimate and are often not as low as many expect. Part B would seem very well priced at less than $1,500 per year and yet in the real world we seldom find these ideal rates. Instead, we find health insurance through Medicare averages around $4K-6K per person per year. Moreover, rates are expected to rise significantly in 2018 because of surcharges.
  • Enrollment in Medicare is not all automatic and requires strict attention to timelines. Timelines appear long (for example, 7 months for the initial enrollment) but to avoid penalties and loss of coverage you will need to act early in the timelines (most wait until their birthday month and may find that they have a gap in insurance coverage even though they make the enrollment timeline). To avoid penalties, initial enrollment into Medicare is 3 months before your birthday month and extends to three months after. If you have approved coverage (for example, from an employer health plan) and need to transition to Medicare you will have a “Special Enrollment Period” with its own timelines that must be initiated prior to leaving your employer approved health coverage (excluding COBRA).
  • There are hefty penalties that stay with you for life if you miss an enrollment timeline – Penalties for missing enrollment timelines into Part B are currently an additional 10% of your normal premium cost for every 12 months delayed. Part D penalties are 1% per month delayed. These penalties continue throughout your enrolled life, meaning that you’ll pay more for the same coverage. For example, if you enroll 3 years later than required, the premium you pay for the same Medicare Part B coverage is 30% higher. If you also missed enrolling in Part D, the premium is 36% higher.
  • Once you enroll in Medicare you can no longer make H.S.A. contributions. Once you begin collecting Social Security you are required to enroll in Medicare Part A, which eliminates your ability to participate in certain plan features. For example, it disallows the annual tax-free H.S.A. contributions.
  • There is free personalized health insurance counseling. You should use it to design the best plan for yourself and to fully understand what you need to do each year to make the most of the health care plan you chose (given your expected annual health care needs). In addition, work closely with your Wealth Manager to ensure that you distribute your wealth in the least costly manner given your lifestyle and available assets.
  • Not all health insurance plans are available in all locations. When planning your Medicare health plan, use the community you are planning to retire into to get the most accurate list of health plans available. There is also a 5-Star rating website, provided by Medicare, to help you choose the best available plan in your area.
  • Since 2007 Medicare has been MEANS tested (i.e., dependent on income). Additional income-based premiums can come as a surprise, but what is perhaps more shocking are the new income limits that will begin in 2018. For the moment, surcharges to Medicare premiums begin at $85K and $170K MAGI (Modified Adjusted Gross Income for those filing as single or married filing jointly). Currently, the surcharges top out at $390/month or $4,700/year for Part B for those with MAGI greater than $214K and $428K (single versus married filings). Separate surcharges apply for other Parts. But take note—starting in 2018, the surcharges will apply to a lower MAGI. The largest surcharges will be for those with MAGI over $160K and $320K. An additional surprise is that the earnings that will be used to calculate your Medicare Premium surcharge (also known as the annual “Income Related Monthly Adjustment Amounts” or IRMAA) will be based on your income tax filing from two years earlier. For example, if you enroll in Medicare in 2018 they will use your 2016 taxes to estimate your IRMAA (there is a process to appeal surcharges).
  • The income included in determining additional premiums is based on your adjusted income PLUS any tax-free income (such as Muni bond interest) – MAGI (in these scenarios) includes all ordinary income (work earnings, pre-tax withdrawals, pensions, etc.), plus 50% of Social Security collected, plus tax exempt interest. It doesn’t include H.S.A. or Roth distributions or loan proceeds. Annual distribution will now need to be tightly connected to your MAGI.
  • A “cost of living” gift from the ‘Hold Harmless’ rule – For some, the “Hold Harmless” rule provides additional premium savings. This benefits those who have their Medicare Part B deducted directly from their social security. This rule prohibits increases in Medicare Part B premiums when there is no similar increase in Social Security benefits. The ‘Hold Harmless’ rule evaporates for anyone not deducting their premiums from Social Security, or if they pay additional premium surcharges (because of income limits), or if it is their first year in Medicare (plus a few other exceptions).

These changes to Medicare (and likely new changes in the future) will make it essential that your accumulated wealth be deployed in a manner that will allow you to have the necessary cash flow for your chosen lifestyle while maximizing the various MEANS adjusted benefits.

It has always been our recommendation that clients have more than just pre-tax savings, Social Security, and a pension to support their retirement distribution. Going forward, Roth and H.S.A. savings will unquestionably become even more powerful adjunct retirement planning tools since they are tax free and not part of Medicare MAGI Means testing.

Know the facts about Medicare. An educated consumer is better equipped to make sound choices leading up to retirement and much more likely to secure the retirement lifestyle they have in mind.

Edi Alvarez, CFP®

Insurance – “The Basics” on when and how to cover contingencies

The purpose of insurance is to cover a specific contingency—risks to life, health, income, property—that insurance companies can pool and provide under an affordable monthly premium. Insurance is a contract and it must be read and understood completely. Properly understood and applied insurance is an invaluable part of your financial life and to building wealth. The wrong insurance, on the other hand, can drain your finances, not cover the contingencies you need. In effect it can derail your wealth building plan. Below are some basics to think about when considering your insurance needs but there are many more than can be discussed here. All insurance tools need to be reviewed from two perspectives: 1) identifying the tools you need throughout life’s ups and downs and 2) the level of coverage that you need (this can change from year to year).

Life Insurance – this tool is essential for anyone who has a dependent. It should always be purchased to cover the future needs of those who are dependent on the insurer’s income. Once you have a target amount you need to focus on obtaining a contract from a reputable company for the least cost over the period you’ll need it. If your cash flow is limited, there are no dependents and your assets are under $5M, then there is no need for life insurance. Similarly, if your cash flow is limited but you have many dependents then only consider term life insurance. This type of insurance is best purchased outside of employer plans and additional amounts can be supplemented from employer benefit plans (if needed for a short period of time).

Disability Insurance – this tool is intended to cover a percentage of your income for you and dependents if you’re disabled (mentally or physically). We highly recommend anyone under 65 consider purchasing long term disability insurance. It is least expensive if purchased within an employer plan but if you’re healthy may be reasonable as private insurance. Self employed or small business owners should purchase personal long term disability insurance while they have sufficient earnings and are healthy.

Long Term Care (LTC) Insurance – this tool covers the cost of care if you’re unable to perform the basic acts of living (dressing, washing, etc). Although you may need it before retirement most individuals purchase this insurance to cover LTC in retirement. The rates do increase with age and may not be available after you’ve developed health issues.

Liability Insurance – this tool protects your wealth from legal actions. Some liability insurance is part of your auto and house insurance but additional liability insurance is purchased as “Umbrella coverage”. This is a relatively inexpensive coverage and the amount changes as your wealth grows.

P&C Insurance (Property & Casualty) – these tools protect your property (auto and house). Your insurance broker/agent can review the latest options, the benefits, and premium available to you. We encourage you to be aware of your policy and get as much insurance as you’ll be willing to claim and as fits with your financial plan.

Of course there are other insurance tools and new ones being created every year. If you wish to discuss a specific insurance tool we’ll help you better understand it and determine if it is a tool that would be appropriate for you.

Edi Alvarez, CFP®

Long Term Care – Should you self-fund or purchase insurance?

Long term care (LTC) provides assistance for those who need help
performing functions essential to daily living. These include basic
functions like eating or dressing yourself.

Who needs it? This assistance is needed after physical or cognitive loss,
a disease, an accident, or loss that occurs naturally as we age. The
probability of needing this type of support increases with age.

Who Provides this care? If still living at home then the care is most
often provided by either family members or in-home care professionals.
At some point either by your choice or out of necessity you may have to
transition to an “assisted living community” and/or “a nursing home”.
Robotic tools are also able to provide some assistance for daily living

Who Pays for it? Costs for LTC are most often paid out of family or
personal assets. Medicare does not cover long term care. Medicaid
(Welfare) provides some limited coverage to low income families. In
your retirement plan we need to include how you’ll cover long term care
expenses. Most often out of your assets or through insurance coverage.
LTC insurance needs to be seriously considered by age 50 since it may
become prohibitively expensive by the time you’re ready to retire. LTC
insurance premiums may be tax-deductible.

How much does it cost? That will depend on how much care is needed,
whether it’s provided at home or in a dedicated community, and the cost
of living in your retirement area.

Your retirement plan should include how you’ll cover potential long
term care expenses – either out of assets or through insurance. We’ll
need to determine which method and amounts are right for you.

Edi Alvarez, CFP®

H.S.A. Limits from 2004 till 2012

At the beginning of each year you should know those financial limits that are important in your financial planning life.  Here are the historical values for Health Savings Accounts for individuals and families – as of 01/11/2011:

This table shows all the changes in limits that have occurred since 2004 to 2012 (the house is currently reviewing 2013).

Year Single FAMILY Catch-up >55 yrs
2004 $2,600 $5,150 $500
2005 $2,650 $5,250 $600
2006 $2,700 $5,450 $700
2007 $2,850 $5,650 $800
2008 $2,900 $5,800 $900
2009 $3,000 $5,950 $1,000
2010 $3,050 $6,150 $1,000
2011 $3,050 $6,150  $1,000
2012 $3,100 $6,250 $1,000

Insurance Claim tips

*** We do NOT sell insurance or receive commissions from any products discussed in this forum ***

As you prepare your emergency document box that will allow you to return to life as usual following a disaster -we’d like for you to include the following:

  1. Notify your agent and carrier promptly. Let them know that you have sustained damage and are filing a claim. Even if you did not buy an earthquake, or flood policy or the damages do not exceed the deductible. Always contact your insurance in writing that you have sustained a loss for a disaster and are filing a claim. Most policies have reporting requirements that are time sensitive and you may not be aware of covered items for EQ in an non-EQ policy.
  2. Be ready with your own expert opinion. Have your own experienced contractor or licensed structural engineer once the insurance adjuster has completed their evaluation.
  3. Review your policy again and remind yourself what limits you have per category and also notice the declaration limits since these can change your expected coverage. If you read the policy carefully when you purchased it you should not be surprised regarding your coverage. Note that earthquake policies provided by CEA are standardized (easy to use) but also quite limited. Contact your insurance company and review your expectations and if not satisfied then contact 1-800-927-HELP and report your complaint.
  4. Do NOT agree to a quick settlement with your adjuster or insurance company until you’ve verified and understand your rights and coverage.
  5. Keep track of everyone you speak to with regards to your claim – this is your responsibility as a claimant.
  6. Keep all receipts for expenses if planning to claim additional expenses or loss of use. Remember that most CEA policies do not provide much for this coverage.
  7. You should have carefully analyzed the wording so that during your claim you will be able to receive true replacement of your property – like kind quality.
  8. Estimates by your own contractor should be similar to those given by the insurance contractor otherwise you may agree to less than it will cost you to get your home rebuilt. Care should be taken with inexperienced or out of state contractors who do not know what needs to be part of an EQ estimate. Assisting them by connecting them with a local experienced EQ contractor may provide you with the quickest and most complete estimate.

*** Above all do NOT sign releases or waivers without legal advice — read carefully and have your legal representative do the same — particularly careful if it contains the words “final” or “release” language. ***

All AIKAPA clients are encouraged to contact us so that we can review your policy prior to needing a claim.

*** We do NOT sell insurance or receive commissions from any products discussed in this forum ***

Edi Alvarez, CFP®

Earth Quake Planning Basics

 *** We do NOT sell insurance or receive commissions from any products discussed in this forum ***

 We strongly encourage you to insure against catastrophic risks. Katrina was a recent example of a catastrophic risk as would be a category 7.0 earthquake. The best way to prepare is to plan for both your physical and financial safety.

We address earthquake planning with our AIKAPA Managed clients and AIKAPA Guided clients usually consult with us as they need. If you’d like us to provide more specific and personal discussion feel free to call us. You may also find value in the links provided in the AIKAPA resource page (
Here are answers to your most frequent questions on earthquake risk planning:

  1. Can I be denied earthquake insurance? It is mandatory, inCalifornia, that home insurance providers make available earthquake endorsement to all home policies sold in this state. The CEA (California Earthquake Authority) was created after the last major earthquake to assist home insurance companies so that they would be able to offer home insurance inCalifornia. I encourage you to call California Board of Insurance directly if your agent states that you can’t get earthquake insurance but you have your home insurance with them (1-800-927-HELP). The laws to protect you are under the California Insurance Code at section 790.03(h) of the California Code of Regulations at Title 10, Chapter 5, and in judicial decisions.
  2. What is likely to be my premium? This year we’ve found that premiums are more expensive – some as much as 75% more. The actual policy premiums, in the Bay Area, can vary dramatically depending on your home’s location, cost of recovery, and deductible. Insurance rates are calculated based on your zip code and the current cost of rebuilding your home. If you login to the CEA website (link provided via you can use their premium calculator to estimate your likely policy premium. Most of our clients have policies in the range of $1,200 to $4,500 per year. These policies do give you credit for retrofitting which you’ll likely want to implement to increase your physical safety.
  3. How much of a deductible should I get? This type of insurance only comes with a fairly large deductible. It is usually in the range of 10-20%. A home that costs $600K to rebuild could have a premium around $1,500 and a deductible around $60 to $120K. This means that you need to self insure the first $60 to $120K in earthquake damage. These funds need to be inflation protected but accessible as part of your ability to self-fund earthquake damage below this level.
  4. What is the risk of earthquake damage? No one can yet predict this with any certainty how your home will fare during the next earthquake. You can review your county and city disaster recovery (earthquake) planning to have a local view of how to plan for your safety and also visit the ABAG and USGS website to find out more about your home and business location with regards to the fault lines and shake areas (see our resource page at It is your closeness to the actual fault line and the type of soil (how much shaking and aftershock you experience) that determine the damage you experience.
  5. What is the likelihood of a quake? The probabilities quoted appear to rise each year. The 2008 USGS survey states that there is a 62% chance of a 6.7 quake in the next 30 years. It is also believed that the next quake will strike further north of the Loma Pietra (1989) 6.7 quake. Those who use frequency analysis to make quake predictions rather favor the prediction that we have entered a higher quake activity period resembling that seen around 1911. You can read more about Geologist’s view at the USGS website. (See the AIKAPA resource webpage
  6. Should I buy this insurance from my current home insurance provider? You should do a thorough review of many providers. This is a pretty expensive premium that you need to feel sure will be available when and if you need it. First, get quotes from large insurance providers including CEA-backed providers (these are easy to find). Second, get a contractor or structural engineer to review your home’s structural condition in case of an earthquake and secure your home (see for several useful links). You’ll next need to carefully review each policy – this is not as straight forward as choosing the least expensive policy. You will need to compare the limits and be aware of exclusions. Make sure that when comparing costs you are comparing the same type of coverage, from companies that are either backed by the CEA or are able to withstand the cost of the next big quake.
  7. When does it make sense to self insure? When you are covering risks that are not catastrophic it is our belief that you should consider self funding. You should also consider self funding a large deductible thus allowing you to have enough cash flow to pay for needed catastrophic insurance and also provide for other cash flow needs. Using your current financial statement, cash flow and home equity you can quantitate your risk and life style exposures.

*** We do NOT sell insurance or receive commissions from any products discussed in this forum ***

Edi Alvarez, CFP®