Long-Term care insurance can be controversial. Unlike other insurance solutions, the decision as to whether you should own this type of coverage is up for debate. As with all financial decisions, this should be researched and determined with a great deal of thought.

For many people, a great deal of concern as our population ages, would be ending up in a nursing home. Alternatively a concern is that a relative, or oneself, would need to live in a nursing home or assisted care facility, but not being able to afford the right place. The harsh reality is that this type of care is expensive.

According to the 2015 Genworth Cost of Care Survey, the median annual cost of a room at an assisted living facility in the U.S. is $43,200. That same private room at a nursing home averages almost $91,250 per year. In more expensive regions of the country, such as the state of New York, the cost of care jumps to $49,200 & $136,437 respectively. As a result, the average individual should at educate themselves as to what options would best serve them.

Covering the costs of long-term care

There are four main ways that an individual can pay for long-term care. They are:

• Medicare;
• Medicaid;
• Self-insuring (covering the cost yourself);
• Purchasing a long-term care insurance policy

Many people believe that Medicare is the solution. However, Medicare only covers long-term care costs under very limited scenarios. Medicaid will cover these costs, but it is a “needs based” program that essentially requires an individual to be both sick, as well as indigent, in order to be eligible for aid. Many individuals spend a great deal of time consulting with attorneys and financial advisors regarding estate planning, so they may protect their assets for their heirs. This is becoming increasingly difficult as asset transfer look back periods have been increased to 5 years. It is possible that this time frame may be extended further in the future, and the ability to gift assets out of one’s estate in advance may be more difficult.

As demographics change over time as the population ages, it is likely that it will become more difficult to qualify for government assistance. Medicaid is typically a last resort for someone who needs care, but has already spent the majority of their personal assets. Because Medicare and Medicaid are not the best of solutions, it is important to have alternative plans to cover the costs. Some may have the resources to self-insure. For others, purchasing a long term care policy may make more sense.

How does long-term care work?

Long-term care (LTC) policies generally pay a specific dollar amount for each day of care that is covered by the policy. Services can include home health care, adult day care, respite care, care in an assisted living facility, or in a nursing home. The policy benefits are triggered when an individual needs help performing the normal activities of daily living (ADL), for example: bathing, eating or dressing. In the United States, there are currently approximately 10 million people who need help with ADL. As life expectancies rise, these statistics are expected to grow. The President’s Council of Economic Advisors estimates that 70 percent of people who reach the age of 65 will require long-term care in one form or another before they die.

Is a policy right for you

LTC policies are usually quite expensive, and are not for everyone. An LTC policy would not be a suitable purchase for an individual who has the following restrictions:

• afford to pay the annual premiums,
• does not have sizeable assets, or
• social security is your only source of income

If, however, an individual desires to protect personal assets for their heirs and can afford the premiums, purchasing a policy is worth the look. Some individuals may purchase a policy for the peace of mind, so as to not be a burden to one’s relatives. In some cases a policy is purchased simply to be able to get into the right facility or even to be cared for with at-home care for as long as possible. Whether or not it makes sense to purchase a policy is most certainly a case by case scenario.

What to look for in a policy

If an individual concludes that a long-term insurance is worth considering for their circumstances, there are a few things one should consider prior to purchasing a policy. Some policies exclude certain pre-existing conditions. Most have an elimination period once an individual enters a facility, before benefits begin to pay out. It is imperative that the insurance company offering the policy is reputable and financially stable. Many policies have benefits that max out at a certain level. The policy should cover a broad spectrum of services as well from home care, to assisted living, and nursing home care. Preferably, it should be an indemnity reimbursement policy once an individual qualifies for benefits, rather than an itemized bill submitted for costs that have to be subsequently approved.

Another consideration is the possibility of coupling life insurance with a LTC policy. While most financial managers generally do not look at permanent life insurance policy favorably as an investment instrument, policies with a LTC rider should be considered. In this type of policy the LTC benefits can be paid in advance of the death benefit of the policy. It is essentially an advance on death benefit proceeds, and often pays more in aggregate LTC benefits than the death benefit. This is typically done with a cap on the monthly benefit. The advantage is simply that a traditional LTC policy can be a sizeable expense. However, if an individual dies suddenly, and never utilized the benefit, this effectively leaves substantial assets to the insurance company. While this is no different than car insurance or homeowners insurance, the difference is LTC policies often carry a sizeable premium. When coupling the life insurance policy with a LTC rider the total cost of coverage is often even more expensive, but there is a guarantee that some form of a benefit will be distributed. If the LTC rider is never activated, the beneficiaries will receive the death benefit as an alternative. Additionally, the underwriting process to determine insurability may be more stringent, as the insurer must weigh the risks of not only a LTC need, but the certainty of death. Those upfront costs associated with these policies are typically more expensive. However, because many offer a fully refundable premium at any point in time, they may seem attractive to an individual holding a heavy cash position which is earning a nominal interest rate in a liquid savings account. Transferring that cash into such a policy will continue to provide liquidity along with insurance protection.

When and how to apply

Being approved for LTC insurance becomes more difficult as and individual ages. As a result, the average age to purchase LTC insurance is 57. According to the American Association for Long-Term Care Insurance, approximately 50% of those waiting until age 70, will be declined due to health reasons.

It is a good idea to look not only at the insurance company’s credit rating, but also the company’s track record in this field of insurance. Many insurers have left the LTC insurance market because they found it too difficult to make actuarial projections on the viability of such an insurance product. Many still offer policies that are subsidized at the state level for part of the cost. In New York State there is the “NYS Partnership for LTC”. One downfall is that subsidies such as the NY state plan can preclude you from utilizing the policy benefits out of state with the same level of asset protection. With so many relocating in retirement, these policies (while more cost effective) may not be viable. However, some states with similar partnerships have agreed to meet the obligation of another state’s plan for those who have relocated. Some companies have had substantial premium increases after the policy is issued. In some cases, it is possible to purchase what is known as a “Ten Pay Policy”. This allows an individual to pay increased premiums for 10 years and the policy is considered to be paid in full and is no longer subject to policy increases. Other policies, such as those coupled with permanent life insurance, allow payment for a policy at an increased premium up front, and in return a request for a full refund should the benefit never be fully realized.

Tax Benefits

A little known benefit is that existing annuity contracts that are Non-Qualified (purchased outside of an IRA or employer based plan) are permitted to take a tax free withdrawal on any gains as long as the proceeds are utilized to fund the LTC premiums. This can be done on a monthly basis, or as a lump sum through a 1035 exchange. However, the annuity payments must be made payable directly to the insurer of the LTC policy. It should also be noted that not all policies accept 1035 transfers.

As you can see, there are many different things to consider before purchasing long-term care insurance. Deciding which option is the best solution can be difficult. However, receiving proper council and doing research will allow an individual to make an informed decision. Some forms of coverage make sense for those who are concerned with protecting the value of their estate. Others, who may have no heirs, may see no issue with spending their assets in order to provide for their care. In such instances, acquiring coverage may not be such a strong priority.

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One of the lessons learned in recent decades resulting from multiple market corrections and periods of increased volatility is that portfolio management has become more dynamic. Traditional asset allocation models of equities, fixed income, and cash equivalents may not be sufficient for growth and income oriented portfolios. In certain cases, alternative asset strategies may be appropriate as a means to supplement a proper asset allocation.

So what are “Alternative Investment” strategies?

The term alternative can mean funds invested in numerous areas such as:

• Arbitrage Funds;
• M&A Strategies;
• Managed Futures; and
• Long/Short Investing

One of the more prominent approaches in recent years is that of a long/short strategy. A long short strategy is traditionally associated with a hedge fund. In this kind of strategy, a portfolio manager may choose to buy equities and fixed income investments they feel are appreciating; while simultaneously shorting some of these holdings that they feel are going to decline. Hedge funds, for many years, have utilized this approach while maintaining greater flexibility to choose an investment strategy that can quickly adapt to a rapidly changing environment. Due to these funds limited regulatory oversight, their ability to stay nimble is unlike that of a traditional equity mutual fund that must stay fully invested at all times. A hedge fund has the ability to move assets in any direction, or potentially, stay in cash at times where value is difficult to find.

Financial planners will generally not advocate that investors actively attempt to time financial markets. Even the best mutual fund managers do this with very limited success. In fact many investment advisors often weight portfolios heavily towards ETF’s and index funds because there is so little evidence that an active equity manager will outperform his benchmark. Historically about 60% of large cap fund managers will not outperform the S&P 500 index. More recently, the data has been even less favorable to traditional equity managers. Aside from the higher costs associated with these funds, managers are typically obligated to remain fully invested even at times when they may not see value in the market. This greatly impairs the ability of an active manager to implement their best ideas. So if one were to advocate indexing through ETF’s, then what relevance is a long/short strategy in a portfolio? It would seem to be the antithesis of the data previously mentioned. However, recent data from the last 20-years indicates that when combining a long/short approach as a percentage of a portfolio to a traditional asset allocation, an investor actually reduces volatility while having a nominal impact on net returns. In other words, this approach may provide a similar level of overall long term returns, with reduced shorter term volatility.

Hedging Investments?

The question now is “should the average investor attempt to invest in a hedge fund as a mechanism to lower overall portfolio volatility?” For most investors, this is not a practical solution. Hedge funds can have limited disclosure and extremely high minimums that make them inaccessible to the general public. This makes them not suitable for the average investor. However, in recent years, the mutual fund industry began to recognize the demand for accessibility to the general public. They began to create long/short mutual funds, which are now available to everyone, as an alternative asset class. However, these alternative asset classes come with the traditional disclosures you would expect from traditional publicly traded mutual funds. An investor does need to recognize however, that along with these higher disclosure requirements, they are not as flexible as a traditional hedge fund. Nevertheless, they have been able to provide more overall portfolio flexibility to an active manager. It is important to note that the data from the 2008 market correction demonstrated that most long/short strategies failed to produce positive returns in all market conditions. However, the record also clearly indicated that these strategies tend to be useful at limiting losses in declining markets and producing relatively low volatility returns that can pay off with more consistent performance over time.

What are the benefits?

When examining the benefits, it is important to look at the data immediately after a major market correction as to not skew performance results after a significant market rebound. Consider that over the 10 year period ended September 30, 2009, the Credit Suisse Long/Short Equity Index generated an annualized return of 8.01%, with an annualized volatility of 9.96%. That compared with the Russell 3000 Index annualized returns of just 0.73% and an annualized volatility of 16.57%.

Of course, it should be noted that this 10 year period was an unusually weak period for stocks which saw two major market corrections beginning in 2000-2002 and again in 2008.

When examining more recent data after a significant market rebound, we find that the Russell 3000 Index for the 10 year period ending December 31st 2015 realized returns of 7.94%. While the Credit Suisse Long/Short Equity Index produced returns of 6.53%. So while the returns are clearly not as strong in more positive economic environments, the data suggests an approach that produces more consistency.

While this data shows the long/short strategy seems to fare better in periods of great stress, it’s important to be cautious about overweighting such a strategy, because not all market environments are periods of great stress. However, maintaining a portion of assets in such a strategy in conjunction with a traditional asset allocation has been shown to reduce overall portfolio volatility without significantly impairing returns.

The premise of asset allocation is to not time markets, but rather to manage risk by combining assets of a lower correlation amongst each other. The consistent reallocation of these asset classes requires constant selling into strength and buying into weakness. But over the years, as our economies have become more global, correlations have increased. This has made it harder for financial planners and independent investors to limit risk. The long/short approach is simply an additional piece of the asset allocation pie rather than a single independent investment strategy.

What are the risks?

Competitive demand for new products has created a rush to bring some of these products to the marketplace. Many mutual fund companies assigned managers to alternative mutual funds with little experience in the non-traditional investment space. However, there are several management teams whom have shown an excellent long term track record to date. The total collective suggested portfolio exposure to all forms of alternative assets is debatable, and dependent on one’s tolerance for risk. As a general rule, managers attempt to limit exposure to alternatives to between 5-15% of an investor’s holdings, dependent upon the objectives of said investors.

Historically, the track record tells us that this combination of traditional asset allocation models that incorporate alternative strategies as part of a multi-asset approach, not only lowers correlations across the sum of the portfolio, but also improves the probability of maintaining an income plan. Investors who experience lower volatility with only a nominal impact on longer term returns can more readily sustain a cash flow which is being proportionately withdrawn from a portfolio.

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