Rarely does an insurance product receive an endorsement from the Governor’s office, but it’s happening in Indiana.

A letter from Governor Mitch Daniels has been going out to Hoosiers for the past two years, encouraging residents to consider long-term care insurance. No, the Governor isn’t moonlighting as an insurance agent. He does have a vested interest, however, because nearly half of Medicaid payments come from state funds. Medicaid takes over when people run out of money and still require care. This scenario plays out far too often for nursing home residents since a nursing home stay can cost $65,000 or more per year, quickly wiping out the finances of many people. From the Governor’s point of view, the more that people invest in long-term care insurance, the less likely they will require Medicaid.

Indiana added to this incentive nearly 20 years ago with the Indiana Long-Term Care Partnership. By purchasing long-term care insurance through the Partnership, residents protect assets so that Medicaid cannot take them away. Let’s take a 65-year-old couple in good health. They buy a three-year policy that pays out $200 per day, which is approximately the daily cost of nursing home care. They are covered for up to $73,000 in long-term care expenses ($200 x 365 days) for each of three years. Money left over after three years can be used for long-term care until it is gone. They would spend about $585 per month to pay for the insurance, which is worth a total of $220,000 (three years x $200 per day). Under the Indiana Long-Term Care Partnership, for every dollar they spend from insurance, they keep that much in assets. So if they spend the entire $220,000 in the insurance policy, their future long-term care expenses will be covered by Medicaid once the value of their assets such as cash, savings, stocks, bonds, CDs, cash value of life insurance, even a second home, drops to $220,000. Other states have similar Partnership plans. Indiana is unique because if residents buy a Partnership policy worth a certain amount (in 2012 it’s $277,000) and receive care in Indiana, they could qualify to keep all of their assets.

The younger you buy, the lower your premiums—makes sense since you’re paying those premiums for a longer
time. Plus, putting off the purchase risks that your health may deteriorate and you become uninsurable. A 60-year-old couple that buys the same policy (three years, $200 per day) would pay approximately $420 per month, a lower amount because they are five years younger than the example above. A 60-year-old woman would pay about $275 per month.

OK, we know that long-term care insurance is a good deal for Governors who must balance a budget. Is it good for their citizens? For those with total assets under $200,000 or over $2 million, probably not. The insurance is too expensive for those in the former group, and not necessary for the latter since they can self-insure. For the rest of us, it’s worth a look. Cost has scared away people in the past, but today’s policies cover in-home care, which is less expensive than nursing home care. Plus, no one wants to be shipped off to a nursing home if they can stay in their own home. Keep in mind, however, that many people purchased LTC insurance while they were working, then surrendered the policy when they couldn’t afford the premiums with their reduced income during retirement.

A primary advantage to long-term care insurance is protecting assets for heirs, but there are even better reasons to consider LTC protection. Insurance can provide the money necessary to give you a wider choice of assisted living facilities or nursing homes, and keep you there. In Evansville, several popular facilities may not accept or keep Medicaid patients.

Insurance can also relieve the burden on loved ones. Everyone would like to stay at home for as long as possible, but that often means extra work for daughters and sons. Insurance can bring professional health aides into the home and alleviate the demands on children who still have their own lives to manage.
Many people purchase policies that pay only a portion of the daily in-home care or nursing home bill, but there’s nothing wrong with that. The insurance allows them to keep enough assets so they can supplement the policy, if necessary, with their own funds.

Like many complicated insurance products, this one requires another set of eyes to make sure you receive the right coverage. Second opinions from local health care organizations, senior citizen advocacy groups or your own doctor can help you decide if you are purchasing valuable protection, or an expensive product that you might drop right before you need it.

With a little help from behavioral economists, I presented the following points this week at our monthly University of Evansville Lunch & Learn. It was a good discussion with a good group of people!

Making Your Money Grow…
With A Little Help From Financial Psychologists

1. We frustrate ourselves with our inability to control our investments
2. We could have more control over our investments, but we get greedy
3. We dwell more on losing investments than winning ones, and become fearful

So…

1. Keep your goals reasonable and realistic
2. Once your goal is established, determine how much risk you must take
3. The longer you have to save, the more risk you can stomach

Maximizing Your Savings

10. Start with your retirement plan…understand your options…learn about various investments to find out what’s best for you…put in enough to get the company match.

9. Don’t forget the flexible spending account if it's available through your employer. You’ll spend about 25% less in taxes on the money you put into the FSA.

8. Keep some money outside your retirement plan in separate accounts, including an emergency fund, new car fund, vacation fund, Christmas fund, house improvement fund. Studies have proven that people save more when they set up specific accounts.

7. Above the company match, consider a Roth IRA ($5,000 annually; $6,000 if 50 or older). Not all of your money should go into retirement. You can always take out your contributions penalty free, and you may never have to pay taxes on a Roth.

6. Annuities are as close as most of us come these days to receiving pensions. Annuities guarantee you money at an interest rate higher than you can get with a bank savings account or certificates of deposit.

5. Dump your debt. Pay off student loans, car loans, the mortgage, and get your credit card balances to zero. The Dave Ramsey way—smallest debt to largest so it becomes a 'snowball.' Many others recommend first paying off the bill with the highest interest rate. The best way? Whichever works for you.

4. Keep a list of every expense for just one month. It's boring. It's nerdy. But it works to find those nickel and dime expenses that add up.

3. Invest in retirement ahead of saving for your children’s college. Hopefully you can do both, but remember that you can get tax credits and low-interest loans for college, not for retirement.

2. Make sure that money you are trying to save gets deposited automatically, before you ever see it. For most people, once it's in their hands, or even in their checkbook, it's spent.

1. Set a specific goal(s) on paper no later than this weekend. Make sure the goal is realistic, and has an end date. If you have a spouse or significant other, decide on your spending and saving goals together. That's not easy since there's often a spender and saver in each relationship, but communication--and patience--go a long way.

Financial Psychology Reading:
Your Money Personality, by Dr. Kathleen Gurney
The Intelligent Investor, by Benjamin Graham
The Behavior Gap, by Carl Richards
Nudge, by Richard Thaler and Cass Sunstein