Question
Should you advise someone to purchase long term care insurance?
Beware of bad deals!

"A Conversation With Barry Goldwater: Are You Recommending Long-Term Care Insurance?" AccountingWeb, April 20, 2007 ---http://www.accountingweb.com/cgi-bin/item.cgi?id=103435

Who is the largest payer of long-term care assistance? It’s the general public who fund long-term care from personal savings and through public assistance programs. But the numbers bear out that CPAs and advisors are doing a poor job of referring their clients to asset protection long-term care programs. Why is this? Because of the way the U.S. healthcare system is set up, a long-term care event could devastate family retirement savings. Last year the long-term care insurers paid out $3.3 billion in claims but that figure only equated to 6 percent of total claims paid – a percentage that pales in comparison to the real costs born by the general public. Twenty-seven percent, or $30 billion, of all long-term care expenses are paid out of savings accounts, a major contributing reason for people going into bankruptcy. Another $42 billion was paid by Medicaid, and Medicare paid $15 billion. In our litigious society, the reality of long-term care insurance (LTCI) being treated as a fiduciary item has arrived. Disgruntled beneficiaries whose inheritances have been depleted by the expense their parents bore funding their long-term care experiences are successfully arguing and receiving monetary judgments from advisors who are not bringing up the subject of future liability planning. It is becoming a question of fiduciary responsibility to recommend asset protection. For example: It is projected that a 50-year-old person today is going to spend more than $1 million a year upon needing long-term care assistance when they are 85. Do you really want to make a negative million dollar decision for your clients if they lose this amount to the lack of asset protection? Are CPAs making these kinds of client assessments or does the CPA really not care whether a client should self insure the risk of a future long-term care event or transfer that risk to an insurance company? Statistic: Forty percent of those needing long-term care (LTC) are under age 65. Do CPAs recommend long-term care insurance? Tax and audit professionals are focused on fee planning in their core competencies. They make few financial planning referrals because their firm does not have a team planning approach outside of their core business model. These CPAs usually do not recommend LTCI. The CPA who is a multi-disciplinary advisor is looking for programs of opportunity in a broader environment that incorporates financial services and wealth management. This group usually will have an in house expert or a very close strategic alliance with an advanced planning insurance broker and will try to incorporate long-term care planning into their practice. These CPAs do recommend LTCI and are proactive inserting this item in their financial plan for clients. Because women generally outlive men by an average of seven years, they face a 50 percent greater likelihood than men of entering a nursing home after age 65. However, just 18 percent of women who responded to a study on the financial literacy of women have talked with their spouse or partner about long-term care insurance. Most women do not want to be a burden on their children. Yet about three-quarters of respondents have not had serious discussions with their children about long-term care insurance. How does the CPA connect with the aging baby boomer client on matters of long-term care and asset protection planning when 71 percent of all caregivers are women who are related to the in need relative? Advisors are not connecting with women and long-term care at all! We believe there is reluctance among CPAs to discuss transferring risk to insurance companies because somehow it is an uncomfortable conversation to have. But the numbers are compelling and advisors need to sit up and take notice. To plan for a future liability in combination with a plan for retirement income is the kind of creative planning clients are expecting. CPA advisors should know and should be making their clients aware that it is not the decision of the client to buy LTC insurance, it is the decision of the carrier whether they will offer the client a contract. When we surveyed our clients with the question, “Would you think it to be a good idea that we do future liability planning alongside of future income planning so that if you need medical or assistance to live in your home in the future, that expense would not come out of your retirement savings account?” When you say it with inflection, it is not as long a sentence as it appears and it is a very responsible question for an advisor to ask. The overwhelming response from our clients was extremely favorable with the most common reasonable accompanying question being “How much does it cost?” In other words, how much of my $20k 401k contribution am I going to be spending in order to protect it? The direct response is; “Based on information analyzed as to costs associated with a long-term care event, you can spend $3k per year for 20 years based on your age and risk factor probabilities or you can spend between $50k-$250k annually, for an average of five years, on your care? Which program can you best afford to fund?” When you consider the potential spend down of assets, you begin to understand the fiduciary aspects associated with prudent advice when the client is told to self insures these kinds of risk. On the other hand, high net worth clients will not pay for something without recognizing its perceived value. If I can fund future liability events from cash flow, why should I spend money on insurance I do not need? Here is the question for our high net worth clients; “Do you have an asset protection plan in place that covers the downside risk of investment loss due to a future medical liability or long-term care event?” That question enables me to have the conversation about long-term care insurance with high net worth people. And these facts bear me out. If the client has a $5 million investment portfolio returning 9 percent per year, his/her income from investments is projected to be $450,000 before taxes. If a future liability occurred and the cost of an assistance related liability was $150,000, the cost to the client would be $150,000 plus the loss of investment income at 9 percent. The total loss of principal plus interest for one year is $163,500, for three years the cost is $490,500. This is not how high net worth people plan, they do not leave these kinds of gaps that can effectuate loss. To transfer the risk, the cost is $6,000 for this married couple in their mid-50’s. If we do the math correctly, they would have to pay premiums for 25 years to equal one year’s cost for care. Their premiums would never exceed the cost of two years worth of care. No matter what one does with his or her money, the cost for care is always going to be the same, $163,000 is always going to be greater then $6,000, high net worth or not. It is our clients call to make, but if we connect our recommendations to the larger picture of asset protection, our message for risk transference becomes more powerful. From the financial data presented, Americans are paying 94 percent of the costs associated with long-term care expenses either in the form of public assistance or from savings. The majority of caretakers are our mothers, wives and daughters. These are alarming figures moving forward and given medical inflation outpacing other inflationary indices, CPAs should be aware of their fiduciary responsibility to make relationships with long-term care insurance specialists so their clients can be better served in this area of asset protection and they will be protected from litigious beneficiaries. About Barry Goldwater Barry Goldwater is the Principal of the Financial Resource Group and a 20-year veteran of the insurance industry. He focuses not only on working with the business and affluent clients of CPAs and attorneys, but also in helping CPA's form and develop a business model to include financial services. He can be reached at 617-527-9736,or at barry@frg-creative.com. His web sites are http://www.frg-creative.com or www.goldwaterfinancial.net

Jensen Comment
It is important to note that the above author is with the insurance industry. In my opinion, elder care insurance is not a good deal for many people. For one thing it is very expensive and adds another "middle man" to profit from elder care. Second, reasonably wealthy people who can afford long-term care expected costs (adjusted for probabilities and family health history) may find insuring for long term care to be a bad deal that cuts into cash flow they might enjoy in earlier years of their lives. Similarly people with limited means who are likely to qualify for Medicaid benefits may find it a bad deal. Also read the fine print of a contract. Insurance companies have a way of limiting their own risk exposures, especially risks of rising eldercare costs.

Another risk is that your so-called financial advisor may be receiving some sort of kickback for helping to get clients to take out elder care insurance. This is an expensive cash flow item that requires high integrity financial advising.

I think Goldwater's analysis is off base because the probability of needing nursing home care beyond a year or two is relatively low (I think). An awful lot of elderly people die in their homes or after a short stay in a hospital where Medicare pays the bill.

Also there is moral hazard of the family putting an insured elderly person in a home before such care is really needed just so the old person's home or farm can be sold.

Bob Jensen's threads on insurance scandals are at http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds

What has been the major change for college faculty in the past decade?
Almost 20 years after the first edition came out, the editors of The Academic’s Handbook (Duke University Press) have released a new version — the third — with many chapters on faculty careers updated and some completely new topics added. Topics covered include teaching, research, tenure, academic freedom, mentoring, diversity, harassment and more. The editors of the collection (who also wrote some of the pieces) are two Duke University professors who also served as administrators there. They are A. Leigh Deneef, a professor of English and former associate dean of the Graduate School, and Craufurd D. Goodwin, a professor of economics who was previously vice provost and dean of the Graduate School.
Inside Higher Ed, January 10, 2007 --- http://www.insidehighered.com/workplace/2007/01/10/handbook
Hint as to what has been the major change for college faculty in the past decade:
In April 2007, Stanford President John Hennessy has named Carla Shatz, , the head of Harvard's neurobiology department, to lead the next phase of Stanford's Bio-X program, the landmark bioscience research effort that promotes interdisciplinary collaborations among life scientists, medical scientists, engineers, physicists and computer scientists.

From Carnegie-Mellon University: How to Turn Your Photographs into 3-D Photographs

"A New Dimension for Your Photos Web service Fotowoosh wants to be the Flickr of 3-D," by Wade Roush, MIT's Technology Review, April 27, 2007 --- http://www.technologyreview.com/Infotech/18596/ 

Bob Jensen's threads on tricks and tools of education technology are at http://www.trinity.edu/rjensen/000aaa/thetools.htm

Question
Do you really understand the SEC's Rule 144a?
What is it and why do accountants hate it?

 

That America's public capital markets have lost some of their allure is no longer much disputed. Eminences as unlikely as Chuck Schumer and Eliot Spitzer have taken to bemoaning the fact and calling for some sort of fix, albeit without doing much.

Tort reform -- to reduce jackpot justice in securities class-action suits -- would certainly help. So would easing the compliance costs and regulatory burden placed on publicly traded companies by Sarbanes-Oxley, Regulation FD and the like. (See Robert Grady nearby.) The good news is that, as usual, private-sector innovation is finding a way around these government obstacles through the rapid growth of something known as the Rule 144a market.

First, a little capital-markets background: Most Americans are familiar with the "public markets," which consist of the New York Stock Exchange, the Nasdaq and other stock markets. These are open to investors of every stripe and are where the stocks of most of the world's best-known companies are traded. Nearly anyone can invest, and these exchanges are comprehensively regulated by the Securities and Exchange Commission.

Less well understood is another, more restricted market known after SEC Rule 144a that governs participation in it. As on stock exchanges, this market allows for the buying and selling of the stock of companies that offer their shares for sale. But participation is strictly limited. To be what is called a "qualified buyer" in this market, you must be a financial institution with at least $100 million in investable assets. If you meet these criteria, you are free to buy stocks of both U.S. and foreign companies that have never offered their shares to the investing public.

And here's the real beauty of it: Companies that issue stock under Rule 144a can access America's deep pools of capital without submitting to public-company accounting rules or to the tender mercies of Sarbanes-Oxley. In exchange, however, they must strictly limit the number of qualified U.S. investors in their company -- to 500 total for U.S.-based firms and 300 for foreign-based. They are also barred from offering comparable securities for sale in the public market. The 144a market is also for the most part nontransparent, often illiquid and thus in some ways riskier. But increasingly, this is a trade that institutional investors and companies seeking capital are willing to make.

There are estimated to be about 1,000 companies whose stocks trade in the 144a market. And last year, for perhaps the first time, more capital was raised in the U.S. by issuing these so-called unregistered securities than through IPOs on all the major stock exchanges combined. Even more telling is that the large institutional investors eligible to buy these unregistered securities are more than happy to oblige. There is no selling without buying, and for the 144a market to overtake the giant stock exchanges, institutional investors who control trillions of dollars in capital must see better opportunities outside the regulations built by Congress and the SEC.

In a sign of these times, none other than Nasdaq is now stepping in to bring some greater order, liquidity and transparency to the Rule 144a market. Any day now, the SEC is expected to propose giving the green light to a Nasdaq project called Portal. Portal aims to be a central clearing house for buyers and sellers of Section 144a securities. You will still need to be a "qualified institutional buyer" to purchase 144a securities. And the companies whose stocks change hands on Portal will still need to meet the limitations on numbers of investors to offer their stock there.

So Portal will not bring unregistered securities to the masses -- at least not directly. It is forbidden to do so because the entire U.S. regulatory system is designed to protect individual investors from such things. What Portal will do, if it operates as intended, is make the trading of Rule 144a securities easier and less costly. And this could, in turn, further increase their attractiveness to issuers and investors alike. Average investors will at least be able to participate indirectly via mutual and pension funds, most of which meet the standards for "qualified institutional buyers."

Given the limitations on eligibility for Rule 144a assets, they will never replace our public markets. But their growth is one more sign that investors, far from valuing current regulation, are seeking ways to avoid its costs and complications. Nasdaq's participation is especially notable given its stake as an established public exchange. Nasdaq seems to have concluded that there is a new market opportunity created by overregulation, so it is following the money.

This leaves our politicians with two choices. They can move to meddle with and diminish this second securities market -- which will only drive more business away from U.S. shores. Or they can address the overregulation that is hurting public markets and prompting both investors and companies to seek alternatives.

"I had to do it. What other choice did you give me?"

These words, spoken by Cho Seung-Hui on a video in between the two sets of killings at Virginia Tech last week, raise more questions than answers. What made him believe that such a tragic act was necessary? Was he a psychopath, a man who killed in cold blood or in anger set off by the slightest provocation? Did he embody what most religions would simply classify as "evil"?

Psychiatrists and neuroscientists are making extraordinary advances in understanding the psychopathic or sociopathic mind, a mind that lacks empathy, compassion, fear, or remorse. In some of the most exciting research, advanced brain-imaging techniques are revealing that certain sections of psychopaths' brains seem to be misfiring.

Using functional magnetic resonance imaging (fMRI), researchers in the United States, Germany, and elsewhere have started taking scans of the brains of psychopaths while the patients view horrific images, such as photographs of bloody stabbings, shootings, or evisceration. When normal people view these images, fMRI scans light up to indicate heavy brain activity in sections of the emotion-generating limbic system, primarily the amygdala, which is believed to generate feelings of empathy. But in psychopathic patients, these sections of the amygdala remain dark, showing greatly reduced activity or none at all. This phenomenon, known as limbic underactivation, may indicate that some of these people lack the ability to generate the basic emotions that keep primitive killer instincts in check.

Other researchers see similar deficits from fMRI scans of the frontal cortex, part of the reasoning center of the brain, which helps regulate impulsive and irrational actions. These researchers say that frontal-deficit syndrome creates a psychopathic inability to rein in overly emotional, impulsive, and violent reactions to the slightest provocation.

James Blair, head of the National Institute of Mental Health's Unit on Affective Cognitive Neuroscience, believes that a dysfunctional amygdala affects the frontal cortex. In just-completed studies of psychopathic brains, to be published late this year or early next, Blair's fMRI scans show that a lack of normal activity in the amygdala is mirrored in the frontal cortex. He believes that the amygdala forwards the wrong signals to the frontal cortex.

Continued in article

"Creating Your Own 'Wiki' Web Site:  Program Simplifies Steps for Entries; Nothing Is Private," by Katherine Boehret, The Wall Street Journal, April 25, 2007; Page D8 --- http://online.wsj.com/article/the_mossberg_solution.html