The Investment Scientist

The reward of a financial advisor

Posted on: January 7, 2013

Old AgeRecently, a client of mine fell, broke his hip and ended up lying on the floor for 20 hours before he was rescued. I went to visit him in the hospital a couple of times. The good news is: he is out of immediate life-threatening danger. The bad news is: he may be wheelchair bound for the rest of his life.

When John first came to me to seek my help with his personal finance, I looked at his overall financial big picture and was pleased overall. He worked at federal and state jobs and enjoyed good pensions. On top of that, he had a decent investment account.

But there was a gaping hole in his retirement security: he was turning 70 then, was divorced, and his children lived far away. That meant if he were to get sick, nobody would be there to take care of him; he would need to hire caregivers. Right then, I insisted that he buy long-term care insurance.

According to research, 50% of seniors who are 65 and older will need long-term care at some point in their lives. The average duration of care is about three years, but about 5% of seniors need care for more than ten years.

The costs of care, depending on the type (home care, adult day care, assisted living or nursing home), could range between $20k to $100k a year. And the costs are going up about 5% a year.

John was employed then. Under my instruction, he found out that his employer offered long-term care insurance as a benefit (through an insurance carrier). The monthly premium was about $460.

John thought that was a steep price. In fact it was not – I did a back-of-envelope calculation for him. It turned out to be a very good deal. Assuming John needs three years of nursing home care, that would amount to $300k. John’s annual premium was about 12x$460 = $4600+$920 = $5520. If John paid 10 years of premiums before he needed the insurance, the total premium he would pay by then would be $55,200. You see the math?

In my opinion, the insurance was a good deal. Part of it was that it was group insurance; therefore, there must be some discount. A few months ago I read reports that many insurance carriers had mispriced the risk and charged too low a premium.

I did not misprice the risk, nor did I underestimate it.

I got a note recently from John’s daughter thanking me for watching out for her dad. In the note, she said her dad spoke very highly of me. That’s the reward of being a financial advisor: helping my clients financially prepare for the unforeseen and getting recognition and appreciation for what I do for them.

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3 Responses to "The reward of a financial advisor"

If you have been a very successful couple odds are you will leave most or all of fortune with a nursing facility. Here’s why. One or the other will get sick. It doesn’t matter who goes first. An end of life sickness will deplete a large portion of the couple’s wealth. Then, eventually the survivor will get sick. With ever increasing care costs and the fact that some or much of the wealth has been depleted, the survivor usually winds up on medicaid with assets liquidated and any family fortune absorbed by the care expenses.

There are limits on how much an individual can gift while living, and the system of facility, medicare, & medicaid have the legal right to plow back gifts (in Ohio I believe it is 5 years, it may vary by state) Even if you have a trust, if you are living you are the trustee. When they say you must dissolve the trust to obtain care, most will do just that.

So, if it can be a budget item that is paid monthly, rather than saving it as we always have, it could make sense to mitigate that risk with elder care insurance.

My Father was a depression era baby and had save 10% of every dollar he ever earned. Even when he started receiving Social Security he saved 10% of that. He also bought elder care insurance. Although he did not use that benefit, he knew that his end of life expenses would not deplete his fortune.

He also bought life insurance, paid to his trust, to offset estate taxes. Even though the trust avoids Federal tax, Ohio still demands to be paid. While it seems cold to the heirs on first glance, insurance keeps the tax man off your life’s work. My Father hated the tax man.

Important information. I referenced it on my site. I hope it gets readers to think!

Ron,

A few thoughts from your comments:

1. I spent $300 a month on a physical trainer, I would have spent the same amount on a dietitian if my wife is not one already. What little money I spend to keep myself healthy will save my tons of money down the road.

2. I highly recommend people who are getting old and infirm move to a senior living facility where they don’t need to climb stair. I have advised this client of mine to do that for at least three years, he never made up his mind to do that. If he had, he would not have suffered the fall and nobody knowing it. A whopping percentage of seniors are killed by falling.

3. I trust the insurance men even less than the tax men.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



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