Suddenly Single? Start Fresh: Protect Finances

Losing a spouse through death or divorce can be emotionally devastating and is often a difficult time to make important life decisions. Yet it’s this very time that attention needs to be paid to important financial matters such as retirement assets, budgeting on a single income, appropriate insurance, or reviewing Social Security benefits.  Should you become suddenly single, avoid the risk of making emotionally driven and potentially harmful financial decisions. Here are six important and actionable steps to help to protect your personal finances.

1. Update your financial accounts.

When you lose a spouse, you’ll likely need to change the registrations on any financial accounts that are owned jointly. Such ownership changes typically require certain documentation.

If you’re widowed, you need to provide your financial institutions with copies of your spouse’s death certificate in order to shift accounts from joint ownership into your own name. In a divorce, changing ownership requires first determining how you’ll divide jointly owned assets. Usually this is through court orders and/or divorce agreements. Then securing any signatures guarantees or documentation required by your financial institutions will be needed to make the necessary changes.

Caution: Attention needs to be paid to the conditions and methods under which you divide assets or change ownership. Following the wrong advice could result in significant tax burdens. You should consult your tax or financial planner…not your broker.

2. Divide or roll over retirement assets.

Pension and retirement account assets have their own set of rules when it comes to changing ownership or splitting the assets.

Death of a spouse
Generally, upon the death of the account owner, retirement account assets will pass directly to the beneficiaries designated on the account. Some questions to consider in this case might be 1) Should you withdraw funds, 2) Should you rollover the assets into your own IRA or 3) Do you create a Beneficiary IRA or 4) Waive your right to the assets? The answers might not be easy. Do you need the money now? Will you be subject to tax and/or penalties? Will you be required to take a required minimum distributions? What will this do to your estate? Depending on your personal circumstances, the answers will be varied. It’s important to consult with a financial planner or accountant to evaluate your situation before making decisions.

The next critical issue to address here is updating the beneficiary designations on your own retirement accounts—such as 401(k)s, 403(b)s, and IRAs. Even if your will were to include your retirement assets, your beneficiary designations supersede them.

Divorce

Retirement assets are often split up as part of a divorce settlement through a qualified domestic relations order (QDRO). A QDRO is a legal arrangement that either recognizes an alternate payee’s right to receive (in this case the ex-spouse) or assigns to that alternate payee all or a portion of his or her former spouse’s retirement account balance and/or pension benefits.

IRAs are divided through a one-time distribution from one spouse’s IRA into the other spouse’s IRA, without income tax or early withdrawal penalties. But this must be a court-approved transfer; otherwise, the distribution is treated as taxable to the original account owner, while the spouse on the receiving end gets the money tax-free.

3. Re-evaluate your income and budget.

Chances are, when you’re suddenly single, you may be taking a cut in your income, so you may need to adjust your budget accordingly. Start by listing your essential expenses (housing, food, insurance, transportation, etc.) and your discretionary expenses (dinners out, vacations, clothing, etc.). Try to match reliable sources of income (salary, Social Security, pension, etc.) to your essential expenses and see where you might trim your discretionary spending.

If you’re near retirement or are already retired and fear an income shortfall, you might consider creating a regular source of income by focusing your portfolio on income producing investments or yield. This can turn your retirement savings into a source of predictable income that you can use to budget wisely.

4. Evaluate your insurance needs.

What you’ll have and what you’ll need for insurance can change dramatically when you lose a spouse through death or divorce. It’s important to take a careful look at all the different types of insurance that are available to see where you may need to adjust your coverage. Be sure to review:

Life insurance. If you are the surviving spouse and the beneficiary on your deceased spouse’s life insurance policy, you will typically receive the proceeds tax free. But if you are still caring for children, you may want to either purchase or increase your own life insurance coverage to make sure they will be protected in the event of your death.

If you divorce, remember to consider (1) changing the beneficiary on your life insurance if it is currently your ex-spouse, and (2) purchasing or modifying your coverage to adequately protect your children if either you or ex-spouse dies.

Health insurance. Even if your spouse carried your family’s health insurance coverage, you can continue to maintain it for a period of time, whether you are divorced or become widowed.

Through the Consolidated Omnibus Budget Reconciliation Act (COBRA), if you’re going to lose health benefits (because of death, divorce, job loss, etc.), you can continue coverage for up to 36 months—so long as you pay the premiums, which can be up to 102% of the cost to the plan.

Because COBRA coverage is expensive in many cases and doesn’t last indefinitely, you may want to check out other insurance options, whether through your own employer or by evaluating individual plans available through the Affordable Care Act (ACA).

Disability insurance. We all hope we will never need it, but disability insurance is one of the least understood and most useful ways of protecting ourselves and our loved ones. What if you were injured or sick and couldn’t go to work? Disability insurance is designed to protect you and your loved ones against lost income.

Long-term-care insurance. If you’re over the age of 50, you may want to consider buying long-term care insurance (LTCi) to help keep potential costs of nursing home stays and home health care from depleting your income resources if you become seriously ill or injured.

5. Review your credit.

When you’re suddenly single, your credit can be among your most valuable assets—so protect it wisely. After divorce or the death of a spouse, you may want to request a copy of your credit report to take inventory of all the accounts that are open in your name and/or jointly with your former spouse.

If you’re divorced, you’ll want to close joint credit accounts and shift to single accounts so that an ex-spouse’s credit score won’t affect your credit rating. If you’re widowed, contact all three credit bureaus (Experian, Equifax, and TransUnion) to let them know that your spouse has passed away, to keep others from falsely establishing credit in his or her name.

Unfortunately, a surviving spouse is often responsible for paying the deceased spouse’s credit card bills, whether these were joint or individual accounts. It’s always worth calling the credit card company, however, to negotiate better payment terms if necessary.

6. Maximize Social Security benefits.

Here’s some good news: Even if you’re now on your own, Social Security recognizes that you were once part of a married couple, and offers benefits to both surviving and ex-spouses. Widows and ex-spouses are generally entitled to 50% of their former spouse’s Social Security benefits, if those benefits would be greater than their own Social Security benefits.

As a surviving spouse, you can receive full Social Security benefits at your full retirement age or reduced benefits as early as age 60. A disabled widow or widower can get benefits as early as age 50.

If you’re divorced, you could be eligible for Social Security benefits, based on your ex-spouse’s record, if those benefits would be greater than your own retirement benefits. However, your ex-spouse must be eligible for Social Security benefits, and generally you must be unmarried and at least 62 years old. In addition, you must have been married for at least 10 years.

You can’t avoid the turmoil that comes with divorce or the death of a spouse, but recognizing how your personal finances might change could help you make thoughtful, rather than rushed, decisions and provide more solid financial ground as you transition to being single.

The information contained herein does not constitute tax or legal advice.  Any decisions or actions should not be made without first consulting a CFP, CPA or attorney.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC.

Long-term Care Policies – The Straight Truth

Ask someone why he or she bought a long term care insurance policy and you will probably hear a story about family.

Joyce Smith, 68, saw her mother develop Alzheimer’s and go into a nursing home, where she’s been for nine years. Her mom’s savings are completely drained, and she’s on Medicaid, the medical safety net for the poor. Joyce and her husband Harry, 62, were shocked to see how much good care costs, so eight years ago they bought a policy that should pay for all or most of their care should they ever need it.

Cost of Long Term Care

The cost of insurance can be less expensive than the monetary, emotional & physical toll of home health or nursing home care.  The risk that you will need nursing-home care or a home health aide is certainly real.  About 70% of seniors eventually need help, and nursing homes (the most intensive kind of care) can cost $200 to $300 or more a day.  But that also means long-term-care premiums can take a bite out of your retirement savings.  The policies can be confusing, with countless combinations of options and limitations which affect premiums.  Whether or not you buy coverage, long-term care needs to be a crucial part of your overall retirement strategy.

The subject is a sensitive one: This is, after all, a time when you’ll be dependent on others for help with basic tasks like eating or getting in and out of bed. That causes some people to avoid thinking about the problem until it’s too late.  The best approach:  Answer the 11 important questions about the toughest dilemma you’ll face in planning for retirement.

The first decision: Whether to buy

How likely is it that I’ll need expensive care?

Wrenching stories like that of Joyce Smith’s mom are just one end of the spectrum. Most care happens outside costly nursing homes — people get help from family, hire home aides, use adult day-care centers, or move into apartments in assisted-living facilities. It all adds up to a financial risk worth planning for but not panicking over. Some have more to worry about than others.

“Long-term-care insurance is a much better buy for women,” says Howard Gleckman of the Urban Institute, because they tend to outlive their husbands. People like Smith with a family history of Alzheimer’s are at greater risk because that and other forms of dementia are more likely to lead to long stays in a home.

If I decide not to buy insurance, how would my care be paid for?

Out of your pocket, for as long as the money is there.

Medicare won’t cover most long-term care.  Unfortunately, you may have to spend down your assets until they are low enough for you to qualify for Medicaid.  As an individual, you have to be down to your last $2,000, not counting the house and a few other assets.

Spouses can usually hang on to only half of their joint assets up to about $110,000, rules vary by state.  Some people shift assets to their children to get onto Medicaid faster while keeping money in the family, but new laws have made that harder. The government now does a “look back” at assets transferred in the previous five years and will delay your Medicaid eligibility for nursing-home care accordingly.

For those whose chief concern is simply getting quality care, ending up on Medicaid isn’t the worst outcome — but you want to put it off for as long as possible.

A nursing home that takes Medicaid won’t kick you out when you switch, but since the program pays less than private rates, a good facility might not let you in the door unless you show you can pay for at least some of your care yourself.  Some expensive facilities don’t accept Medicaid at all and Medicaid generally won’t get you a private room.  Depending on your state, it’s also more difficult to get home-based care or assisted living via Medicaid.

Having more money, from whatever source, means more options. So at the very least you’ll need significant savings to act as a buffer between you and the Medicaid safety net.

Who needs insurance most?

Insurance adds a buffer, which can be emotionally reassuring for people without kids who can help.  For many purchasers, the point is less to guarantee care than it is to preserve assets to pass on, or to protect a spouse’s lifestyle.  Everyone should at least consider the use of insurance as it presents a viable alternative in the protection process but more importantly preserves the dignity and choice for the individual requiring care.

Is the insurance affordable?

This is the deal breaker. If you aren’t yet sure you’ll have enough money to fund even a healthy retirement, long-term-care insurance isn’t a cost you’ll want to carry.  For a couple in their mid-fifties, coverage can easily cost from $2,000 to $6,000 a year, depending on the benefit they choose. If you find you can’t afford your premium, you’ll lose your coverage unless you paid extra for a “non-forfeiture” benefit.

The National Association of Insurance Commissioners recommends you spend no more than 7% of your income — including the income you’ll have in retirement — in premiums. When you do the math, leave wiggle room: Your premium is likely to rise, perhaps by 10% or more every 10 years. Insurers can’t single you out, but they can raise rates for everyone in your class of policy.

When should I buy?

It’s a complicated trade off, but the sweet spot is in your late fifties. The longer you wait, the higher your premium will be: A lifetime Genworth policy that costs a 55-year-old couple $4,800 would cost $6,400 for 60-year-olds.

Your risk of being turned down also goes up as you age. In your fifties, you have a 1-in-7 chance of not qualifying, says the American Association for Long-Term Care Insurance, a trade group. In your sixties there’s a 1-in-4 chance.

Why not buy as early as possible? A lot can change over the life of a contract: the insurer’s financial health, its premiums, your financial position, and even the technology used to deliver care, which could make it cheaper or more expensive. Buying too early extends the uncertainty. Also, in your late forties you may have more pressing priorities, such as college tuitions and building up your nest egg.

Would health-care reform change any of this?

President Obama has now signed health reform into law, and the new law includes a voluntary, public long-term-care insurance plan. If you are near 60 or older, this probably wouldn’t change your decision, says Gleckman of the Urban Institute.  The coverage would be partial, and the premiums might not be a better deal. Also, you’d have to pay in for five years before benefits kicked in.

The second decision: What to buy

What must my policy cover?

Long-term-care insurance isn’t like health insurance. Instead of covering a portion of whatever care you need, it pays you up to whatever benefit level you choose in advance, often referred to as a “pool” of money.

Most policies are written in terms of maximum daily benefits — say, $200 — for a set number of years.  Benefits are triggered when you can no longer perform two “activities of daily living” or become cognitively impaired.  You should base your daily benefit on the cost of care where you plan to retire — or where your kids live, if you think you might move near them should you become ill.

At a minimum, make sure that the policy can be applied not just to nursing homes but also to licensed home care and assisted living, and that it includes an “alternative plan of care” provision. That last item gives you wiggle room in case medical advances change how long-term care is delivered, or merely as a matter of choice if possible.

Some policies will let you pay anybody including friends or neighbors — as long as they’re not family — for informal home care.

Do I need inflation protection?

Absolutely!  This particular benefit is invaluable when you consider that the annual cost of health care increases possibly only second to the cost of education.

Most analysts of the long-term-care industry expect costs to rise significantly in the coming years. Unfortunately, plans don’t offer a benefit that rises with an index of nursing-home costs — instead you have to choose an annual rate of growth for your benefit.

Most prices at assisted-living facilities and other care centers have increased a bit over 4% a year since 1996. But be mindful of a peculiar industry practice: You can sometimes choose a “simple” or “compounded” growth rate. Compounded is how you usually think of a growth rate, and it’s how inflation works.  A simple 5% means a smaller benefit. It will also have a lower premium, but for younger applicants that could be a dangerous trade off, since there’s more time for inflation to do its damage.

How long should my coverage last?

If you’re forced to choose between flexible benefits and the length of coverage, trim back length before cutting key options like inflation protection and home care. Also, a plan that covers three years can actually last longer: Exhausting even a three-year policy is pretty uncommon.

Note that if you start care at home or in an assisted-living facility, you’re likely to be spending less than your maximum daily benefit. The extra money goes into a pool for use later, extending the amount of time you’re covered. Another time trade off you might consider is to extend your “elimination period” up to 90 days. That’s the period at the start of your care when you aren’t covered.

A “partnership” plan is a good idea if it’s offered in your state. After you exhaust your benefits, you’ll be allowed to go on Medicaid while keeping more of your assets.  This should only be considered if you plan on maintaining a residency in that state to the end of your life.  While the benefits are payable anywhere, when the plan runs out, you would need to return to that state as you’ve “pre-signed” for Medicaid, which is a state run program.

What should I know about the insurer?

Some holders of older policies have been socked with enormous rate increases or have complained of hassles getting claims paid. This is even more likely with financially weaker firms that priced their products too low early on in an effort to get market share. So buy only from insurers with a strong financial rating.

Also look for companies with decades of experience in long-term care.  That tells you they are committed to the product and have a history of claims experience. Finally, it can’t hurt to check complaint records with your insurance regulator.

My agent wants to tack long-term care onto my life insurance or annuity. Does that make sense?

It depends.  If your health precludes you from qualifying for long-term-care insurance, some annuity “hybrid” policies have less extensive medical underwriting.  There are some hybrid policies that allow you to make a single lump sum contribution which will guarantee both life insurance, long term care benefits and provide money back.  They can do this because the lump sum premium earns a reasonable rate of interest in the contract while cost of the insurance are deducted.  These type of contracts tend to be more complicated, involve market risk and may not be appropriate for all investors depending on risk tolerance and time horizon.

This blog explores the various considerations relative to long term care insurance.  The insurance is usually used as a compliment to a good estate plan.  Before you make your decision, consult with a certified long term care specialist, financial planner or an elder law attorney.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.