Sunday Morning Coffee

This week’s Barron’s featured a three article Retirement Special Report. One of the articles was on long term care insurance, one was on an idea for a new type of TIPS and the third offered ideas about where to capture yield.

Many people seem to be skeptical about all forms of insurance as am I and health care costs are extremely controversial for all sorts of reasons but these are issues that most of us do have to grapple with (if you have millions in the bank you can cope financially with a $500,000 illness).

Bruce Krasting recently noted that his insurance premium was going up 25% at an annualized rate from a little over $1600 per month which is obviously a very big dollar amount these days although some folks do have a higher premium. The Barron’s article notes the costs of long term care policies going up and also because of the dynamics of the industry that some companies are getting out of the business.

Long term care is tricky because it is a type of insurance you may never need but according to the article only 2/3 of seniors will need long term care at some point in their lives. Personally I am motivated to be one of the other third and hope a combination of lucky genetics (my parents are 84 and 79 and have not needed this) and a lot of vigorous exercise will do the trick. We have no control over our genes (yet?) but we can commit to exercising regularly and while I’m at it eliminating soda from our diets.

The article did not talk about health insurance but this also looms as problematic as evidenced by Bruce’s premium increase from what already seems like an astronomical number. One possible solution for people working on their own is to try to get into a group plan with some organization where they have an affiliation. For me, I think I could get insurance through my fraternity and I know I could get it via the fire department (more likely an association of many fire departments or firefighters). This can’t work for everyone but it can solve the problem for some folks.

The article about a new type of TIPS was an idea about what seemed to me to be reverse zero coupon bonds where the payout has an inflation component. Essentially you would by this product, the author called it an amortizing TIP, at face value, it would pay out an interest rate that adjusted for inflation and do so in a way that the principal exhausted after 30 years. The government is going to issue the debt so this would be about making the wrapper, based on the arguments in the article, a little more useful for investors (read the article for the logic).

As long as people realize there is no principal coming back at maturity it seems like a cheaper and more liquid annuity of sorts and seems potentially useful for being part of the solution as it removes some of the variables of executing a retirement plan and creates some predictability (per the author). There was no discussion as to whether the numbers involved could work from the government’s standpoint but I though the idea was interesting and is a reminder that there can and will be innovative ideas (hopefully more that are not government related) to help with some of the retirement problems that appear to be lurking just around the corner.

The third article on capturing yield certainly covered most of the bases in terms of what is available but didn’t delve enough into what can go wrong with each segment. The key takeaway should be that in a zero percent world something that yields 6% has risks. Having risks is not a bad thing per se but too many people do not understand the risks they are taking and end up with too much exposure to something that then blows up. A little exposure to something that blows up should not damage your financial plan but a lot of exposure might.

I stumbled across the pictured fire truck while doing a little work at the fire station. That is one beefy brush truck I have to say, but the open air seating (so to speak) makes it more for grass fires (our fuels are trees and brush) where you pump and roll which I have never seen in a brush truck because of how quickly they run out of water. Still pretty neat looking though.

23 Comments

  1. Roger, Tks for the link to my story on medical insurance. I got dozens of emails from folks who also got 25+% increases recently.

    As you point out, the problem is I do not work for a big company and therefore have no “group” that can help amortize the costs. What a dumb reason to charge me (and millions of others) a ridiculous rate.It will cost me $25,000 just for insurance next year (this covers only ONE person), and I am not sick.

    Watch out for joining that other group that Roger mentions. It is a good idea but could backfire. It will work fine until you get real sick and have a big claim. If the relationship one has to the “group” is flaky, i.e. an old fraternity. The insurance company may reject the claims as there is no “substance” to the group. It was done merely to avoid paying a market rate.

    A question:
    Wasn’t some of this silliness we face supposed to be addressed by the health care legislation? I guess not…….

    Reply
  2. Hi Roger–

    I’m like you when it comes to LTC insurance. My parents had normal life spans but could have lived much longer had they not smoked. That has motivated me to take much better care of myself.

    Sometimes I wonder, though, if that will eventually work against me. Do the unhealthy simply fall over (not to be crass,) while the healthy eventually get too frail to live alone? It would be interesting to read a study that explores the conditions and motivations of residents who enter LTC facilities.

    Thanks for today’s post.

    Reply
  3. Hi Bruce out increase was also 25% for our high deductible HSA from $236/mo to $295/mo which covers both of us. I have to say I didn’t even think about an insurance company not paying in the manner you describe and obviously would be a huge factor for people and thoroughly sinister on the part of insurance companies.

    Anon, I’m not sure the answer there. My dad is 84, lives alone and while he looks like an old man he is not frail (he has zero trouble acclimating to our 7000 feet when he comes to visit from sea level). Some get too frail, some just expire while very fit on a relative basis and everything in between I suppose.

    Reply
  4. Roger,
    As I have said in the past, my wife and I “self retired” ten years ago when I was in my early 50s so we got no company supplied healthcare benefits. We have been buying high deductible BCBS of Arizona plans for a decade now and our monthly premiums have tripled over that period of time. We now spend almost $1000 per month for a very high deductible plan. In October we got almost a 15% increase.
    Obamacare has done and will do NOTHING to curb costs.

    Reply
  5. my brother and I had a long conversation last night about political stuff–my take has been that Obama’s ideology is wrong for the time, poorly executed and ignorant of potential unintended consequences.

    Reply
  6. Roger, for what its worth, I am in 100% total agreement with your political comment.
    JCarr

    Reply
  7. Which begs the question then Roger, what ideology would be “good” for the time given the ideology we’ve lived with for the last 40 years (save a couple here and there).

    My own take was Obama and the Democrats lacked the stones to do what clearly had to be done to solve the problem: Flat single payer, medicare for everyone. Any add-ons or extra perks folks want to pay for okay.

    Extensive concessions to the pharma, health and insurance industries led to this ‘reform,’ the only advantage to which that I can see at this point is that you can’t be dumped by your insurance carrier after you get sick or refused by another carrier for a pre-existing condition.

    Reply
  8. RW,

    Not sure I have a lot of solutions that fit into a system that is not structured to incentivize anyone toward a solution (the nature of political cycles and so forth).

    A big part of the health care issue as I understand it is uninsured people going to emergency rooms. I read something a couple of years ago that I have mentioned here a couple of times that essentially said that by creating more urgent care facilities and getting people to go there it would somehow be much less expensive. I don’t remember the numbers but whatever it is that makes emergency rooms so expensive simply does not exist with urgent care facilities–this assumes the article was correct.

    As far as ideology it has seemed to be that Obama has tried to have a heavier hand in almost everything thinking he had a mandate to do so. i think this was a misread as I believe any democrat would have beaten any republican based on how low Bush’s numbers were. Obama appears to me to have been acting on a mandate that he did not actually have. As far as poorly executed these things have been pitched poorly given the difficulty he has had with getting his own party on board for fear of election losses. I think a better leader with the same ideology could have found a way to make more progress by not appearing so standoffish and presenting the idea as focusing in improvemetns but not necessarily so disruptive and also doing more to demonstrate an understanding of the consequences which I don’t think was done at all.

    As far as pre-existing I don’t know. a customer has some very expensive malady and asks a new (to him) company to insure him? what is the insurance company supposed to charge that person? What is a fair premium for $100k a year illness?

    Not being dropped by existing when you do get sick is obviously important but this whole thing is a mess and doesn’t seem to be on the road to a solution that doesn’t make things worse.

    Reply
  9. Roger,A good view of what a national healthcare system should look like can be found in Norway.

    The system we just adopted is fatally flawed as the GOP derailed what could have been a good system-specifically, single payer option.

    Insurance was originally a shared risk pool and how it got to be a profitable enterprise paid to some degree by employers seems to espape most folks.

    WGT LTC:

    One should consider insuring against expenses that that have devastating consequences. That is to say the rich don’t need it and neither do the poor. The middle does however as it can turn your life into a beggers very quickly. Consider at your age Roger, having a paralyzing stroke. What would become of your family? If you had pre-school children or others that relied on your income? Could your wife take care of you or would you put her in the poor house as well?
    Another mistake is taking out a policy that pays too many years or too much money. Perhaps the policy needs to cover a portion of nursing home expenses. There is a lot to think about when shopping LTC insurance. The younger one does it the better. IMHO…

    Reply
  10. Roger, granted, our political cycle guarantees a rather short attention span just as our electoral system guarantees money buys influence but perception is a funny thing. I’ve heard all the claims about Obama — some so virulently vile or racist as to stand hair on end — but would have still said Obama was anything but heavy-handed, was in fact so hands-off with congress, willing to grant them the lead, that congress did what it usually does: bartering, selling, swapping and compromising until some kind of hodgepoge, pork-filled agreement was hammered out.

    That kind of deal-making may work for the smaller stuff maybe, or at least it doesn’t create too big a mess until it accumulates (like our tax code), but it doesn’t work for the big stuff, for changing course; that requires vision and it also requires political courage. These days that kind of courage means you need vigorous direction even when it steps on toes and take the chance your backers will withdraw support leaving you unable buy enough ad space to persuade your constituency you were right.

    I’m fortunate because I live in one of the few states that has a state plan and that didn’t waste time contesting the health reform bill but immediately started negotiations to set up an our own exchange now rather than later. I won’t have to worry about my wife’s pre-existing condition or getting priced out of the market entirely like folks in the other 48 states will but it should not be that way. Really, it should not.

    Reply
  11. Well, I don’t think you can blame it all on the uninsured going to emergency rooms.

    Last spring my doctor ordered a test, basically a sonogram of the carotid arteries. Took a bit over a 1/2 hour.

    Six weeks later I got a bill from the clinic for $1,163. Called insurance and the clinic and insurance had paid it, the clinic missed seeing it in their system for some reason.

    What did insurance pay the clinic you wonder? $36.

    $36 vs $1,163. Both numbers seem absurd.

    Reply
  12. sure, if you look at health care as $$ and cents like most ignorant Americans.

    How much should you spend on “defense”? Well America spends trillions and trillions and wastes 100s of billions – no problem for ignorant Americans….more people die from lack of health care then the single terrorism event every 10 years…but Americans are ignorant fools.

    Reply
  13. Anon 12:47 and anyone else who thinks the government should be in everything, have you ever heard of the Constitution? Have you ever read it? Didn’t think so.

    Reply
  14. Insurance is not about someone paying our tab, it is about amortizing the probable costs of our care over a period of time for a fee. If we purchase first dollar coverage for auto insurance which included car washes then my gut tells me that our auto insurance would be higher…and if my fifteen year old wants to drive my E class then adding him might cost more…anyway shop for insurance and take a hard look at the cost for coverage…a responsable broker should walk you through the process…I’m in a HSA over sixty and pay a small fraction of what Bruce is saying…and of course some states have even more mandated coverages…which costs more!!

    Reply
  15. Anon 12:47, since the constitution is what created the government in the first place and granted it its powers, what are you arguing here?

    Anon 8:41, If insurance were “about amortizing the probable costs of our care over a period of time for a fee,” it would essentially be a mortgage and no one would need a special corporation such as an insurance company to get it. Insurance is about pooling risk; the bigger the pool the more the cost of risk can be distributed.

    Reply
  16. Clearly the concept of pooling is nonsense….in the end you pay for the probable cost of your care plus a fee to the insurance comapany…cost shifting is perhaps what you are thinking of which is what the political class has mingled into the discussion…have the young ones pay for my heart transplant…or the unmarried pay for my premature baby…but that is cost shifting between unlike pools..the statics within a given risk pool allow an insurance company to smooth out the cost over a few years for a fee..it really is that simple…no magic…just finance 101

    Reply
  17. Anon 11:02

    Hate to break it to you but do your homework on the history of insurance. The basic premise was a group of folks all throw in a hundred bucks and hope to God they never have to worry about a) getting their 100 back and b) never having to be the beneficiary of the “pool”. The hundred they coulde afford, the amount of the pool not so.
    Originally started in Scotland to provide for the pastor’s wife in the event of a calamity.
    What is nonesense is what we have today. Obscenely compensated executives of insurance companies residing in Taj Mahal surroundings all driven by the notion of denying coverage, denying claims and for the most part figuring out how to screw the participants. The idea that an employer would pay for this is equally nonsencical. If a national health plan does not come under the mandate of the constitution. (promote the general welfare), then the rest of the mandate is equally nonsensical.

    Reply
  18. I just knew some liberal would call out the “promote the general welfare” phrase. How about the 10th amendment?

    “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

    Reply
  19. Singapore has the world’s best heatlh case as measurede by low cost (% of GDP) and best outcomes (life expectancy)

    Singapore uses a combination of private and public similar to what Obama tried to promote before it got ripped apart by senators back by big insurance.

    Not sure why Obama did not veto the ripped apart version – sad.

    Reply
  20. Obamacare is not perfect but it is going to save my butt (I am retiring in my 50s and will run out of COBRA before being able to get Medicare). It will save my sister’s butt too (unemployed, diabetic, and running out of COBRA). Those who want to repeal it – show me the alternative. The alternative is back to where we were, where the insurance companies cover who they want, charge what they want, and those not in the employer-based health care market are just out of luck.

    Reply
  21. I travel 50+ days a year outside America and the shocking thing is how backwards and 20th century American thought is.

    Even Americans with multiple degrees, so call educated folk, seem to brainwashed and/or insane.

    The only comparison I can make is when I traveled deep into the U.S.S.R and the people there truely thought they were the greatest nation on earth…

    Reply
  22. The biggest driver of the inflated hospital costs has been the medicare…which does not pay the full cost…the hospital then recovers the cost from other customers in the “rack rates”…from which all commercial customers negotiate. So we have ten dollar asprin and fifty dollar bed pans.

    Reply
  23. As my ER doctor said to me, “you know who pays for the Medicare people and the uninsured who come to the emergency room?” pause “YOU DO”. I pay for my own insurance and have been hit by a 100% premi increase the last 2 years (I’m 49). I’m trying trying to get a new policy, but becasue of pre-existing I may be up the creek for 3 more years when supposedly I can get a new policy. People with employer based coverage may have no idea the fun and games us self payers have to deal with. I would consider moving out of this country in 8-10 years if nothing happens to change things.

    Reply

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Sunday Morning Coffee

This week’s Barron’s featured a three article Retirement Special Report. One of the articles was on long term care insurance, one was on an idea for a new type of TIPS and the third offered ideas about where to capture yield.

Many people seem to be skeptical about all forms of insurance as am I and health care costs are extremely controversial for all sorts of reasons but these are issues that most of us do have to grapple with (if you have millions in the bank you can cope financially with a $500,000 illness).

Bruce Krasting recently noted that his insurance premium was going up 25% at an annualized rate from a little over $1600 per month which is obviously a very big dollar amount these days although some folks do have a higher premium. The Barron’s article notes the costs of long term care policies going up and also because of the dynamics of the industry that some companies are getting out of the business.

Long term care is tricky because it is a type of insurance you may never need but according to the article only 2/3 of seniors will need long term care at some point in their lives. Personally I am motivated to be one of the other third and hope a combination of lucky genetics (my parents are 84 and 79 and have not needed this) and a lot of vigorous exercise will do the trick. We have no control over our genes (yet?) but we can commit to exercising regularly and while I’m at it eliminating soda from our diets.

The article did not talk about health insurance but this also looms as problematic as evidenced by Bruce’s premium increase from what already seems like an astronomical number. One possible solution for people working on their own is to try to get into a group plan with some organization where they have an affiliation. For me, I think I could get insurance through my fraternity and I know I could get it via the fire department (more likely an association of many fire departments or firefighters). This can’t work for everyone but it can solve the problem for some folks.

The article about a new type of TIPS was an idea about what seemed to me to be reverse zero coupon bonds where the payout has an inflation component. Essentially you would by this product, the author called it an amortizing TIP, at face value, it would pay out an interest rate that adjusted for inflation and do so in a way that the principal exhausted after 30 years. The government is going to issue the debt so this would be about making the wrapper, based on the arguments in the article, a little more useful for investors (read the article for the logic).

As long as people realize there is no principal coming back at maturity it seems like a cheaper and more liquid annuity of sorts and seems potentially useful for being part of the solution as it removes some of the variables of executing a retirement plan and creates some predictability (per the author). There was no discussion as to whether the numbers involved could work from the government’s standpoint but I though the idea was interesting and is a reminder that there can and will be innovative ideas (hopefully more that are not government related) to help with some of the retirement problems that appear to be lurking just around the corner.

The third article on capturing yield certainly covered most of the bases in terms of what is available but didn’t delve enough into what can go wrong with each segment. The key takeaway should be that in a zero percent world something that yields 6% has risks. Having risks is not a bad thing per se but too many people do not understand the risks they are taking and end up with too much exposure to something that then blows up. A little exposure to something that blows up should not damage your financial plan but a lot of exposure might.

I stumbled across the pictured fire truck while doing a little work at the fire station. That is one beefy brush truck I have to say, but the open air seating (so to speak) makes it more for grass fires (our fuels are trees and brush) where you pump and roll which I have never seen in a brush truck because of how quickly they run out of water. Still pretty neat looking though.

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