Senior Issues

One of the biggest new benefits for seniors under healthcare reform is closing Medicare’s Part D “doughnut hole.” But the benefits may not materialize the way people expect, warns The Senior Citizens League (TSCL), one of the nation’s largest nonpartisan seniors groups.

“Proponents of healthcare reform are confident that the public will warm to the new legislation,” stated TSCL Chairman Daniel O’Connell. “They say ‘the more we learn about healthcare reform, the more we will realize the benefits.’ But so far TSCL is concerned that the benefits for seniors may be outweighed by new costs and taxes.”

The Medicare Part D doughnut hole coverage gap grows bigger every year and is projected to exceed $6,000 by 2020. In 2007, an estimated 14 percent of all Part D enrollees fell into the doughnut hole. And while TSCL supports closing the Part D doughnut hole, “the way healthcare reform does it is like trying to fill a bathtub with the drain open,” O’Connell explained.

Under the standard Part D benefit for 2010, beneficiaries pay a deductible of $310, and monthly premiums. After paying the deductible, beneficiaries are responsible for co-pays that represent 25 percent of drug costs. Drug plans, which receive subsidies from the government, pick up the rest.

Once total spending by beneficiaries and their drug plan exceeds $2,830 in 2010, they hit the doughnut hole, the point at which they must pay 100 percent of the cost of their prescriptions. After spending another $3,610, coverage kicks back in and beneficiaries only pay 5 percent of drug costs.

Under healthcare reform starting this year, Medicare beneficiaries who hit the doughnut hole will get a $250 rebate to go toward the $3,610. In 2011, beneficiaries who fall into the hole will get a 50 percent discount on brand-name drugs and a 7 percent discount on generics. Beginning in 2013, the federal government will gradually phase in additional subsidies in the hole to reduce beneficiary co-insurance rates to 25 percent by 2020 (meaning a 75 percent discount on both brand name and generic drugs).

“But even while the amount that beneficiaries pay for drugs is going down, the doughnut hole is still scheduled to grow,” O’Connell noted.

Between 2014 and 2019, the legislation works to reduce the out-of-pocket required for beneficiaries to receive the catastrophic coverage. “But a lot could go awry, “ O’Connell said. “Completely closing the hole may be tough to do if drug costs grow more quickly than anticipated. By 2020, the totally unexpected happens. The level of out-of-pocket spending required for catastrophic coverage reverts to its former level, the level at which it would have been absent the reductions in intervening years.”

Seniors will gain new coverage for the drugs in the hole, reducing costs to 25 percent co-insurance instead of 100 percent, much better than before. Yet the problem of out-of-pocket costs continuing to rise will only be slowed. In 2020, beneficiaries still would need to spend an estimated $6,000 to reach catastrophic coverage.

TSCL is conducting a national online survey to learn what seniors think of healthcare reform, and what their expectations may be about the legislation. To participate in the survey, visit www.SeniorsLeague.org.

With over 1 million supporters, The Senior Citizens League is one of the nation’s largest nonpartisan seniors groups. Located just outside Washington, D.C., its mission is to promote and assist members and supporters, to educate and alert senior citizens about their rights and freedoms as U.S. Citizens, and to protect and defend the benefits senior citizens have earned and paid for. The Senior Citizens League is a proud affiliate of The Retired Enlisted Association. Please visit www.SeniorsLeague.org or call 800-333-8725 for more information.

Estate planning includes an analysis of what your estate tax liability might be at your death. If one of your goals is to reduce estate taxes, then we must determine what assets are included in your estate and what estate taxes may be due at your death. Yes, your personal property is included: jewelry, automobiles, art, and antiques. Yes, your real property is included: home, vacation home, and all other real estate.

Your gross estate includes all property in which you have an ownership interest at death. If you are married and you and your spouse own an asset as joint tenants with right of survivorship, then if you die before your spouse, one-half of the value of the asset will be included in your gross estate. However, if you own an asset with your sister, of anyone other than your spouse, in joint tenancy, then if you die first, the entire value of the asset will be included in your gross estate.

If you own life insurance payable at your death, the proceeds will pass tax free to the named beneficiary, but the value of the death benefit will be included in your gross estate. When you own an annuity with a term certain or a joint life/survivor annuity, and if the annuity has value at your death, the value of the annuity will be included in your gross estate. These assets will pass to named beneficiaries, but are included in the value of your estate.

When you transfer property within three years of death, the amount of the gift may be pulled back into your estate. If you transfer property during your lifetime but you keep the right to income from that asset during your lifetime, the asset will likely be included in your gross estate.

The fair market value of the assets that you own on the date of your death is the value of the assets in your estate. How important is it to you to reduce estate taxes? Do you want to find out if you may have a taxable estate? Will your estate go through probate and be taxable too? If you want answers, call E. G. Moser & Associates, P. C. at 630-305-7540 or Email: egmoser@gmail.com.

To provide protection from systematic risk, also known as market risk, various asset allocation strategies have been used with limited success when extreme market movements and “once in a lifetime” events occur. Principal preservation products have evolved to address the needs of many risk-averse consumers by providing them a safety net for their investment/savings capital. The products are structured in a way that reduces the risks associated with other asset classes.

One of the significant developments for principal or asset preservation vehicles has been the fixed index annuity. Index annuities have been producing returns since the first one was purchased on February 15, 1995. Unfortunately, most of the articles and studies ignore this data and attempt to portray how index annuities should have performed while ignoring actual results. The studies we use are actual results. From 1997 through 2007, the five-year annualized return for FIA’s averaged 5.79%. This compares to 5.39% for taxable bond funds, 4.73% for fixed annuities and 3.94% for Bank CD’s.

Recent studies released by the Wharton School of the University of Pennsylvania and by Advantage Compendium Ltd., St. Louis, MO, indicated that fixed indexed annuity returns are not only much more consistent than S&P 500 index returns, but are quite attractive as well.

The Wharton study examines five-year annualized returns from 1997 to 2009. The studies calculated industry average annuity returns based on actual returns credited by insurance carriers that offer fixed indexed annuities. S&P 500 index returns, including dividends, are regarded as the premier measure of U.S. stock market performance.

The industry average annuity returns exceeded 4% in all seven of the five-year periods examined. In contrast, only two of the annualized S&P 500 returns exceeded 4%, while in three of the periods; the S&P 500 index had a negative return.

Most articles written about FIA’s fail to take into account the various free withdrawal provisions in all FIA’s. Generally a 10% withdrawal is allowed annually without surrender penalty and some firms offer more standard withdrawal provisions. That is about triple what you can withdraw from a Treasury bond portfolio in today’s interest rate climate without subjecting yourself to losses of principal occasioned by bond price fluctuations, and even more so when the alternative portfolio includes common stock. Most articles analyzing appropriate withdrawal rates for retirees range in the 4-6% range annually, depending upon various methods of thought. This being said, a 10% withdrawal privilege should not be an issue for most retirees and individuals.

FIA opponents commonly cite surrender fees as an issue. With the various free withdrawal privileges and based on the appropriate range of annual withdrawals, most individuals who purchase a FIA will not encounter a penalty except through their choice. Furthermore, FIA’s provide a guaranteed minimum return along with principal preservation, which mutual funds and other similar investments do not provide.

The reality is that most index annuities have produced returns that have been truly competitive with certificates of deposit, fixed rate annuities, taxable bond funds, and even equities at times. How will index annuities perform in the future? We do not know, but the concept has proven to work in the past. FIA’s should not be promoted to provide returns to compete with equity mutual funds or stock portfolios. The FIA is designed for safety of principal with returns linked to upside market performance.

Asset Management & Protection Corp specializes in financial and investments advise with emphasis on risk management. Securities are offered through Triad Advisors; member FINRA/SIPC.

For more information, contact 847-824-6650. Ask for Mike or Ken