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H What does it take to qualify for benefits? The only acceptable answer is any one of the three conditions that follow. In order for you to qualify for your benefits, and have your insurance company start paying your LTC bills, you are going to have to prove to this company that in fact you really need long-term care. This is called “making it through the gatekeepers.” You won’t see a penny until you qualify.
The easiest qualification, or gatekeeper, is medical necessity. This is where your doctor says, “Yes, my patient needs long- term care.” Make sure that if the policy says that medical necessity will serve as a gatekeeper for long-term care, the person who gets to decide is your own doctor and not someone you have never seen before who probably works for the insurance company.
The second gatekeeper is not to be able to carry out certain activities of daily living (ADLs). In order to function normally, most of us need to be able to 1) be ambulatory; 2) bathe ourselves; 3) feed ourselves; 4) clothe ourselves; 5)transfer ourselves (get in and out of bed, chairs, and the like unattended); 6) be continent; and 7) use the toilet. With a good policy, if you got to a point in your life where you could not do two out of these seven ADLs, then you would qualify for benefits.
The last gatekeeper is cognitive impairment, which simply means that you qualify if you come down with, say, Alzheimer’s disease or cannot think or act clearly on your own and therefore cannot care for yourself. Here, again, doctors make the decision. Make sure it is left to your doctor to decide, not the insurance company’s.
An important note here is that in certain cases, your LTC insurance premiums may be tax deductible as a medical expense, if your medical expenses come to 7.5 percent of your adjusted gross income. According to the Health Insurance Portability and Accountability Act of 1996, which took effect january 1, 1997, your policy must meet certain requirements for the premiums to be deductible. You either had to have purchased a policy prior to 1997—in which case your policy will he grandfathered in and is qualified for the tax deduction—or, if you purchase one in 1997 or later, then your policy may not offer medical necessity as a gatekeeper, and it must be based on six ADLs rather than seven. The ADL that has been eliminated is being ambulatory. There are other differences as well but these two are the most significant.
To find out more about the differences, you can call the HICAP or Health Insurance Counseling and Advocacy Pro-gram (800-434-0222) to find an office near you that can provide more information. You’ll have to decide whether you want a policy that is tax qualified but offers less generous options, or one that is not tax qualified. If your premiums would not be deductible anyway because they’re less than 7.5 percent of your AGI, then stick to the recommendations above and look for an LTC policy that offers all three of these gatekeepers I mentioned, and where any one of them will allow you to qualify to receive benefits. Ask to see a specimen policy that defines the gatekeepers as well as the ADLs and find out if your policy. meets the definitions to be tax qualified or not.
I How much is it going to cost? Not as much as you would think—if you find the right company.
There is a huge difference among companies offering LTC insurance (or any insurance, for that matter). I have seen policies from different carriers offering essentially the same benefits but with a difference of up to $1,500 a year—a big difference, especially for retirees, and especially when premiums can be raised. When you are comparing these prices, make sure that you are comparing apples with apples, that you are comparing policies that have the exact same benefits across the board. Otherwise your price comparisons won’t give you the information you’re really looking for. The benefit period, the elimination period, the benefit amount, the inflation rider, and home health care will all need to be identical when comparing prices among different companies. Here are explanations of what those terms refer to.
The benefit period means the length of time the policy will pay for your long-term care. I recommend choosing between the four-year and the lifetime option, depending on what you can comfortably afford now and will be able to afford in the future.
The elimination period means the amount of time you have to pay out of your own pocket before the policy will kick in. I recommend a zero-day elimination if money is not an issue. If it is, then go for no more than a thirty-day elimination. Can you imagine where your loved ones would get the money to pay for the first ninety days of your stay, for instance, if the cost of a home was $10,000 a month? I would rather see you pay a little more now than possibly a lot more later.
The daily benefit amount means how much the policy will pay per day if you use the benefits. I recommend $100 per day for LTC care and about $50 per day for home health care. This assumes that you are going to take the inflation rider option and that the average cost of a nursing home in your area today is $3,500 a month. If it’s a lot more or less, adjust it accordingly.
The inflation rider means how much the daily benefit amount paid will increase year after year. I recommend 5 percent compounded inflation. Unless you are in your late seventies, then 5 percent simple inflation or a higher daily benefit to start is the way to go.
The home health care (HHC) clause means that you can receive certain kinds of care at home if this care is administered by professionals, friends, or individuals deemed qualified by the insurance company to provide HHC. Some plans state that if you belong in a nursing home but would rather be at home instead, the policy will pay your LTC benefits at home, just as if you were at a nursing home. I view HHC as coverage you would need at home for the short term—for a broken hip, for example. With HHC, you are expected to get well. With LTC, you are not expected to get better. I recommend no more than two years of home health care.
If you or a loved one you’re responsible for ends up in a nursing home, all the great things you wanted to do with your money, all the sums you eventually accumulate, all can be lost. Don’t let this happen. There is nothing worse than seeing someone in his or her seventies or eighties devastated emotionally by losing a spouse to a nursing home, then also having to endure the financial devastation that can follow. Although our bodies age, we all still feel deep inside that we’re twenty or thirty years old, and we don’t want to deal with things like this. But we must. We may even feel that our parents are still invulnerable.
But they’re not. If you have two sets of parents alive today, between you and your partner, the chances that at least one will end up in a nursing home are 90 percent. Love and loyalty aside, if you are to pay for this, it will leave you very little money with which to create more money and not very many ways to hold on to what you already have.
With long-term-care insurance in place, this won’t happen. You will have gcne a long, long way toward being responsible not only to those you love, but also to yourself and the money you’ve worked so hard to earn.

You can buy mutual funds that invest in almost anything you want. Once you decide on your goals, you now have two other choices: Do you buy a managed mutual fund, or do you buy an index fund?
MANAGED FUNDS
A managed fund is run by a manager who decides what he or she is going to buy and sell with all the money the investors have deposited into the fund. If you know what kinds of things you’d like to invest in, you find a like-minded manager and choose that fund, if its track record stands up to scrutiny. When you buy a managed fund, you’re actually investing in the manager who’s in charge of the fund. A good manager buys and sells wisely, so that the NAV or the value of your shares goes up and you make a profit. A mediocre manager could lose you money. Thus it’s important to keep track not only of how your fund is going, but also of the manager who’s responsible for your return.
Rule of thumb: Before you ever buy a managed mutual fund, look to see how long the manager has been in charge. Is the current manager the one responsible for a fund’s terrific track record, or has that person moved on, leaving someone new in charge? It’s the manager’s track record you want to know about, in other words, not the fund’s, because the manager is the one who creates the fund’s success.
A number of publications monitor the funds—how they’re doing, who is moving on—but the one I like best is called Morningstar. You can subscribe to it directly, find it at the library, or access it on the Web or in the Personal Finance section of America Online.
INDEX FUNDS
When you don’t know which mutual fund to buy, and don’t want to learn all this stuff about managers, you have a great Option: You can buy an index fund.
There are several indexes that track the values in the stock market. You hear abqut these every day when you listen to the news and constantly hear the newscasters quoting the Dow Jones Industrial Average. You know how they’ll say, for instance, “The Dow Jones is up twenty-three points today and closed at 5600.” The Dow Jones average is an index based on thirty stocks. If these thirty stocks happen to go up, so does the Dow Jones average, and if they go down, same thing. I always found it fascinating that so much seems to rest on just thirty stocks, but it’s used widely.
To my mind, a far better index, and one that’s also widely referred to, is the Standard & Poor’s index, the S&P 500. This index tracks five hundred stocks, which is a lot more than thirty, of good-size companies that are traded on the New York Stock Exchange. You will often hear this index quoted right alongside the Dow Jones, and when you do, pay attention. This is also a great index because so many people use it to measure the market—which means that many, many experts are keeping tabs on it every single day.
There are other indexes that track the American and overseas stock markets (as well as indexes that track the bond market, but we are focusing on stocks here); they aren’t quoted as much as the Dow Jones or S&P, but they’re also used to track hOW everything is doing overall. Among them:
The Wilshire 5000 equity index. This index tracks thousands of stocks of companies of all different sizes, large and small. It’s also outgrown its name—it really follows almost Neven thousand stocks. Even though it’s not widely quoted, it’s one of the best.
The Russell 2000 index. This index tracks two thousand stocks that are traded on the OTC (over-the-counter) market.
H The EAFE index. This one ranks the stocks in Europe, Australia, and the Far East.
Mutual funds constantly compare their performance tothat of the various indexes. A fund will boast of “outperforming the S&P 500” over a cçrtain period of time, meaning it increased in value by a greater percentage than did the S&P index. (Of course, many funds underperform the indexes, too.) So one easy and effective way to invest is to buy what’s called an index fund, which simply buys all the stocks in the index you’re interested in. Its performance will, by definition, match that of the index exactly, whether it’s the S&P 500, the Dow Jones, or the EAFE. Many mutual fund companies offer S&P index7 funds, as well as growth, international, and bond indexes, and it’s easy as can be to sign up with one of them.

The difference is about 4.5 percent, give or take, out of your pocket.
In addition to the expense ratios that all funds carry in order to pay the people who work at the fund, if an adviser suggests you purchase a fnnd and you do so through him or her, you will also pay the adviser a commission. The commission can cost anywhere from 2 percent to 8.5 percent; the average commission is about 4.5 percent. The commission is known as a load. Think of it as a burden on your money.
A no-load fund, on the other hand, is a mutual fund you buy directly, without an adviser, and therefore there’s no commission attached to it. In my opinion, no-load mutual funds are the only way to go. Think about it. If you were to invest $10,000 in a no-load mutual fund and decided, two seconds latei that you wanted to withdraw your money, you’d get all $10,000 back, assuming the market didn’t move. Loaded funds, on the other hand, would cost you.
The Price of a Load
There are two kinds of loads, a front-end load and a rear- end load (also known as a 12[bjl charge). Sound confusing? It’s meant to be. The people making this money, your adviser or broker, would rather you didn’t know how much you were paying.
Front-end loaded funds charge a load up front. They are also identified as A share mutual funds. When you see the name of the fund spelled out anywhere, if it has an “A” or says “A shares” after the name, then you know it’s a front-end loaded fund. If you invested $10,000 in a 5 percent loaded fund, and decided two seconds later to withdraw your money, you would get back only $9,500—the adviser got that $500. This fund would have to go up 5 percent in value just for you to break even.
Rear-end loaded funds are even worse.
When mutual funds first came onto the scene, you could buy one only through a broker, so they were all loaded funds. Over the years, though, many mutual fund companies came out with no-load funds, and slowly but surely investors began seeing their value and investing. This migration was putting a big dent into the profits of brokerage firms that sell pnly loaded funds, so they came up with a way to make you think you could buy a no-load fund through them: It’s called a 12(b)1 fund.
A 12(b)1 fund is a mutual fund usually sold to you by a financial adviser. Some of these advisers sell you these funds under the pretense that you are not going to pay a load to be in the fund as long as you stay in it for five to seven years. If you cash out before then, there will be, the adviser will explain, a “surrender charge” starting at around 7 percent and going down by 1 percent each year until it reaches 0 percent. (In a true no-load fund you can cash out the same day without paying a penny.) Not too bad, you might think, since I plan to leave the money in there for a long time anyway, so it won’t really cost anything. Wrong. You will also be paying an extra .75 percent to 1 percent a year in 12(b)1 expenses year in, year out. What this means is that if your fund makes a return of 10 percent, you would get only 9 percent after the 12(b)1 charge, and you’ll continue to pay that percentage for as long as you stay in the fund, even after the seven years are up. In fact, if you stayed in the fund for fifteen years, and were paying 1 percent for the privilege of owning your 12(b)1, you wøuld in essence have paid a 15 percent sales commission. You would even have paid about 10 percent more than what a front- loaded mutual fund would cost. And, of course, you would have paid 15 percent more than what a good no-load fund would have cost.
This 12(b)1 fee is in addition to the other fees as well. You’ll also have to pay the management fees and other expenses of the fund, just as you do with a no-load fund. So the 12(b)1 fees are put in place to pay the adviser’s fee for having sold you the fund. How it works is that you buy the fund, the brokerage firm advances the broker’s commission to him the day you buy it, and you keep paying and paying so that the firm will get back the money they paid to the broker. Your 12(b)1 fee is how they get the money back. If you close the account early, your surrender charge is what guarantees the company it will get back more than it pid the broker: a no-lose proposition for the brokerage firm, but you lose all around.
In other words, 12(b)1 mutual funds are a rip-off. If you see a “B” or “B shares” after the name of a fund, or if your adviser says you have to stay in a fund for X years or pay a surrender charge—you have a 12(b)1 fund.
Why Would My Adviser Sell Me These Funds?
Because that’s how he or she makes a living, and you’ve not chosen an adviser wisely. True financial advice is to tell the client how to get the most bang for the buck, even if it means the adviser won’t make a lot of money with the transaction. Advisers are there to help you get rich, not to get rich off you. It’s the adviser’s fiduciary responsibility to tell you if there’s a less expensive way for you to make money—and give you the choice of what you want to do after explaining how much each of your options will really cost you.
But no-load funds can be purchased without the help of an adviser—no middleperson, no commissions, no hidden costs, just smooth sailing to greater and greater wealth over time. Do you need an adviser? If after reading this next section you feel you do, then you do, for your own peace of mind. But you may just want to test the waters yourself. . .

Sherry was worried. Her husband’s father was dying, and she feared that when he died it would be the financial death of the whole family as well.
Tim, my husband, and his brother, Daniel, work for their dad at this machine shop he owns. They’ve worked there forever. I keep the books and see all the papers, so I know pretty much what’s going on. The shop makes pretty good money, but it’s just all these machines mainly, and a lot of the money goes back into the business to keep the machines going. Some of them are getting pretty old, but the business is still worth about a million bucks.
The way it’s set up is that Tim’s dad owns the whole business. He says one day it’s all going to be Tim’s and Daniel’s, so not to worry. He’s pretty old and not well at all, and Tim’s mother is probably not going to live that much longe1 either. I don’t mean they’re both going to die tomorrow, nor do we want them to, but they are both in their mid-eighties, and death, I keep telling Tim, is a fact of life. Pop owns the business, and when he dies, if Mom is still living, she inherits it. He has a will saying so. Then her will leaves everything to Tim and Daniel. The shop is a family business, so what happens next is that Tim’s and Daniel’s wills both leave the business to each other. We’re all really close, but it still doesn’t feel right to me, or to Daniel’s wife, Christine, either. What will happen to me when Tim dies? What happens to Christine when Daniel dies? When Christine and I ask them, they’re just like Pop—they both just say, “Don’t worry, I am taking care, it. End of discussion.” But I am worried.
Sherry was so right to be concerned. How many times have we said or heard those words: “Don’t worry, I’ll take care of it”? These words don’t handle the problem; at times, in fact, as was the case here, they create the problem. Sure, we all intend to get around to taking care of things, but there’s a big difference between thinking we will and actually doing it. Being responsible to those you love is knowing that you have taken care of everything, rather than just thinking you have. Being responsiHe also means being open to talking about issues such as death, sitting down with everyone involved to discuss their concerns, fears, misguided assumptions, and questions. Seldom do the words “I’ll take care of it” take care of anything.
When Sherry came to see me, I told her her family could be in big trouble. Even though Pop and Mom had a will, in truth they had not taken care of the very problems they sought to avoid.
To begin with, their total assets were worth more than $600,000, which is the maximum amount you can leave to anyone other than your spouse without having to pay estate taxes to Uncle Sam. Therefore, when Pop and Mom die, and Tim and Daniel inherit a business worth $1 million, they are going to owe huge estate taxes. And because the ownership of the business and house and bank accounts passed under a will rather than a trust, they could be hit with huge probate fees as well.
Is there a way for Sherry’s family to reduce the federal estate tax that would be owed on an estate worth $1 million? Yes. Tim and Daniel’s father could have really taken care of it by setting up a tax-planning trust. This is a trust for those with larger estates—worth $600,000 or more.
Depending on whom you talk to, these trusts can be known as marital trusts, credit shelter trusts, bypass trusts, or AB trusts: they’re all the same thing. I like to call them bypass trusts, because I just love the thought of bypassing taxes. A bypass trust can eliminate federal estate taxes on estates valued up to $1.2 million and reduce the tax considerably for even larger estates.
Federal estate taxes fall into the realm of the IRS and don’t vary from state to state the way probate fees do, so don’t confuse estate taxes with probate. Probate fees are determined in each state and cover the cost of processing a will through the court system to transfer property from the person who died to his or her living heirs. (Some states also impose estate taxes; see page 104.) Federal estate taxes are the share of the estate owed to the IRS if you leave more than $600,000 to anyone other than your spouse. Unless, that is, you eliminate or minimize the sting by setting up a bypass trust.
In Sherry’s family’s case, here’s how the inevitable deaths of Mom and Pop would play themselves out with, and without, a bypass trust.

Whether you want to believe it or not, you and you alone ha’:re the best judgment when it comes to your money. Here’s a story about me and my mom:
A few years ago, I had a terrific hunch about a particular stock. I just knew it was a great buy, especially priced as it was at around $1.50 a share. So I told the person that I love most in the world, my mom. My mom has always lived really, really frugally and, since my dad died, has managed to have enough
to live comfortably on, but she has never been a great risk taker in the stock market; in fact, she still worries about me when I buy or sell stocks. This time, to my amazement—maybe she caught the excitement in my voice—she said she also wanted to invest in the stock I had chosen—$5,000. Eighty- three years old, and now she decides she wants to jump into the market!
Now—again to my amazement—I began to caution her. Did she understand that any stock that was selling for only $1.50 a share was totally speculative? Yes, yes, she understood that perfectly well. Did she understand that she could lose the entire $5,000? Yes, she understood. She felt the worst-case scenario was that if she lost it all, she would have $5,000 less to leave me when she died. Was I willing to take that risk? (I hate it when she outsmarts me at my own games.) I was willing, so my mom and I invested in the stock that same day, each of us putting in $5,000.
Everything was holding steady pretty much until a few months later, when the stock started to go down and down and down. My mom, who by now was really into this, began calling me up every day and saying, “What do you think we should do?” I would say the same thing I would have said to my clients, “What do you think you should do?” and, satisfied, she’d say, “Let’s just hold it.” That was how I felt, too, until the day the stock hit twelve cents a share, which made me begin to doubt my own inner voice. Five thousand dollars is a lot of money, and this was my very own mother.
That was the day she called up to say, “Let’s buy more.” I couldn’t believe it.
I said, “What did you say?” and she said, “I just have this instinct to buy more.”
When she said this, I’m sorry to say I did not encourage her to follow her instincts. Instead I said something to the effect of, “Mom, are you crazy? This stock is almost belly-up and we can’t throw good money after bad.” I’m also sorry to say that now she began to mistrust her own instincts as well and simply agreed with me. We left our money where it was, but our hopes fell and now we both trusted less in what we had believed about the stock.
To make a long story short,. the stock fluctuated between twelve and twenty-five cents a share for almost a year, then:
boom. It started to skyrocket, and soon after that we had both tripled our money. One day, while the stock was still at this high, my mom called again. “Suze,” she said, “I’ve decided that it’s time to sell.” This time Ididn’t stop her from listening to her inner voice. I said, “Go for it.” She made three times the money she put in, and she was perfectly happy about it.
Even so, my mom would have made ten times, not three times, her money if I hadn’t drowned out her inner voice and made her doubt what she knew to be true for her. If that spark of instinct had been guiding her actions, she would have been far better off than she was by letting my doubts get in her way.
The moral of the story is that—whether you want to believe it or not—you and you alone have the best judgment when it comes to your money. You must do what makes you feel safe, sound, comfortable. You must trust yourself more than you trust others, and your inner voice will tell you when it is time to take action.
I’m not in any way suggesting that if you take your nest egg and go out and find a speculative stock to invest it all in, you’ll get rich. You won’t. You’ll be a sitting duck if you do that. What is more, I doubt your inner voice would guide you in that direction anyway.
Nor am I suggesting that you shouldn’t listen to others or learn about what you’re planning to invest in. You need information to make good decisions. But your inner voice will help you weigh that information properly. What I am suggesting is that you test the waters before you jump in with everything you have and that you practice listening to that inner voice. As soon as you see how easy it is to stay afloat, and get used to the investing temperature, so to speak, you very well might want to go in deeper.

With time on your side, you win when the market is up—but you also win when it goes down.
My company has a 401(k), but I never joined it. I know that it would be a good way to build up retirement money, but I never knew which investments to put my money in, plus I was afraid to make the wrong choices. I’m more a cash kind of guy. But now I’m starting to make more, and I’m thinking of getting married to my girlfriend. I’ve been feeling more like a grownup, I guess, and I was really thinking it was time to invest.
Since it was the beginning of the year; I thought why not start the year off right, and I signed up, and started to contribute the maximum I could, which they told me was $750 a month based on what I made. I put all the money into this one aggressive growth mutual fund that seemed as though it had done really well over the years. The first month, fine, and the second. But then the market dropped, and the fund tumbled way down. I couldn’t believe it. By the time I had added my third payment, my $2,250 was only worth about $ 1,950—I had already lost money. I was somehow seeing my fear come to life. But I decided to stick with it. Two months later, after I put in another $750 for each of those months, I should have had $3,750, more if it was actually earning money, but when I looked at my statement I only had $3,343. I was still losing money. This was when I couldn’t take it anymore, so I went back to the human resources department to withdraw from making any more contributions to the 401(k). I mean, there’s no point in losing money. I thought at least I could wait till the market started to go up and maybe then I would rejoin.
Michael’s trouble was that he understood only the concept that when you buy something you want it to go up, better known as “buy low, sell high.” He didn’t understand that what you want to do with dollar cost averaging—which is what you’re doing with a 401(k)—is to buy low and lower and lower and then sell high. Michael had actually chosen a great fund to invest in, and since he had many years left until he retired, he should actually have been thrilled when it took a tumble. But no one told him that.