Almost every financial advisory organization today is putting an emphasis on health-care planning in retirement. There are many ways advisors can engage affluent clients in long-term-care (LTC) planning—and those options are probably only going to increase.
But how can you navigate the maze of self-insuring, standalone LTC insurance and life/LTC solutions? And why should the wealthy even consider such solutions when they assume they can easily afford to pay for care?
You will hear a plethora of opinions on this from a variety of resources, including insurance brokerage general agencies and insurance companies, who send out armies of wholesalers discussing the latest life insurance products that include chronic and long-term care riders.
For your more affluent clients, it’s important to not confuse a checkbook with a plan for care. There are two major considerations: the financial part of the equation and the emotional and complicated family part.
Financial Considerations
First, let’s look at the financial part of the equation. Coming up with “a number” that someone needs for long-term care is tricky, especially for those in their 50s who may not need care for 30-plus years.
The way many advisors today determine a number is to use carrier cost of care surveys, such as a recent one from Genworth. They then do a calculation by using an expected number of years of care, such as three, which is a historic average. Using a projected inflation rate, an advisor can estimate how much money a client will need in the future.
For example, using $160 per day as the average cost of eight hours of home care in the U.S. times three years, the current cost of care is about $180,000. If you project that cost of care out 30 years at a 3 percent inflation rate, the amount to set aside is about $412,000.
You can use the cost of care survey to check for regional differences and adjust this cost up and down. However, there is a caveat: Predicting the cost, type, or duration of care this far out can be hard. It is important to careful examine a number that seems large compared to the total net worth of a client. Most LTC claims data show the vast majority of claim incidents have been less than $250,000.
Let’s say an advisor comes up with a $500,000 cost of care number. What are the options to getting there? One increasingly popular way is through mind maps.
A mind map is an effective way to lead a long-term care planning discussion. A good start may be to discuss why Medicare and Medicaid might not be the best options to rely on for care. Although Medicaid is currently the biggest single payer of LTC, planning for Medicaid LTC is difficult. Medicare helps pay for some LTC services, but it is typically limited to the financial constraints and reimbursements that Medicare faces. Some private-duty care providers do not accept Medicare as a payment source to avoid the regulatory burden.
Besides government programs, here are three popular options for financing LTC:
1. Cash and equivalents. This is the default approach and it has several benefits, including not paying insurance premiums for something that may never happen. However, the key to this strategy is that some assets need to be identified as the assets that will be used to pay for care, and that designated pool must be periodically reviewed.
2. Stand-alone LTC. For most people, stand-alone LTC insurance is the most straightforward way to pay for care. The product in its current incarnation is straightforward. People select a monthly benefit maximum, a total benefit maximum and inflation options. The challenge for most clients and advisors is comparing different carriers’ products and getting underwritten for health, which they will typically need. Standalone LTC is very popular with people who have experienced friends or family coping with the cost and stress of care and who want to help minimize the impact on their own family members.
3. Life with LTC riders. If someone is buying life insurance for protection or as part of retirement planning, there are often riders that can be added to policies that may allow policyholders to accelerate benefits if LTC is needed. Additionally, there are plans that allow single premiums to purchase a combined life/LTC policy. Life with LTC riders can vary greatly in the amount of money available and what medical conditions are required to access benefits, so they require some research to understand.
Emotional And Family Reasons For Planning
Often, your affluent clients can afford to self-insure. So why do many buy LTC insurance? This brings us to the emotional and familial side of the equation. LTC insurance can solve a lot of problems. Here’s a partial list:
1. LTC insurance can come with built-in care coordination to help access care. Care coordinators work with the policyholder, family members and physicians to help ease the journey without mandating that certain providers be used. It’s a great starting point if help is needed.
2. It allows for guilt–free choice of care. Even if a “self-funding” cash account has been set aside for care, it’s still difficult for a client to write the actual check for care. It seems easier to let the insurance company pay.
3. Some people describe LTC insurance as a “coupon” that can deeply discount care even if it doesn’t cover all the costs. This demographic most likely would love getting a highly reduced rate at a luxury hotel. LTC insurance can work in a similar manner.
4. It is good for families with extended children in different life circumstances. LTC insurance allows a third party to assist with care coordination and funding of care. Siblings are often thrown together to help in a family crisis, and LTC insurance is highly appreciated by them.
When discussing either part of the equation, it’s important to remember that before someone discusses LTC insurance with you, they have no doubt done research on the Internet and probably have read a lot of positive as well as contradictory information. Here are some common mistakes that both advisors and consumers make when considering LTC planning after researching it:
Overbuying benefits. Many financial articles discussing LTC insurance will recommend that a LTC plan offer very high benefit levels with a 5 percent compound inflation rider. The problem with trying to insure for 100 percent of any possible costs is that it often puts annual premiums into the five-figure range for a couple and may dissuade action.
Not taking into account possible tax incentives. With standalone LTC policies, you are usually able to pay premiums through HSA accounts and deduct them as a health insurance expense through a business.
Medicaid planning. States are under huge financial stress due to aging populations and public employee pensions. Expect Medicaid benefits to be tightly managed. Medicaid is a safety net, not something to rely on for higher level LTC care.
Assuming past performance of products indicates future performance. Older LTC policies have been through cycles of rate increases due to missed actuarial assumptions. However, newer polices have more conservative pricing reflecting the lower interest rate environment.
Not conducting periodic reviews of policies. Older policies need to be reviewed to see how the client’s policy works and the current pricing and benefit levels. Advisors can partner with organizations that can assist with this.
One positive and socially responsible way policyholders can think of LTC insurance is that, in the end, it is part of the evolving “sharing economy.” You are paying a monthly fee—and you may or may not use the service. If you do, it’s great. If not, someone will benefit.
Tom Riekse Jr., CEBS, ChFC, is managing principal at LTCI Partners, a brokerage general agency specializing in long-term care insurance. He can be contacted at [email protected].