To Buy Or Not To Buy?
That's still a big question for clients when it comes to LTC insurance.
Confusion and controversy continue to create concern among consumers considering long-term-care insurance, but more people are buying it and more advisors are discussing it with their clients.
According to a January 2003 report by the Health Insurance Association of America, the market grew an average 18% each year between 1987 and 2001. As of December 31, 2001, the most recent date for which the association has statistics, 8.26 million policies had been sold.
But long-term-care insurance is still a relatively new, unfamiliar product that many clients are reluctant to buy. "Although people fear that they might need extended care in the future, they seem to have little interest in taking steps to ensure that they will be able to pay for it. Society simply has not embraced LTC insurance as a necessity. After all, for most people it isn't even part of a standard employer benefit plan," says Shannon Arenella, a life product specialist in insurance for Commonwealth Financial Network, in the November/December 2003 issue of the firm's Business Review magazine.
Fueling the controversy over LTC insurance is a report that ran in the November 2003 issue of Consumer Reports magazine that concludes "... for most people, long-term-care insurance is too risky and too expensive." Among other things, the article says policy benefits may cover only a portion of the total expense, policies are packed with catches that can keep clients from collecting and there's no guarantee LTC insurers will be around decades from now when you may need them to pay.
While all those complaints are valid, the article notes LTC insurance "may be a lousy deal, but right now it's just about the only deal." If you are going to buy it, consider doing so around age 65, look for a strong insurer, buy a flexible policy and look at a four-year benefit plan, says Consumer Reports. Skip a plan if your net worth is less than $200,000-Medicaid will pick up the bills after you exhaust your funds. If your assets exceed $1.5 million-you will be able to pay for your own care, the report adds.
Virtually every advisor interviewed for this article had already read the evaluation in Consumer Reports. Their reactions were across the spectrum, with some believing many of its conclusions while others thinking it was seriously flawed-and an injustice to consumers and the industry.
"I think the analysis of it is very accurate. It's the group in the middle that needs it," advisor Henry F. "Hank" Hanau says of the report. Hanau is president of New York City-based HFH Planning Inc., an hourly basis firm that assists people with their entire financial situation. Clients interested in LTC policies are referred to brokers, and Hanau monitors the process.
"I have espoused the attitude that a lot of people are doing it out of fear and ignorance rather than out of an educated look at what they ought to be doing," Hanau says. He cites the example of a client who came to him who is married to a man 30 years her senior, has no children and owns a million-dollar-plus home. Hanau suggested she drop the LTC policy she has on herself because odds are he will be dead when she might need to go to a nursing home and her residence would be more than enough to pay for nursing care. It would have made more sense for her husband to have the LTC policy, he says.
Meanwhile, advisor Russ Barschi, also based in New York City, described the Consumer Reports article as an "abomination." In particular, he took issue with the asset range the magazine recommended for people to consider LTC insurance. "Someone worth $1.5 million doesn't need this kind of thing?" he questions unbelievingly. A couple worth that amount would get $60,000 a year toward living expenses if they withdrew a standard 4% annually, he notes, and long-term-care costs could be much higher than that-as much as double in the New York area.
He agrees the poor and rich don't need LTC insurance, but he thinks a couple needs to be a lot richer than what Consumer Reports described for them not to need it. "If you divide middle class into lower and upper, the lower would need it more to directly cover services as opposed to the upper middle. I'm looking up to $3 million to $5 million on the high end of middle class [not ultra-wealthy by New York City standards]. On the high end if it's a couple, they would need it so there wouldn't be a major impact on the significant other's lifestyle and also for preserving assets for the next generation," says Barschi, an independent insurance broker and RIA, who has sold hundreds of LTC policies and advises other planners on LTC insurance. He also own Seminars for the Advancement of Financial Education and focuses on eldercare planning.