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.

Although they may look at LTC insurance in different ways, advisors agree it's important to discuss it with clients. Family relationships and medical history, assets, types of policies and their costs, and the nursing home charges in the area a client lives are among the topics often covered in such discussions.

"Long-term care is a part of retirement planning. When should it begin? At birth," says Chris Cooper, owner and founder of Chris the financial advisory firm Chris Cooper & Co. in Toledo, Ohio. He also has worked as a paramedic and nurse and owns Elder Care Advocates, a private geriatric care management and long-term-care consulting firm.

"Anybody with under $2 million in net worth needs to look at the insurance or they will go broke, especially because two-thirds of the persons availing themselves of long-term care have dementia, largely caused by Alzheimer's, and they can last 20 years," he comments.

Janice K. Hobbs, owner of Jan Hobbs Financial Advisors in Orange, Calif., says she believes 60 is a good age to consider LTC insurance. But it might be appropriate for a younger client depending on medical history, such as if adult-onset diabetes runs in the family, she adds. Many LTC insurance companies deny policies to people, no matter what their age, with various ailments. Also, an LTC policy might be appropriate for a younger client who is extremely concerned about having such coverage. "We're really big at being able to sleep at night," Hobbs says.

However, there can be a downside to purchasing coverage when you are younger, Hobbs notes. "Features and benefits and costs change over time, and you may end up with a policy that doesn't offer what you need. And the probability of suffering a chronic ailment is unlikely in your fifties. You're likely to be working and have disability insurance. So this is a different need all together and typically associated with old age," she says.

David J. Moran, senior vice president for wealth management firm Evensky, Brown & Katz in Coral Gables, Fla., says a big concern of his is that people don't have the amount of coverage they need. "That's a sales practice issue. It was hard enough to get people to buy, and then sticker shock set in, and the agent low-balled them because something is better than nothing. They may have bought their policy six or seven years ago with no inflation rider. Now someone comes in with an $80 a day policy. They now think they have a policy that will pay when they need help, but that's not going to buy lunch," he says.

In fact, policies and benefits vary widely. Two points advisors interviewed for this article agreed upon are that indemnity policies generally are better than reimbursement policies and an inflation adjustment rider is a must. Indemnity policies generally provide full benefits, say $6,000 a month, once you qualify, regardless of out-of-pocket expenses. With reimbursement policies, policyholders generally pay for expenses and then file claims to be reimbursed, which can lead to a potentially onerous claims procedure, advisors say. Not surprisingly, indemnity policies generally cost more than reimbursement policies.

"For the most part it's cut and dried," says Barschi. "For almost everybody, the same policy makes the most sense. Generally speaking, it's evaluating the price point of the policy. I look for the cost to benefit."

For many advisors, evaluating all the ins-and-outs of policies can be time-consuming. Hobbs uses a consulting company that does research on long-term-care insurance for financial advisors. "They keep up with all the new developments. All the pricing, all the specifics of the policies," she says.

Her firm does insist on at least A-rated insurance companies and policies that offer 100% coverage for home-health care. Most often, the policy's elimination period-the waiting period before one can collect benefits-will be 90 days, she adds. Two people applying together can save more than 20% in annual premiums compared with two individual policies, Hobbs says.

She also suggests lifetime benefits because they don't cost that much more than four- or five-year policies, she says. "The statistic is the average stay in a nursing home is two-and-a-half years, but that doesn't count all the home-health care that went on before. If a client enters a nursing home and stays more than six months," Hobbs says, "the chances are they'll be there over five years."

But she and other advisors agree most people can't afford policies that will cover all the costs of long-term care should they happen to need it, and they should be prepared to pay part of the expense. "You start looking at co-insuring," says Moran. "In 12 years I've only seen one person buy a Cadillac plan. We came in with three recommendations, and she said they weren't enough. She reminded me her mother was 94 and in long-term care for the last six years, and had seen her Caterpillar stock eaten up. But more often than not, you look at how much someone is willing to co-insure."