As an investment advisor, you'd probably wince in your chair if a client told you that he didn't carry automobile or homeowner's insurance. After muttering to yourself, "What an idiot!" you'd probably begin sternly counseling the client that he was taking a costly gamble through such an oversight, and then either show him to the door or start the process of getting such coverage. But would you be so quick to chastise the client for not having long-term care (LTC) insurance?
Arthur Stein, a planner who is president and CEO of Cassaday & Company, Inc. in McLean, Virginia, thinks advisors should warn clients about the hazards of not carrying LTC insurance because he believes LTC is "much more important" to a client's financial future than auto, homeowner's, or even disability insurance. "The percentage of people who will need long-term care and the amount of money they will spend on it is much higher, on average, than for most insurable events," says Stein, who specializes in LTC insurance. About 40% of people who reach age 65 will need LTC insurance, he says, and 9% of them will need more than five years of long-term care assistance.
If you've checked into the cost of assisted living services lately, you know that it isn't cheap. A recent public opinion survey by the American Council of Life Insurers (ACLI) found that 69% of Americans are concerned about not being able to afford long-term care. There is good reason for their concern. GE Financial's Long-Term Care Insurance division released a survey in August on the skyrocketing cost of nursing home care. The survey found that in the last two years, the cost of nursing home care has jumped by 7%, with the national average stay in a nursing facility now costing $57,700 per year--and that doesn't include costs for therapy, rehabilitation, or medications. If a client lives in Alaska, the most expensive state for this type of care, they'd pay $166,700 per year. That compares to $35,900 per year in Louisiana, the least expensive. Stein's advisory practice is in the Washington, D.C. area, where he says long-term care services can cost from $60,000 to $120,000 per year.
Buck Stinson, president of GE's Long-Term Care Division, says that those advisors making a living from charging a fee for assets under management are recognizing the importance of protecting clients' assets through LTC insurance. "Statistically, 30% to 40% of the people in [an advisor's] book of business will need care," Stinson says. Many of those clients could self-insure, but if we're talking about a client with $1 million in investable assets, "you can quickly see how the cost of care could eat into that" to the tune of $200,000 to $300,000 per year if you're living in California or New York. Advisors should also be thinking about protecting their business as well, Stinson says. If 40% of an advisor's assets under management "are at risk as their clients age past 60," he says, "then doing the right thing for [the advisor] would be to protect those assets and offset that risk to a LTC insurance policy."
Younger Buyers, Higher Premiums
More and more consumers are also catching on to the benefits of LTC insurance--at a younger age--despite the fact that premiums are spiking. According to the Life Insurance Marketing Research Association (LIMRA), more than 125,000 consumers in the United States purchased LTC insurance in the first three months of 2003, totaling more than $230 million in annualized new premiums. Those figures translate into a 14% increase for the individual LTC industry based on new policies and annualized new premiums. Stinson says 2003 sales of LTC policies at GE, the nation's largest LTC carrier, are up about 5% over last year. And sales of LTC policies are also booming at John Hancock Life Insurance Company. Loida Abraham, second VP of Retail Long-Term Care at John Hancock, says that as of June 30, individual LTC insurance sales were $95 million, a 68% increase over last year's sales of $56.4 million.
The introduction last year of the federal government's Long-Term Care Insurance Program, which offers coverage to all federal employees, has increased the awareness of LTC insurance. Baby Boomers are also realizing they have to find a way to care for their parents, and themselves. Another government initiative that could spark more consumer interest in LTC insurance is legislation introduced in the Senate earlier this year that would allow all taxpayers to deduct the cost of long-term care insurance premiums. The bill, introduced by Senator Charles Grassley (R-IA), chairman of the Senate finance committee, and Senator Bob Graham, (D-FL), another member of the committee, seeks to encourage consumers to take personal responsibility for their long-term care needs, thereby taking the strain off of government programs. The Senate bill is similar to legislation introduced in the House by Rep. Nancy Johnson (R-CT), and Earl Pomeroy (D-ND), "The Long-Term Care and Retirement Security Act of 2003," or HR 2096. Both bills provide an above-the-line deduction for a LTC insurance premium, and include an annual tax credit of $3,000 for taxpayers with LTC expenses. The bills also permit LTC insurance as an option in flexible spending and cafeteria plans.
GE's Stinson says such legislation is necessary because "the Medicare and Medicaid bills will eventually bankrupt the country." In the short-term, Stinson says the bills will have a "tough time" passing because they're expensive. But ultimately the bills will be passed, he says, "once government officials are able to step back and determine the cost that's ahead of them in supporting Medicare and Medicaid," and see the opportunity the legislation gives them "to offset that cost and off-board it for personal insurance, and let the insurance companies bear some of that weight."
Planner Stein says it "would be nice" if the bills pass, but competing bills on LTC insurance are introduced every year, and have yet to get through, he notes. Besides, he says, "LTC premiums are already deductible; it's just that there are so many restrictions on the deductions that very few people can take advantage of it." If Congress passes the bills with a "meaningful deduction," he says, "that would be great, but a meaningful deduction would mean that it's available to all taxpayers."
The average age at which people are buying LTC policies is now in the upper 50s and early 60s, whereas a few years ago it was around age 65. Why the drop? It's mainly because consumers are recognizing that the earlier they apply for LTC insurance, the more likely it is they'll get coverage, and at a cheaper price. "Two out of ten people that want LTC are turned down because of medical reasons," notes Robert Davis, president of Long-Term Care Quotes, a consumer research center and independent agency specializing in LTC insurance in Chandler, Arizona. "Most carriers will reward good health through a price discount of 5% to 15%," he says. Planner Stein adds that the earlier consumers buy LTC coverage, the cheaper the cost will be over their lifetime. "The amount that somebody pays for LTC insurance depends upon the benefits they choose and also their age," Stein says. "Each year that they wait, they increase their cost a certain percentage, and the percentage increase is high enough that if you wait a year to purchase, it increases the total amount of premium you'll pay over your lifetime."
But some consumers are hesitant to buy LTC insurance in their 50s because they fear they'll be paying premiums for 30 years. This is a legitimate concern, Davis says, so insurers are responding with new products called accelerated pay, or limited pay, policies, which allow consumers to pay off the policy in ten years, or pay it off at age 65, when they would typically retire.
While insurers are coming out with new policies and offering more benefits to existing ones, they're also raising their premiums. On new products, "we're witnessing prices that are anywhere from 15% to 40% more than they were a couple years ago," Davis says. "But these are very benefit-rich policies. We haven't reached the point where companies are streamlining policies in order to keep costs down."
GE's Stinson says the uptick in premiums is indicative of where the LTC insurance product is in its short 25-year "life cycle." Insurers have done a good job of building LTC products that provide the features and benefits consumers need, Stinson says. Now, policies are evolving "to keep pace with advancements in the medical industry in terms of medical technology, and also advancements in how care is provided through assisted living facilities that didn't exist a decade ago." Part of the LTC product's evolution is "taking into account the things that drive profitability, or a firm's ability to pay claims," Stinson says. "Many [insurance] firms have been overly aggressive in an attempt to capture market share, and have underpriced the product." Stinson says the single biggest reason premiums are going up is due to "voluntary lapses"--assessing how many people are actually going to hold on to the policy. Unlike a term-life product where the average "lapse point" is from five to seven years, Stinson says, a LTC portfolio has an average life of more than 20 years because a client buys the product to use when they're in their 70s and 80s. "When you have a miss on your voluntary lapse assumptions of 200 to 300 basis points over 30 years, it's a huge assumption," he says. "And if the [insurance] company has under priced the product and missed that point, the only way they can keep the policies in force and can continue to pay claims is to raise rates."
Better Buy Soon
Planner Stein says that consumers who want to get a "good deal" on two of the best features in an LTC policy--the unlimited benefit period and the 5% compound inflation adjustment--should buy an LTC policy within the next six months. The ratings agencies are pressuring insurers to raise the premiums on these two features because the payouts are "potentially enormous." Of the two features, Stein says all policyholders should buy the 5% compound inflation adjustment feature, and quickly. When the price goes up in the next seven to 12 months on this feature, he says, "Everyone is just going to have to bite the bullet and pay it."
When insurers raise premiums, they naturally run the risk of losing clients. But both GE and John Hancock say they have continued to add benefits to their policies without increasing the price. Consumers are particularly fond of Hancock's Custom Care, Abraham says, because it includes a benefit allowing up to four extended family members to be covered by the same policy.
GE's Stinson says consumers are looking for more services from insurers that center around "wellness." So it recently partnered with a company called Lifeline Screening, which provides mobile body scans for policyholders.
Because many advisors aren't well versed in LTC insurance, they often decide the task is too daunting, and refer clients to a specialist in LTC insurance. That's okay, says planner Stein, because it takes time to customize the client's policy and compare the nuances of each insurer's LTC offerings. Never mind the lengthy and sometimes awkward conversation about a client's health. That's why GE provides a wholesaling model for advisory firms, says Stinson, helping advisors explain LTC insurance and assisting with the sale.