Almost all of your working clients will soon be confronted with decisions about long term care insurance. I believe retirement advisors should be knowledgeable on this issue. It's an opportunity to serve your clients better, broaden your relationship and offer effective solutions.
Despite the media's fixation with health reform, the new health care law recently enacted contains a provision for a major long term care insurance program, run by the federal government, which went almost entirely unnoticed. This law is known as the Class Act (for Community Living Assistance Services and Support Act). It states that employees will be automatically enrolled at the work site in a government insurance plan that would pay no less than $50 a day (it is estimated that the benefits will wind up being about $75 per day) for community based, non-medical care for those who need help with bathing, eating, dressing or other activities of daily living. The premiums will be based on age. The Congressional Budget Office estimates that the average monthly premium will be $146. The Centers for Medicare and Medicaid Services believe the average will be higher at $240 a month. There will be a five year waiting period before benefits will be paid. In other words, employees will have to participate in the program for five years before they are eligible for benefits. Importantly, although employed people will be automatically enrolled, they can opt out. Hence, they have to make a decision. The government will start communicating to employees about this program in 2011. Worker participation is expected to start in 2012. In other words, financial advisors have time to think this through. But retirement planning and discussions about long term care should certainly factor this in.
There are a number of serious problems with this law, but that's a public policy discussion. For financial advisors, the practical issue is that now that the law has been enacted, how will it affect your client base and you and, most importantly, what should you do about it?
I believe long term care insurance is an important part of financial planning for people with assets between $300,000 and $6 million. Long term care insurance is complex and sale and many financial advisors do not want to deal with it. The new law makes the discussion easier.
One of the striking things about the benefit of $75 a day is that it provides an important foundation, but it is still inadequate. The U.S. Department of Health and Human Services estimated that in 2008 the average cost of home health services was $29 an hour: homemaker services averaged $18 per hour. The average cost of a private room in a nursing home (and if you went into a nursing home would you want to share a room) was $76,285. If your clients choose to participate in this program you have a clear obligation to inform them that the benefits paid will not be enough.
When Social Security first passed, many people in the insurance business felt that the program would cut into their business of helping people prepare financially for retirement. They were wrong. By establishing a floor of income, Social Security actually focused attention on retirement and made many feel they would be comfortable if they supplemented the Social Security foundation.
The Class Act risks giving some a false sense that they have protected themselves sufficiently, which would impede the purchase of additional long term care insurance. Effective financial advisors can counter that misperception and indeed use a discussion of the Class Act to suggest policies to supplement this program.
The Class Act has faults, but it can lead to productive discussions between you and your clients about how to deal financially with the risk of needing long term care.
Mathew Greenwald is president of Washington, D.C.-based Mathew Greenwald and Associates.