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To the Point by Jack Bobo

About 20 years ago I attended the very first symposium on the subject of financing long term care, which was held in Palo Alto, California. The meeting was facilitated by Stanford Research and attended by various disciplines of health care providers, the insurance commissioners from Arizona and North Dakota and a few people from the insurance industry.

After three days discussion, it was apparent that no one had a clue as to the most effective way to finance this looming social crisis. At that time, long term care was not an insurable risk, as there were no reliable statistics upon which insurers could base rates.

Everyone agreed that for coverage of any kind to be affordable, it had to start at younger ages. But the question left unanswered was: How do you get young people to buy insurance that at best may not be needed until 30 or 40 years in the future?

In the final report, the only viable solution offered was the purchase of a permanent cash value (whole life) insurance policy, which would serve current needs for young people and if death did not occur, the cash value could be used for LTC in later life. It was, to say the least, a slow start.

Soon after, companies started to come forth with limited indemnity policies to cope with the LTC problem. In the intervening years enormous progress has been made. Today, a wide range of policies is available with numerous options for the kinds of care that may be needed. In every sense our business has stepped up to the plate to provide relief for what 20 years ago seemed an insurmountable problem. Some companies are specifically targeting the 30-50-year-old market where rates are more affordable.

But despite great progress in policy design, sales fell 5% last year, according to LIMRA, and in 2001 only five million people had LTC insurance policies. Obviously there is buyer resistance despite the demonstrated need for such coverage.

According to the June 11, 2002 issue of The Wall Street Journal, this buyer resistance is being bolstered by financial planners who advise against coverage before 50 or 60 years of age–if at all. I suspect that many believe savings in the stock market will take care of the problem if it arises. Today that could be a hard sell since the Wall Street bubble burst.

The fact that people are not buying does not lessen the need. One way or another LTC in an urban society is a problem that needs to be solved. This is particularly true of single persons who may not have family or friends who could take care of them. Public assistance under Medicaid or some other program offers only a grim prospect for those in need.

Buyer resistance may not be motivated by a lack of appreciation of the problem, but rather may be a matter of priority. When dollars are limited, they will generally flow to where they are most needed. Certainly people in their 40s with young children may feel more pressure for survivorship benefits in the event of death or funds for college than for an event many years in the future. In such cases may be the most practical solution.

Perhaps I can illustrate with my own approach to the problem. Recognizing this as a future problem and long before the Palo Alto conference, I designated one of the $100,000 whole life policies to be the funding vehicle for LTC if the need arose. When I was working, I carried a large amount of long term disability insurance in the event of an early need. Today, in retirement, the dividends on that policy now exceed the annual premium by more than 10%. Therefore, instead of paying a current premium, I receive a check each year for the amount by which the dividend exceeds the premium.

The cash value of the policy currently is sufficient to pay a benefit of about $2,000 per month for three years. MetLife estimates the average stay in a care center today at $2,159 per month. If I combine the benefit my policy provides with Social Security, the payout extends to six years, well beyond the average stay at such a facility.

In the event of my death, the proceeds of the policy will provide my wife $2,200 per month for more than four years and with Social Security, over seven years.

Of course, the cash value referred to earlier would be available either to my wife or me should the need arise.

At the time I set my plan into motion there was nothing else available. But it has worked and I believe it vindicates the report that came out of Palo Alto endorsing whole life as a viable solution.

But the choices today are manifold and the coverage is, I believe, essential. But it is also comforting to know that we can serve this market in a variety of ways. If other exigencies preclude the purchase of a long term care insurance policy, then we can always fall back on the concept of “.”

A $100,000 policy has served me well. In the light of todays economy, a young person today should consider $200,000 or $300,000 for their funding.

Reproduced from National Underwriter Life & Health/Financial Services Edition, August 19, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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