Revisit High Net Worth Clients About LTC Needs

By Mark Ameigh

There have always been people who feel the strength of their financial situation means they do not need long term care insurance.

However, recent events in the financial markets should cause prudent people to re-examine their assumptions about the basis of their future financial security.

After all, the stock market plunge has wiped away a lot of personal wealth over the past 18 months. Furthermore, the prolonged period we have seen of low interest rates, though helpful to home buyers, has squeezed people who are dependent on interest earnings. In fact, the drop in rates can be devastating to some individuals.

The combined effect of these trends may lead people who once believed they could self-insure the financial risk of long term care to recast the role of LTC coverage in their lives.

Take the example of a couple approaching retirement who had $1 million in assets, split 50/50 between equity and income producing investments. This couples plan was to use income-producing assets to supplement Social Security benefits. They had intended their equity investments to serve as an inheritance fund, but one they could draw upon to pay for LTC costs if necessary.

Now, due to the twin declines in the stock returns and interest rates, this couple is looking at a much different financial picture.

If the two suffered a 25% reduction in the value of their equity portfolio, as so many people have, their equity assets are now worth $375,000. If the rate of interest on their income producing accounts has fallen 25% as well–lets say from 4% to 3%–this couple may need to start drawing down the principal in those accounts or take money from the equity fund.

If the couple chooses to transfer money from the equity fund to bolster the income fund in order to maintain the level of monthly retirement income payments to which they have been accustomed, they would need to reallocate over $115,000. This would mean the equity portfolio is now down nearly 50%.

As you can see, self-insuring LTC expenses may no longer be as viable as it once appeared. In this scenario, the inheritance/self-insurance fund has lost so much value that the entire fund could be wiped out in a matter of three to four years of paying for LTC services. Just as importantly, if there is a need to inflation-adjust the retirement income stream generated by the income fund, there will be further degradation.

Furthermore, if the idea of leaving an inheritance remains a key objective for the couple, it is time to revisit the LTC protection option.

Speak to anyone who has retired within the last few years, especially those who opted for an early retirement package. Within minutes, the subject of the financial markets recent reversal will probably emerge as a key concern. In worst-case scenarios, some retirees may need to reduce their standard of living or forego some of their most cherished retirement dreams.

In sum, a serious disability that requires LTC services has the potential to swallow up diminished financial assets. LTC insurance can help mitigate the effect of market and interest rate volatility on retirement income by “walling off” financial risk associated with a serious disability that requires LTC services.

Mark Ameigh, CLU, is a life and health insurance broker in Longmeadow, Mass. You can e-mail him at mrameigh@msn.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 20, 2003. Copyright 2003 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.