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.”