Honest and thoughtful answers to basic questions help advisors and clients determine if planning should include long term care risk analysis.
Unfortunately, substantial misinformation and questionable assumptions lead most planners and clients blissfully to ignore the issue or to underestimate the LTC impact on family wealth.
Using a set of questions, such as the following, may help turn things in a more productive direction.
The ‘Do Nothing’ Questions
The first group of questions could be labeled the “do nothing” set. Here, “yes” answers will provide assurance that doing nothing is a great decision. This set could start with an agree/disagree type of general statement to the effect that, “I agree with some of the following and will continue to do nothing to mitigate LTC risk.” Then, ask for yes/no responses to the following:
1. I will never need personal care assistance from anyone.
2. I believe cost of care is insignificant.
3. Even if cost is significant, I will happily pay all care costs personally.
4. Future taxpayers will always be able to pay for my care.
5. I will happily pay taxes adequate to cover LTC costs for everyone.
6. My family and friends will provide care at no physical or financial cost to them.
7. I can invest in “My Personal LTC Fund” and do better than insurance.
The ‘Do Something’ Questions
The second group of questions may be labeled the “do something” set. Here, “yes” answers will provide assurance that addressing LTC is a vital planning function that should not be ignored. As before, start with an agree/disagree statement. It could be along these lines: “I agree with some of the following and will determine if insurance is a better deal than personally paying care costs or than expecting someone else to pick up the tab.” Then, obtain responses to these yes/no points:
1. It is reasonable to assume I may need care for a year or more during my lifetime.
2. Care costs are significant and can erode even substantial wealth.
3. I would be uncomfortable liquidating investments, paying taxes due, then losing investment income on those assets used to pay care expenses.
4. High quality care is most assured if funded privately or with insurance.
5. Given what we know about our country’s unfunded commitments to retired and elder citizens, it is unlikely that LTC will become a new entitlement.
6. Cost of care is the big problem. Premium is a comparatively small problem.
7. Investing same amount as premium in a personal account will not accumulate as much money as available with properly designed LTC benefits.
8. LTC insurance seems to be a complicated and uncomfortable topic; however, it is child’s play compared to the financial chaos caused by uninsured care.
Let’s look at how it might play out. Assume private facility care of $190 a day, (the current national average based on various industry reports). If a 55-year-old needs care at age 81, at 5% inflation, the daily cost will average $643 or $235,000 annually. A 4-year care event will be $1 million. To save $1 million (in order to fund the $1 million care event personally), at 4% average annual after tax rate of return, it would require a lump sum deposit today of $375,000 or monthly payments of $1,945 for the next 25 years.
With an LTC policy, however, 25 years of LTC premium for a policy covering 4 years of care would cost about $3,900 annually. This money would be returned to the policyholder as claim payments after 152 days. Adding 4% investment opportunity cost, the premium break-even occurs after 272 days of claim payments.
In sum, LTC planning is critical for each of us as individuals, as professionals advising clients and to our great country. Doing nothing is leading to unsustainable reliance on future taxpayers and placing personal wealth at great risk.
Ralph Leisle, CASL, ChFC, CLU, is president of LTCi Decision Systems Inc., an Irvine, Calif., LTC software development and consulting firm. His e-mail address is firstname.lastname@example.org.