Despite long term care insurance’s compelling benefits, producers report they still have to slog through dogged struggles with prospects to get them to purchase.
So one more time: Exactly what is the value of owning an LTC insurance policy? Here’s how some noted experts spell it out for clients:
“One of the things about being a large administrator and managing 13,000 claims and seeing $5 million to $8 million dollars a month going out the door to pay claims, I know there’s value,” says Peter M. Goldstein, executive vice president, Long Term Care Group Inc., Segundo, Calif. “So when I hear, ‘There’s no value,’ I always say, ‘So who’s getting the $8 million?”
The industry passed the $1 billion mark in claims last year, he adds. That is a lot of care. And manufacturers are bringing out better policies all the time, he points out.
“In the design of policies today, part of the value is in care-management features, so not they’re not just policies to pay bills anymore,” Goldstein says. “Most good policies also help you find care and advice to help the family deal with the situation. So a policy provides a service as well as a financing tool.”
William Dreher, managing director, Compensation Strategies Inc., New York, believes it’s much easier to explain the value of LTC insurance to wealthy clients.
“I think for a great many people with middle class incomes who don’t have large assets beyond their house, there are so many demands on their disposable income, long term care winds up taking a back seat. It’s extremely difficult to convince people about something that is going to pay off in 30 or 40 years.”
The “natural market” for LTC insurance is either corporations providing a benefit for upper level and executive staff or successful businessmen and professionals who have assets to protect and disposable income sufficient to pay the premiums, concludes Dreher.
With the tax breaks available through corporate-bought policies, many affluent clients can be more easily convinced that LTC insurance is a decent value for money, Dreher says.
“Most corporations aren’t interested in providing benefits for everybody,” he notes. “Because these are not ERISA plans, you can discriminate (i.e. take a tax deduction for the LTC policy, even though they don’t cover the rank-and-file employee).
Some employers still are not willing to put out extra money on behalf of an executive to help him or her secure an LTC policy, Dreher says. At the same time, there’s a way they can be talked into assisting executives in making the purchase.
“The business owner can tell the executive, ‘I’m willing to pay the premium as long as you are willing to take a cut on your salary or bonus.’ That often works out fine, because the employee winds up getting coverage using pre-tax dollars, thus saving money, while the employer has a wash,” he observes.
The employer can even go one step further, if it has a deferred compensation arrangement for executive retirement. The company can offer to pay for LTC after retirement if the executive is willing to take a cut on other post-retirement benefits, he suggests.
“That way, the employer doesn’t take on extra liability and saves money, because the company doesn’t have to pay Medicare tax on salary transferred to the medical benefits expense ledger,” Dreher says.
Claude Thau, president of Thau Inc., Overland Park, Kan., says he tries to bring the client’s advisors into the discussion by talking in terms of the risk to the client’s assets that they have helped to build.
“Why should the financial services industry, including CPAs and financial planners, leave clients with what is probably their largest unfunded risk?” he asks. “It could impact on retirement plans and the family business.”
Even if a client seems wealthy enough to self-insure, it still leaves a big question, Thau points out: “Do they really want to? The financial planner has to know if the client will self-insure long term care, because that impacts modern portfolio theory.”
Mention modern portfolio theory, and you’re speaking the financial planner’s language, Thau notes.
He explains the theory this way: People are not just concerned about returns; they’re concerned about volatility. Modern portfolio theory is not so concerned about the upside. Rather, it seeks to protect the downside, based on how risk-averse a client is.
“Most investments with a large upside also have large downsides,” Thau says. “Most kinds of insurance protect the downside and have little impact on upside volatility.”
Thau asks what’s worse: a $250,000 investment loss or a $250,000 long term care loss? The long term care loss is substantially worse, he argues.
“How many people had $250,000 in investment losses, and the spouse didn’t even know about it? Quite a few, actually. With LTC, you can’t hide it. This gets back to family stress and lifestyle problems with a LTC case. If the financial advisor is concerned about client losses, I tell them this: You’ve got to consider protecting the downside against the most volatile risk you think they have.”
The standard advice on investment loss is to sit back and wait for it to come back, Thau notes. “But that’s not going to happen if you need LTC. With LTC, you can’t work to rebuild assets. Basically, it’s all downhill from there.”
There’s also the impact on the family, emotionally as well as in terms of lifestyle, and financially if someone needs LTC. What’s often overlooked, he notes, is that the primary caregivers get hit so hard they may wind up needing acute care themselves. Studies show caregivers have a higher likelihood of dying and of mental depression, he says.
“In the senior population, 15% are clinically depressed, but among caregivers, its 40%,” Thau says.
The point is, people need to discuss LTC insurance for the sake of the people who would most likely be taking care of them.
Thau believes the affluent client has good reasons to buy LTC insurance, but they are not the same reasons as for the middle class. Too many brokers and agents don’t appreciate that difference, he says.
Whether the client is middle class or affluent, the two most common reasons producers give to buy LTC insurance is to protect one’s estate and to protect the lifestyle of the spouse. But for really rich people, neither argument holds much water, Thau argues.
“The really affluent say their kids already have too much money. Protecting the lifestyle of the spouse is even more ridiculous. The spouse has lots of money.”
The real attraction for the truly affluent is not so much in saving assets but in investing them, Thau argues. Show how LTC insurance can be applied to make the client even richer, he advises.
“Many wealthy people like to tame cost by transferring risk,” he says. “You can show that when they have an LTC policy, they don’t have to set aside huge reserves for the possibility they or their spouse may need long term care. If self-insuring, they have to set aside enough money to take care of Alzheimer’s or whatever. But if they’re insured, all those monies are freed up to give to kids, to charity, to see that money has some effect you want in your lifetime instead of when you die.”
Then the client doesn’t have to worry about passing up investment opportunities or a vacation home because he needs cash in reserve in the event they need care. Having an LTC policy frees up cash, so they can make even more money, Thau says.
Finally, he asks advisors to ponder how their affluent clients get to be affluent. They got that way, he notes, by having a lot of control over a successful business.
“People who are accustomed to control have a concern if they do need long term care, they can lose control,” Thau adds. “Buying an LTC policy creates a huge pool of money nobody else can get their hands on.”
Thau’s suggestion to the industry: To increase awareness of the value of LTC insurance, encourage LTC planning.
“Advisors tend to put the cart before the horse,” he says. “There’s too much sales discussion about population statistics, the number of people going on claim, and so on. That doesn’t cause people to internalize the message. You should be asking, ‘What if this happens to you? What will you do if you need care?’”