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Long Term Care Planning Is Mostly A Financial Decision

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Expansion of the LTC Partnership program to more states creates new opportunities and challenges for long term care insurance producers.

The challenge is similar to working with high net worth clients in that, on both cases, numbers become a critical component of the planning.

If protecting assets through a Partnership LTC policy and still qualifying for Medicaid is one rationale for insuring, then benefit selection decisions are critical. In contrast, in high net worth planning, the critical objective is demonstrating value of insurance versus investments.

For markets in between the two extremes, the lack of LTC insurance penetration suggests that customers need 2 sets of information: 1) A better understanding of the financial impact of LTC on their lives; and 2) a better understanding of the value of owning LTC insurance.

This need can be stymied by conflicting recommendations from various advisors. In fact, the different views tend to encourage consumers to do nothing.

Consider: Traditional LTC insurance specialists make an emotional appeal, but this is countered by other advisors who suggest investments are a better way to cover care-related financial risk. Another advisor will argue that combo life/LTC or annuity/LTC products are better than wasting money on traditional stand-alone LTC policies which may never be used, while the LTC insurance specialist will argue the opposite.

In the end, the consumer’s ultimate decision may be emotion-based. However, the facts suggest that accurate financial projections are invaluable. For that reason, trusted advisors should guide clients through an unbiased comparison of choices.

In short, the cure to no action on LTC insurance is reliable and objective financial analysis.

Two situations will demonstrate the importance of numbers for Partnership planning and high net worth planning.

The Partnership situation is similar to that faced by people in traditional middle markets. In most cases, a compromise is required between desired coverage and affordable premium. In these situations, the question is “what is the optimum mix of benefits, future co-pay and premium, appropriate for a given client’s finances?”

By comparison, the high net worth client can afford maximum coverage but this client still wants optimum value–which can be found only by analysis of the future impact of the benefit choices made today. Indeed, benefit design decisions are likely more important than most advisors and clients realize.

Partnership prospects have limited resources. Without LTC insurance, they will likely qualify for Medicaid soon after a care event begins. Here, affordable premium and future co-pay are of paramount importance. Co-pay includes future cost of deductible days and difference between care costs and claims paid.

Example: Let’s look at the future co-pay of 2 different benefit designs, using modeling software. We’ll compare the same policy from the same carrier, but use a different mix of benefits. The premium is identical, at $1,800 annually.

Benefit design selection “A” provides the policyholder with a $100 daily benefit, growing at 5% compound inflation for a 5-year benefit period. Design “B” is identical except it has a 3-year benefit period and a $130 daily benefit. Assume the current care cost for this individual is $130 daily growing at 5% compound. The future co-pay with benefit “A” is $147,000 versus $40,000 with design “B.” So, design “B” is worth $107,000 more to the policyholder at time of care than design “A.”

But can the client afford the “A” plan’s co-pay of $147,000 at time of care? And, if the care event goes 5 years, can the client afford all the co-pays, which will amount to $375,000 and $235,000, for plans “A” and “B” respectively?

It is likely that neither of the above options will be affordable for a Partnership prospect. Under current regulations, once the applicant goes on Medicaid, asset protection is capped even though policy benefits remain. Asset protection objectives are limited or defeated. Hence, covering a shorter period effectively is more valuable than covering long periods with unaffordable co-payments.

High net worth clients can afford to pay care costs from personal resources. For them, the question should be, “is LTC insurance a more cost efficient way to cover this risk?”

Using common financial planning concepts, a dramatic story can be explained in minutes. The story is simply projecting the impact of care on family wealth, and then the relative value of insurance versus using personal resources.

Example: Assume that investments earn 4% after taxes over a 30-year plan period. Also assume that the financial impact of a care event–now costing $200 daily and growing at 5% compounded over 3 years beginning 20 years from now–is $860,000. And assume that the LTC plan will insure both the care recipient and spouse for 5 years for all above costs other than a 30-day deductible. In this case, the cost over the 30-year plan period with insurance is $203,000; this includes premium for both policies and the 30-day deductible during the first care event. The second policy and extra 2 benefit years available to this care recipient are ignored in the calculations.

If the surviving spouse needs 3 years of care at the end of life, the impact will be another $910,000–for a combined impact of $1.7 million on estate assets if there is no LTC insurance. If LTC insurance is present, the 30-day deductible is the only second care event cost not already included in “cost with insurance” calculations. Note: Only 60% of potential insurance value is being used in this high net client scenario.

Premium breakeven, including both policies and loss of investment opportunity on premium, is 355 claim days. In other words, breakeven including both policies is one claim year for one insured. All claim payments for either insured beyond that point adds to profit from deciding to insure.

Whether working with a Partnership, traditional middle market, or high net worth client, the advisor should keep in mind that the care cost problem and insurance solution are the same. Only the numbers are different.

Ralph Leisle, CLU, ChFC, CASL, is president of LTCi Decision Systems, an Irvine, Calif. software development and LTC consulting company. His e-mail address is .