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August 25, 2008 at 08:00 PM
Of all the obstacles long-term care insurance faces to become a viable product for the financial services industry, none is harder to overcome than the belief that is it inappropriate for high-net-worth individuals. This belief is based on fundamental misconceptions of what long-term care insurance actually does. When combined with a historical antipathy towards the product, it leads many to avoid the subject entirely by suggesting to their clients they can self-insure a long-term care event.
There are three key misconceptions:
- Long-term care insurance protects individuals.
- Long-term care insurance protects assets.
- Wealthy people can afford to self-insure.
Long-term care insurance doesn’t protect individuals — it protects families
To understand what long-term care insurance does, you must first understand what motivates people to purchase it. The commonly held belief that individuals purchase the product for reasons such as maintaining their independence, getting into a good nursing home, or to avoid being a burden to those they love, is incorrect. No one purchases any form of personal-line insurance such as life or disability income expecting to use it; if this was the case, the carrier would never issue the policy.
As with other mainstream products, people purchase long-term care insurance because they understand the consequences a need for care would have on those they love. Simply put, reasonable people never assess the risk of an event happening to them, only the consequences to those they care deeply about if it ever did. If severe enough, individuals will completely disregard risk and focus only on a way to mitigate these consequences. It is no different than what motivates people to buy life or disability insurance.
The majority of care is informal, which means family or friends provide it. This assistance, referred to as custodial care, is necessary because of either a chronic illness, cognitive impairment, or both. The former makes it difficult, if not impossible, to perform basic daily functions. The latter affects the individual’s ability to safely interact in his environment. The nature of custodial care is often all-consuming for those who provide it, leading to serious emotional and physical costs.
Put simply, if your client ever needs care over a period of years, his life is not going to end — the lives of those providing his care are going to end.
Long-term care insurance should be viewed exactly like life and disability insurance, as protection not for the insured, but his family. By paying for care, it allows your client’s wife and children to supervise, rather than provide it.
Long-term care insurance doesn’t protect assets — it protects income
Clients work a lifetime to accumulate a portfolio that will generate sufficient income to maintain their standard of living during retirement. This includes keeping prior financial commitments. It is reasonable to assume that clients’ retirement income is matched with their retirement expenses. If nothing has been allocated to pay for care, the income must be reallocated. Where else can the money come from?
