As a financial planner, it can be difficult to know whether to recommend long term care insurance to your wealthier clients. Many articles have been published suggesting that those with significant assets don’t need long term care insurance in their financial planning because of their ability to self-insure. These articles argue that individuals who are financially capable of self-insuring their long term care risks should do so, rather than purchasing long term care insurance.
One approach may be using facts and case studies to get your clients thinking about viability of the self-insurance option. But to answer the question, “How much money will a person need to cover their long term care risk?”, you can also try the following formula:
- Determine the average cost of care in your area
- Project it forward to the time when your clients are at the highest risk of needing care, based on their current age and the rate of inflation
- Multiply that figure by the expected number of years of care
The result can be an alarmingly high dollar figure for your client.
Determining the average cost of care
Today, the average cost of care for a semi-private room in a nursing home is nearly $70,000 per year nationally, according to the April 2008 Genworth Cost of Care Survey. When catering to wealthy clients, however, you must keep in mind that they are not average, in the sense that they may be more likely to seek care from better-than-average sources. To more closely approximate realistic care figures for today’s wealthy population, therefore, we should inflate the national average by 30 percent, estimating that the national average cost of care for a wealthy individual is closer to $90,000 per year.
Projecting the future cost of care
Although you must begin by estimating today’s annual average cost of care for the wealthy, it’s more important to project how much your clients’ care will cost at the time they are most likely to need the care. Statistics have shown that 97 percent of Americans will require some sort of long term care assistance by the time they are 85 years old. When you’re discussing long term care needs with your clients aged 50 to 60 years old, therefore, you will need to project the cost of care 30 to 35 years down the road. If we assume a conservative inflationary growth rate of 5 percent, then in roughly 15 years, the national average cost of care will be close to $180,000 per year, and in 30 years, that figure will have risen to approximately $360,000 per year.
Determining the duration of care
Now that you’ve projected a future annual cost of care, you need to figure out the expected length of care. While many studies have shown that the duration of care is trending toward seven to 10 years, we will assume a conservative five years of care. This means that, in 15 years, nearly $900,000 in assets will be spent on long term care needs, and in 30 years, nearly $2 million of assets will be at risk.
Why else might an affluent client buy LTCI?
The alarmingly high cost of self-insuring long term care is certainly one reason to consider long term care insurance. But it’s not just about the money — there are other reasons why your wealthy clients might want to own a long term care insurance policy.
Today’s 50- and 60-year-old clients were raised with insurance as an integral part of their lives. They recognize the value of a policy that’s designed to reduce the financial risk associated with owning a home, a car, or business properties. People who own insurance feel entitled to the benefits their policies promise and are, in turn, willing to make claims against those policies.
We might conclude that, like owners of other lines of coverage, individuals who own long term care insurance would be far more likely to use the coverage. They would be less likely to wait until all else has failed, and they would very possibly lead healthier and happier lives as a result. Without the benefit of long term care insurance, individuals are more likely to deny their needs and otherwise put off the care they need. Health care professionals tell us that it can be devastating to a person’s health and happiness to delay required care. Policy ownership, therefore, not only reduces the high cost of self-insuring — it also offers a sense of entitlement that prompts individuals to seek the care they need.
A second benefit of policy ownership is the care coordination feature, built into most of today’s policies. Care coordinators are contracted by the insurance companies as a service to the policyholder. They are available to develop a plan of care, to find appropriate service providers, and to supervise the policyholder’s claim on both an initial and ongoing basis. The process of seeking care can be intimidating to both the policyholder and their family members. A professional care coordinator can relieve much of your client’s stress at an extremely difficult and critical time.
Don’t forget that your role is to assist your client in fulfilling their needs.
One agent said, “I’m not worried about my client — I’m worried about my client’s kids’ lawyers!” Remember: We all carry errors and omissions insurance to protect ourselves against consequential loss. The risk to your clients’ assets in the absence of long term care insurance far outweighs the risk to you. You are protected by E&O — protect your clients with LTCI.
Long term care can pose a significant financial obligation, so it only makes sense for those who can easily afford to purchase a quality insurance policy to do so. Using the formula discussed earlier shows how financially devastating it could be for your clients to self-insure their long term care risks. By purchasing long term care insurance, your clients can transfer risk from their own assets over to the insurance company, they are more likely to receive the care they will need, and they are able to achieve peace of mind knowing that there will be someone available to help at a time when help is needed most.
Scott D. Boyd is the vice president of long term care for The National Benefit Corp. He can be reached at [email protected].