Most financial service advisors are accustomed to reviewing a portfolio with an eye for whether an investment recommendation will meet the clients risk tolerance. We contend that long term care planning is no different – both for the consumer and the advisor – and risk tolerance should be able to be used to make the best recommendations in this arena, as well.
Each consumer evaluates their level of personal risk tolerance for whether they believe they may someday need long term care services. “Will this ever happen to me?” If they agree it may someday happen, they may wish to create a plan for future long term care needs. Unlike other investment decisions, the consumer must surpass an initial degree of risk tolerance in order to proceed with any LTC planning options and proposals.
Once a consumer has agreed to begin planning, the specifics of policy design have their own level of risk tolerance. Since no one can accurately predict the when and for how long they may need long term care services, the only adequate policy design to cover the full exposure would be a lifetime benefit policy.
However, this benefit can be more expensive than a policy design with limited coverage. The most commonly posed question to configure one’s benefit is, “What is the average length of time for which I might need long term care?” Here, many advisors and consumers have seen studies or claims that say something like, “The average consumer would need to stay in a nursing home for 2.7 years.” This statement has been published in a variety of studies, with slight variations in the exact number of years; however, we need to look closely at this statement.
First, any average is based upon a group of incidents ranging from a low to a high point. When it comes to risk tolerance, it is important to understand the consumer’s concerns, as they may only be concerned with the high points. So what, then, is the high point? Frankly, only the survey takers would know this answer.
Next, we need to be aware that long term care services are delivered in a large variety of settings, not just merely nursing homes. In fact, many studies have shown that the vast majority of long term care services are delivered at home. Typically, only those with extreme circumstances would choose a nursing facility for their long term care service needs, as long as other alternatives such as home care or assisted living facilities are available.
The recommended benefit amount, whether daily or monthly, has similar implications. The typical suggestion is to use the “average” cost of care for a nursing home in the client’s geographic area. Here, the average is often inaccurate given the reality at claim time, although the effect on the client is likely to be minimal and tolerable. Many clients choose to only fund 70 to 80 percent of the average costs, accepting a copayment responsibility for the difference. This, too, may meet the clients’ “risk tolerance,” in balance with their premium tolerance, and should be acceptable.
We see similar results in applying risk tolerance when selecting an elimination period (EP) to a policy design. While a 90-day EP usually strikes an acceptable balance of premiums to risk exposure, there may be times when a shorter or longer EP would be a better choice for any one client.
The final component of a long term care policy to consider is the addition of a cost of living adjustment (COLA) rider. Without this rider, there is an increasing shortfall in the policy’s ability to meet future needs and expectations. At a presumed 5 percent rate of rising costs, a care provider that costs $100 per day today will increase to $200 per day in about 15 years, $300 per day in around 21 years, and $400 per day in just less than 30 years. Owning a $100 per day policy when the cost of care has increased to $400 per day is not very likely to pass anyone’s risk tolerance test.
Any other features and options on the policy may affect the premium and coverage proportionately, and should be considered with the same risk tolerance factoring. The client must find their own premium tolerance amid the low points, high points, and all additional options. They must be aware that if they decide to purchase the lowest premium option, they’re more likely to not have enough coverage in the future.
We now need to consider the effect on the advisor – not the consumer. We must ask what the risk tolerance level is in the eyes of the advisor. Do they want to be seen as a full-service advisor, or not? There is a level of exposure when deciding not to discuss long term care risk with the consumers when a client and their family see the producer in an advisory capacity.
Scott D. Boyd is vice president of long term care for The National Benefit Corp. He can be reached at 800-275-8622 or [email protected].