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September 26, 2010 at 08:00 PM
A great many advisors and insurance agents are advising their affluent clients to self-insure the risk of needing long term care (LTC)–and as a result, few wealthy individuals own LTC insurance.
Ironically, this advice is being given by the same advisors and agents who would never dream of telling their clients to self-insure their life, disability, homeowners or liability risks. The result of their ill-conceived suggestion not to buy LTC insurance: their clients are exposed to the potential of million-dollar costs that can decimate their incomes, shred their assets, and impose severe financial and emotional consequences on their families.
There are three reasons why highly capable advisors are giving their clients such flawed and potentially disastrous financial counsel:
Reason #1: Ignorance
They don’t know much about long-term health care. And as a result, they don’t know the insurance solutions to it, either. Because LTC is a complex subject, some advisors and agents simply avoid talking about it with their clients. Unwilling to discuss something they know very little about, they tell them to self-insure.
Admittedly, LTC insurance is complex. But demonstrating the effect of LTC costs on a client’s assets and income is much simpler than it used to be because of new software that is available to perform this task. Advisors, therefore, should concentrate on educating their clients about the consequences of LTC costs rather than concerning themselves with the insurance solutions to them.
Reason #2: Cost
They don’t realize that long-term health care costs can easily be doubled by the investment surcharge (the loss of earnings on assets spent on LTC services) and a potential tax surcharge (the tax when assets are liquidated at a profit or distributed from qualified retirement plans to pay for this care).
When individuals say they are going to self-insure, what they mean is: “If I or my spouse ever need long term health care, I’ll liquidate assets to pay for it.” But after saying that, they fail to ask themselves, “What assets am I going to liquidate?”
Regardless of the answer, liquidation always means the loss of earnings on the money spent on care costs. For example, liquidating $1 million of assets to pay care costs means the loss of $1 million of capital to the family, plus the perpetual loss of earnings on it. For example, at 5% interest, in 15 years nearly $1 million of investment earnings would have been lost, in addition to the $1 million principal. In 30 years, nearly $3 million of earnings would be lost.
