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.
Furthermore, when investment assets are liquidated at a profit, there can be a tax surcharge because the gain would be subject to either income or capital gains taxes. And when qualified retirement plan assets or nonqualified deferred compensation plan accounts are liquidated, there will be an even more serious tax surcharge, because these distributions are 100% taxable as ordinary income. In a top tax bracket, that means an individual would have to distribute $1.6 million of qualified plan assets to pay $1 million in care costs.
Reason #3: What’s in it for them?
They don’t understand the tremendous value proposition that LTC insurance policies can provide to their clients.
To make sure clients and their families are never subject to the debilitating costs of long term health care, advisors and agents can offer these value propositions:
o If you or your spouse needs LTC, the insurance company will pay some or all of the costs with tax-free dollars.
o If your client buys a LTC insurance policy with a return-of-premium benefit, and the client never needs LTC, the insurance company will refund the premiums paid to the individual’s beneficiaries upon death. This converts the maximum cost of the insurance to the opportunity cost of money.
o Federal tax subsidies and state tax credits may pay a significant part of the client’s premium.
These propositions are compelling reasons to consider transferring the long term health care risk to an insurance company.
Advisors have an ethical and professional responsibility to educate their clients on the consequences of long term health care to their financial security. If the client then wants to explore insurance options, advisors who are not comfortable with discussing these options can bring in accomplished insurance professionals to talk about them.
Philip Davis is the President of Corporate Compensation Plans Inc. and its subsidiary, WealthSecure, Danbury, Conn.