A survey recently released by John Hancock provides insights on a key area that financial advisors should try to address more directly: the failure of most people to prepare for the financial risk associated with the need for long-term care.
The survey results offer important insights into the consumer mind-set, which can help advisors provide more effective guidance. Such guidance is necessary because it is clear that the financial strategies being used by many people entering retirement make it likely that many of them will end their lives in circumstances that they never anticipated or intended.
The conundrum that advisors face is that many clients have an “approach avoidance” reaction to this issue. While clients know that making sure they will be able to afford good care is important, they cannot seem to bring themselves to the point of addressing the issue. For that reason, financial advisors should consider taking a more assertive approach. Although planning ahead for long-term care needs is important, it is not an easy issue to discuss, and that is why the Hancock survey is helpful.
The possibility of long-term care costs financially wiping out unprepared clients is not minimal. The most careful estimates of the likelihood of a 65-year-old ever needing long-term care vary between 35% and 55% depending upon definitions. The average cost for a semi-private room in a nursing home is about $75,000 a year: If costs increase at 4% a year (most expect nursing home costs to rise faster than general inflation), the average cost will be $164,300 a year in 20 years, when a person turning age 65 today will enter the high-incidence years for needing long-term care. With this level of risk and cost, the necessity of planning is clear.
The John Hancock survey, which was conducted online with 1,000 people ages 21 to 75, provides six key lessons for your practice.
The most critical lesson is that the majority of people are receptive to their financial advisors initiating discussions about long-term care. They know there is a significant likelihood that they will need long-term care at some point in their lives. Indeed, only 6% believe this eventuality is not at all likely. Six in seven agree with the idea that “it is irresponsible not to plan for your own long-term care needs.” Also, it is important to almost all respondents that their assets are protected if they do need long-term care. Having long-term care insurance protection is clearly the most efficient approach for all that do not have the high amount of assets that allow them to self-insure.
Second, people know that insurance is the best way to address the long-term care issue. Asked which of five strategies is best for handling the cost of long-term care, six in 10 chose purchasing long-term care insurance. The second most frequently selected strategy—saving for a portion of the expense and relying on government programs for the rest—has drawbacks that the respondents recognize. Three-quarters of the survey respondents expect that the benefits covered by Medicaid will be cut back within the next 10 years. Further, for most people, it is important that the care they receive in a nursing home be of at least good quality, and three-quarters do not expect this level of care in a Medicaid-approved facility.
Third, most people are actually not capable of addressing the financial risk of long-term care without the intervention of a financial advisor, and their planning reveals this. While they reject the notion that it is a good idea to put off preparing financially for the risk of needing long-term care, that is exactly what most are doing. The impact of avoidance is clear. Three-quarters state it is difficult to admit they might need long-term care and the same proportion state that they have so many other concerns that addressing this risk is not a priority. The role of the financial advisor in this situation is to help them get their financial priorities in order and demonstrate how long-term care insurance can often be an appropriate, cost-effective solution.
Fourth, when the issue of financial preparation for long-term care is addressed, the results are quite positive. The John Hancock survey asked working people if they calculated how much they need to save by the time they retire, and if they did, whether they considered the possibility that they would need long-term care. Not many people were that proactive, but those who were took a number of very positive actions to help safeguard their futures.
Three in 10 started saving more for retirement and four in 10 decided to purchase long-term care insurance, either right away or at some time in the future. Only a quarter did nothing based on this consideration. Clearly, addressing this issue is productive; in most cases it leads to positive action or provides a foundation for further discussion.
The fifth point that came out of the survey is that the main reason people purchase long-term care insurance was the desire to avoid being a “burden” on their family. This is a key point that should be carefully considered. The baby boom generation is noted for, among other things, being very child-centered. They are focused on their children’s well-being and tend to be very caring parents. Helping and protecting their children are very important values to them. That explains the strong desire not to disrupt their children’s lives and financial well-being by asking for help with activities of daily living or financial assistance. Yet, without long-term care insurance, there is a substantial risk that is what will happen.
Sixth, the John Hancock survey asked respondents who do not have long-term care insurance how they would pay for care if they needed it. The most frequent answer was qualifying for Medicaid, followed by using home equity. As we know, both of these strategies are risky, because Medicaid programs are already overburdened and will most likely be even more overwhelmed when the wave of boomers reaches the high-incidence years for needing long-term care. Not to mention that the options for care under Medicaid are limited and generally not what most people desire.
What do these finding suggest? Advisors must address this risk with their clients. If Americans overwhelmingly believe it is irresponsible for them not to plan for this risk, don’t you think your clients will feel it would be irresponsible for you not to bring it up?
A discussion of long-term care should be integrated into the retirement planning process and initiated when clients reach their 50s because the cost of long-term care insurance is lower and insurability is higher than for people in their 60s. It is important to stress that long-term care insurance accomplishes four key objectives: It reduces the need to spend down and risk spousal impoverishment; it helps assure that people can afford to get care in their home; it helps assure more choices and options (and does not limit people who need nursing care to Medicaid-approved places, from which, the survey shows, most people expect a low level of care); and it prevents people from having to end their lives as a burden on their children, increasing the likelihood that their assets can be passed on to children rather than paid to a nursing home.
By proactively planning and bringing the value propositions of long-term care insurance to your clients, you will be serving them well.