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LTCI Watch: Pot of gold

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James Bruyette has an interesting take on use of long-term care insurance  (LTCI) planning.

I am not qualified to know whether he’s right or wrong, but it just seems to me that one point is that anyone really interested in getting LTCI referrals from financial planners probably needs to have an informed opinion about this sort of analysis, and that another point is that it hints at a serious problem with the fabric of Western civilization as we know it.

Bruyette, a planner at Sullivan Bruyette Speros & Blayney, recently appeared in Washington at a symposium on “health and wealth” organized by Lincoln Financial Group (NYSE:LNC) and Barron’s. 

Bruyette suggested at the panel discussion that a 50-year-old who is thinking about buying LTCI coverage probably needs about $1.5 million to $2 million in net worth to spend, say, $400 per month on a policy that would pay $200 to $300 per day for four to five years, according to a summary of the event provided by Lincoln.

Bruyette suggested that clients with more than about $3.5 million in net worth could think of LTCI as a tool for protecting estates against depletion later in life.

At first, frankly, I thought that someone at Lincoln had goofed, and that Bruyette must have said that a family needs a net worth of $1.5 million to self-insure against the risk of needing long-term care (LTC) services.

But Lincoln put me in touch with Bruyette, and, hey, sorry, I was wrong, The folks at Lincoln wrote down what Bruyette said completely accurately.

Via e-mail, Bruyette gave the example of a hypothetical 50-year-old couple with a $1 million net worth.

If that family spent $400 per spouse per month on LTCI coverage for 35 years, that means it would end up paying $252,000 in premiums, and that the present value of those payments would be about $150,000 to $200,000.

“If you were that couple, would you allocate 15% to 20% of your net worth to cover a possible health situation 35 years down the road, knowing that there is debatably a 50 percent chance it will not be used?” Bruyette asked. ” What would they have to forego in their retirement lives to free up this kind of cash for LTC protection? In my experience, many clients who take a rational look at these numbers conclude that they simply can’t afford to cover the whole need here, and either opt for lower amounts of coverage or no LTC at all. Given their priorities, they conclude that they can’t afford it.”

Bruyette emphasized that he is not saying that buying LTCI is a poor use of money, or that people should avoid buying LTCI coverage.

“It’s just not a panacea or a no brainer for many, many people,” Bruyette said.


First, if you’re one of my readers, and you e-mail him, and you’re passionate about LTCI: Please be polite!! He’s trying to help consumers, just as you are, and simply coming at the topic from a different perspective than many of the readers of this blog probably are.

Second, it seems as if the current strange, ultra-low-rate environment makes the current present value of the $252,000 in lifetime LTCI premiums seem very high. If interest rates jump up, that might make the amount of cash needed to fund the premiums look like a lot more attractive to consumers, just as that could make the amount of cash needed to fund LTCI benefits obligations look a lot more attractive to insurance companies.

Third, let’s say that, in a world with normal interest rates and insurance companies that go back to enjoying writing LTCI, 50-year-olds really need a net worth of, say, $750,000 to fund LTCI.

Of course, antiselection makes individual LTCI expensive. Say we all have LTC coverage through some universal insurer with deep pockets — let’s call it the government — and that, maybe, if the universal insurer eliminated antiselection issues, the real amount of funding needed would be something like, say, $200,000.

I think the median age of the 300 million people who live in the United States is about 35. My level of energy to search for Web calculators to mask my ignorance of math has waned, but I’ll take a wild guess that the fact that the median age of the U.S. population is 35, rather than 50, means that the U.S. government needs only about $100,000 in present value per person, or about $30 trillion altogether, to fund LTC services for each of us.

According to Wikipedia, total U.S. financial net worth amounts to $54 trillion. The United Nations has estimated that the total wealth of the United States — including financial assets and human capital — is about $118 trillion. 

In other words, if all of these ballpark estimates are actually in the ballpark: The country as a whole already is, kind of, sort of, using about 25 percent of its total wealth and close to 60 percent of its financial wealth to fund LTC services.

Of course, that’s not really true. Scientists will probably find ways to prevent, cure or control Alzheimer’s and other debilitating conditions soon and cut that total in half, but that would still mean that the country is really devoting about 30 percent of its financial wealth to funding future LTC services without consciously realizing it.

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