Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
ThinkAdvisor
An aide in scrubs helping an older woman walk.

Life Health > Long-Term Care Planning

12 Ways Long-Term Care Risk Eats Your AUM

X
Your article was successfully shared with the contacts you provided.

Whether you’re trying to sell retirement planning services, stocks, mutual funds or annuities, long-term care costs hover over your book of business like a hungry, remorseless demon.

Lincoln Financial found when it organized a survey of 1,003 U.S. adults last spring that just 35% of the participants with financial professionals had talked to those financial professionals about LTC planning.

About 27% of those survey participants with financial professionals said the financial professionals had never even raised the issue.

America’s Health Insurance Plans, a health insurance company group, says in a new report that only about 7.1 million U.S. residents have private long-term care insurance, with 6.3 million having stand-alone LTCI policies; 512,440 having life insurance policies that can accelerate the payment of benefits when the insureds need long-term care; and 286,873 having life insurance policies or annuities that offer extended benefits for insureds who need long-term care.

But the story behind the report is that, of course, $10 million or more of any client’s assets now under your management could end up in the long-term care kitty.

Long-term care planners already know that November is Long-Term Care Awareness Month.

Here are 12 reasons for investment advisors with a focus on AUM to think about long-term care risk, even if they’ve never even opened long-term care insurance brochures and have clients who are all under the age of 25.

1. Long-term care costs are a big drag on the economy.

Home care and facility-based care will account for about $342 billion in spending this year, or 1.3% of gross domestic product, according to the national health expenditure figures from the Office of the Actuary at the Centers for Medicare and Medicaid Services.

The amount spent directly on home care and facility-based care amounts to about half of what U.S. residents will put in personal savings.

2. Long-term care costs reduce what your clients have inherited or could inherit from their parents.

Dementia is just one of the conditions that can lead to a client needing care for a long time.

The average lifetime cost of care for a U.S. resident with dementia was about $393,000 in 2022, and people with dementia and their families paid about $280,000 of those costs out of their own pockets, according to data compiled by the Alzheimer’s Association.

EstateExec reports that the value of 58% of U.S. estates is less than $250,000, meaning that the typical lifetime cost of dementia care is bigger than the value of the typical estate.

Your clients may have come from families that were more affluent than average, but just 3% of U.S. estates have a value greater than $5 million.

That means the cost of care for dementia and other long-lasting conditions can easily be big enough to cause a noticeable dent in the bequests for children and grandchildren, even in affluent households.

3. The long-term care costs for people who end up needing care for many years may be difficult or impossible to insure.

Advisors’ clients are likely to have relatively high standards for what constitutes an acceptable level of care, and that means that the real bills could be big enough to get the attention of even clients with four homes and a private jet-share membership.

The Genworth Cost of Care survey, for example, shows that the annual cost of care ranged from less than $60,000 per year for eight hours per day of homemaker services at home in the Kansas City, Missouri, area — where average care costs tend to be low — up to about $218,000 per year for a private nursing home room in the Bridgeport, Connecticut, area — where costs tend to higher than in most of the country, other than in Alaska.

The cost of a room in an assisted living facility might be about $55,000 in Kansas City and about $75,000 in the Bridgeport area.

Once clients need care, they and their children are unlikely to be happy about using average-cost care, let alone shopping for the cheapest care. The kind of facility-based care that moderately affluent people in an area use is likely to cost more than the figures shown in the Genworth cost data.

The median cost of round-the-clock care provided by a home health aide is about $236,000, according to Care.com.

For clients used to a high quality of life, maintaining that level of quality while getting home care could mean adding at least $50,000 per year for additional staffers who can handle care management, cooking, shopping and errand-running services, and, possibly, multiplying the median figures by at least 1.5, to ensure that any employees get competitive wages, health benefits and vacation time.

Many clients will need no long-term care, or care that costs less than $100,000. But, for a 65-year-old widow who has a stroke, stays at a home for 20 years, and uses round-the-clock care, bills could easily average $500,000 or more per year, for 20 years, for a total of about $10 million.

The American Association for Long-Term Care Insurance reports that the typical cost of $165,000 in stand-alone long-term care insurance benefits, with 3% compound inflation benefits, for a 55-year-old couple starts at $5,025 per year.

New York Life shows that the initial lifetime maximum benefit available with its Secure Care 250 long-term care insurance policy is only $273,750.

The numbers mean the clients can use long-term care insurance and related products, such as life insurance policies and annuities designed with LTC needs in mind, as the base for LTC planning. But affluent clients should give some thought to other strategies for preparing for and managing catastrophic long-term care risk.

4. Fears about long-term care costs frighten clients away from putting money in annuities or other classes of assets that might reduce liquidity.

Reluctance to “lock up money” is one of the infamous barriers to increasing annuity sales.

One of the concerns is that clients will need a large amount of cash to pay for long-term care.

Many contracts allow for penalty-free withdrawals when clients use the cash to pay long-term care bills, but if clients don’t know that, silent worries about long-term care bills could quietly smother efforts to help clients use annuities in income planning.

5. Long-term care bills have no interest in the stock market.

Cancer, Parkinson’s disease and Alzheimer’s disease can hit when prices are up or when prices are down and no one is buying.

Long-term care bills can also arrive when tax rules or other rules have changed and complicate efforts to convert assets into cash.

6. Long-term care bills can shred a 4% rule strategy without adequate safety margins.

A well-designed asset withdrawal strategy likely includes pots of cash set aside for acute health care and long-term care emergencies.

If the strategy does not come with a large emergency fund, a client may find that a 4% withdrawal strategy that easily covers $15,000 in monthly living expenses is not enough to cover all of the extra costs related to long-term care.

7. Long-term care bills can stall gifts while the parents are alive and empty out estates.

Uncertainty about how expensive long-term care will be and how long care will be needed can throw off a client’s gift planning.

Adult children who expected to receive a certain amount of cash by a certain data might not get it.

8. Past, poorly structured efforts to write long-term care insurance have created friction for U.S. life, health and annuity issuers.

The insurers that are still around say they are managing their liabilities well.

But executives from publicly traded insurers that got out of the long-term care insurance business have to report to securities analysts and investors every three months about how their closed blocks of LTCI business are doing and how well efforts to persuade state insurance regulators to let them increase the premiums have been going.

9. Clients’ caregiving responsibilities may hurt their ability to plan for their own future.

When Transamerica surveyed about 1,700 U.S. workers, 91% agreed that long-term care planning should be part of retirement planning, but only 45% said they had thought about long-term care planning.

Guardian found, when it surveyed about 2,000 full-time workers, that only 23% of caregivers classified themselves as having excellent or very good mental health.

About 33% of the non-caregivers had excellent or very good mental health. Similarly, the percentage of Guardian survey participants in very good or better physical health was 27% for the caregivers and 34% for the non-caregivers.

For financial health, the percentage in very good or better shape was 21% for the caregivers and 28% for the non-caregivers.

One possibility: Caregiving may take away some of the physical and mental energy caregivers need to work with people like you to improve their financial well-being.

New York Life surveyed 1,003 adults who were providing care both for aging adults and for young children. About 83% said they were thinking about buying long-term care insurance or other products to prepare for their own future care needs, but 26% said they are coping with caregiving costs by contributing less or nothing to emergency savings funds.

10. Overseeing care may take up much more time and be much less predictable than clients expect.

In articles, great care is just a phone call away.

In the real world, even wealthy clients may have trouble finding the right kind of care and the right kinds of professional caregivers quickly.

That can add to clients’ stress levels and inability to focus the usual level of attention on their financial affairs.

11. Dementia can lock clients’ families out of your clients’ accounts.

You see articles all the time about the 95-year-olds who text, post on TikTok and are learning to code their own apps.

Once flesh-and-blood clients develop dementia, they may forget their passwords and where they put their paper password lists.

They will forget how to hang up phones that need to be hung up and how to charge phones that need to be charged.

A financial services firm will want to send a confirmation text to the client’s cell phone before letting the family into the client’s account, then want to get a second confirmation via email. Even if the family manages to get into the cell phone, getting into the email accounts may be impossible.

How well have you protected your clients and their families against account lockout and 2-factor authentication failure risk?

12. Caregiving responsibilities split families.

The in-town child who provides hands-on care management may resent the children who live out of town.

The children who live out of town may be angry at the care providers the in-town sibling picked, not understanding the difference between the options shown in brochures, TV commercials and magazine articles and the much less appealing options that are available in the real world.

The adult children from one of the client’s marriages clash with the adult children from another marriage.

If you’re trying to build a multigenerational wealth advisory practice, you may find the drama is a headwind.

Credit: InsideCreativeHouse/Adobe Stock


NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.