By George T. Leamon, CLTC, Lutgert Insurance –
Of all the obstacles long-term care insurance (LTCi) faces in becoming a viable product for the financial services industry, none is harder to overcome than the belief that it is inappropriate for high net worth individuals. These clients are generally defined in trade journals as having at least $2.5 million in investment assets.
This belief is based on fundamental misconceptions of what long-term care insurance actually does. That, combined with a historical antipathy towards the product leads many to suggest, “You can self-insure.”
There are three key misconceptions:
• LTCi protects individuals.
• LTCi protects assets.
• Wealthy people can afford to self-insure.
LTCi doesn’t protect individuals – it protects families.
To understand what long-term care insurance does, you first need to understand what motivates people to purchase it. The commonly held belief that individuals purchase the product for reasons such as maintaining their independence, getting into a good nursing home, or to avoid being a burden to those they love is incorrect. No one purchases any form of personal line insurance such as life or disability income to use it; if they did the carrier would never sell it to them.
As with these traditional products, people purchase long-term care insurance because they understand the consequences an unlikely event such as needing care would have on those they love. Simply put, reasonable people never assess the risk of needing care, only the consequences to those they care deeply about if they ever did need care. If they believe they are severe enough, clients will then disregard risk and focus only on a way to mitigate consequences. It is therefore, essential for the professional to understand what these consequences are.
The majority of care is informal in nature, being provided by family and/or friends. This assistance, referred to as custodial care, is necessary because a chronic debilitating illness makes it difficult, if not impossible, for people to perform basic daily functions. The nature of custodial care can be all- consuming for the providers, leading to serious emotional and physical consequences. Put simply, if your client ever needs care over a period of years, his life is not going to end; but the lives of those pro-viding care, as they know it, are going to end.
LTCi doesn’t protect assets – it protects income
It has been held that longterm care insurance protects assets. It doesn’t; it protects income. Clients work a lifetime to accumulate a portfolio that will generate sufficient future income in order to maintain their standard of living during retirement. This lifestyle also includes keeping prior financial commitments. It is not unreasonable to assume that retirement income is matched almost dollar for dollar with retirement expenses. Since nothing had been allocated to pay for care, the income, already committed, will have to be reallocated. Where else can the money come from?
In its purest sense, long-term care insurance is no different than disability insurance: it provides a source of income. In this case, that income can be used to pay for care. This allows the client’s retirement income to continue to be used for its intended purpose, supporting lifestyle and keeping financial commitments.
Without the product, the family has limited options. They can curtail their lifestyle or liquidate assets. The former may have far reaching consequences. The latter may create serious tax issues and/or shorten the payout of qualified funds and annuities.
Not all wealthy people can afford to self-insure
Financial and consumer publications will often assess the cost of long-term care in terms of nursing homes. By doing so, the math becomes simple: the average stay in a facility is 2.5 years, which is then multiplied by an average cost of $67,000 per year, resulting in $167,500. This would seem well within the ability of a person with $2.5 million to pay. This fails to take into consideration two critical issues. Long-term care is not about nursing homes and that income pays for care.
Every carrier in the long-term care insurance industry reports that the overwhelming percentage of claims submitted is for care at home and in the community, which can cost anywhere from $10 to $15 thousand per month. The cost of that care can easily exceed a nursing home stay (which may never be necessary) and therefore must be factored into the overall cost of assistance over a period of years.
Assuming a 5% rate of return and that 100% of the portfolio is in income producing investments, $2.5 million would generate approximately $125,000 each year. As previously stated, it is likely that income is fully committed to support lifestyle. Question: Where’s the money going to come from to pay for care?
What about the client with $20 million in assets? The first question to ask is; “What is the nature of his or her assets?” Many small business owners have the majority of their wealth tied up in their company. Paying for care can pose a liquidity problem. Have you considered the tax consequences of liquidating assets in order to pay for care? What if the portfolio has to be sold in the bear market? There is also the issue of legacy assets and which of them would have to be sold to fund care over a period of years.
Clients nearing retirement focus not on assets, but how much income they will need to support their lifestyle and keep financial commitments. $2.5 million is therefore reduced to the income it generates. Since that income is already committed, it presents the client with very difficult choices, should care ever be needed in the future.
If you are considering the self-insure approach, let me show you a way to use an existing asset to leverage the potential risk. If you don’t use it for LTC you still hold the asset.