A Message for Advisors
The client says “Should I buy Long Term Care Insurance?”
The advisor responds: “You can self-insure.”
The advisor is looking at the client’s total assets and has calculated that there are enough assets to comfortably pay for care. But….for how many years of care?…..But…..when will the care be needed?…..But…..what will the cost of care be when it is required?
20-30 years from now the cost of 4 years of care for one person could easily be $1,600,000.
For husband and wife needing this length of care ….$3,200,000.
It is all the UNKNOWN.
The client has $10,000,000 in assets.
Instead of saying, “you can self-insure”, a responsible advisor should say “do you WISH to use your own assets to pay for care?” This question puts the decision back to the client. At the time care is required EVERYONE would rather not have to pay for care. The advisor is not going to help the client pay for care.
The client deserves the OPPORTUNITY to meet with a Long Term Care Specialist – spend an hour in a discussion about LONG TERM CARE PLANNING.
Get all their questions answered!
Put the clients in control of their future!
Advisors – Connecting with the Children
On June 14, 2010, The Wall Street Journal had an interesting article by Annie Gasparro titled “The Next Generation”.
The article deals with the baby boomers retiring and at some point the assets will transfer to the children.
What can the advisor do to build relationships with the children?
The article does not mention the following: the children will be concerned about 1. mom & dad’s health 2. the inheritance remaining in tact should one or both parents require care.
By helping the parents obtain a quality long term care insurance policy, the advisor can build a bridge to the children. Mention this coverage now or in the future when care is required. The children will be absolutely delighted and thankful that the advisor was proactive in helping to protect the assets for the parents, the children and the grandchildren.
This is a positive way to commence a relationship with the next generation!
Long Term Care Insurance Leverage
Couple, age 55:
- Beginning Daily Benefit: $250
- Annual Benefit Increase: 5% Compound
- Benefit Period: 10 Years Shared (5 years each)
- Annual Premium: $5,200
At year 25 – age 80:
- Total premiums paid: $130,000
- Monthly Benefit: $ 25,400
- Benefit Period to recapture premiums paid: 5.1 months
Should spouses use all years (10), total benefit received (tax free): $3,048,000
- Should this occur, the benefits received will be 23.4 times the total premiums paid.
Long Term Care Insurance – The Cost of Waiting
I am often asked: When should I purchase a LTC Insurance policy?
For the past 6 years my answer has been: “Wait 5 years and your premium will double AND you will pay the delta (the increased premium) for the rest of your life.”
The premium increase is due to the following factors:
1. Cost of care increases at 5-6% annually and in 5 years you will have to purchase higher daily benefits.
2. You will be 5 years older.
3. You will be forced to purchase a policy that is offered 5 years from now and the policy will be more expensive as the carriers reprice due to higher claim experience and lower bond returns.
4. You may experience a health issue.
Case Study: 6 years ago my clients (a couple, ages 53 & 48 and both preferred) purchased the following benefits: $200 Daily Benefit, 5% Compound Rider, Unlimited Benefit Period and a 100 day Elimination Period. Total annual premium: $3,926.
Today, 6 years later (ages 59 & 54), I ran an illustration for the same carrier at $270 Daily Benefit and the other policy features are equivalent. (Today the original policy pays a Daily Benefit of $268 due to the 5% Compound Rider.) I kept both insures at the preferred rate. The total annual premium on the new policy would be $8,542. If either insured had experienced a health issue the cost would be higher.
Additional Note: At the present time 2 major carriers have or will be increasing the pricing on policies that have a 5% Compound Rider.
The Healthcare Reform legislation includes the Class Act, a voluntary government program under which employees can obtain coverage for long term care on a guaranteed issue basis. Over the next 2 years the Department of Health and Human Services will be making final plan designs and pricing. The Class Program will not be offered until 2013. More information will be forthcoming.
The employer can opt out of the program. If so, the employer may have to arrange a private long term care insurance program for the employees. If the employer does not opt out, the employee will automatically be enrolled unless the employee opts out. Participants must have a certain level of income (unknown at this time) and claim eligibility can only start after 5 full years of paying premiums. Thus from right now, it will be 8 years before a participant is eligible for benefits.
Benefits and premiums are not set at this time. The benefit will be $50-$75 a day. The annual premium may be approximately $260 monthly according the chief actuary of the U.S. Centers for Medicare & Medicaid Services. The length of the LTC benefit is not known at this time. The annual cost could be about $2,880. We do not know if these numbers include a compound CPI rider.
Since the Secretary of HHS must ensure the program’s solvency over 75 years, HSS can adjust the premiums annually. Some actuaries are of the opinion that the plan will cash flow positive in the first 10-12 years and that afterward, the program will run negative due to large utilization (claims). Since the program is available on a guaranteed issue basis, there will most likely be significant adverse selection (the unhealthy will apply).
Needless to say, the Class Act only provides minimal long term care coverage. For relatively healthy people, the private long term care insurance market will be less expensive for an equal amount of insurance. The private market provides much greater design flexibility and discounts when married and in good health. I believe that the private market will experience greater long term price stability.
Unfortunately, people who participate in the government program will find that at claim time, they are way underinsured!
An LTC Case Study
Almost 20 years ago my mother purchased a long term care policy with the following benefits:
- Daily Benefit: $75
- Annual Benefit Increase: 5% Simple
- Benefit Period: 3 Years
- Annual Premium: $1,200
At year 18, she went on claim.
- Total premiums paid; $21,600
- Monthly benefit: $4,200
- Benefit Period to recapture premiums paid: 5.1 months
- Monthly benefit ($4,200) x 36 months = $151,200 (total benefits over 3 years)
My mother is now into her 2nd year of benefits.
I project that she will use all three years of benefits.
Should this occur, her benefits received will be exactly 7 times her total premiums paid.
Perspectives – Clients in Their Senior Years
Financial Concerns –
- Assets matter; willing to accept less return for more stability;
- Cannot start afresh to build assets since I am in retirement;
- Afraid of out-living my assets; cannot keep my spouse from worrying
- Cannot control the future tax environment
Family Concerns –
- Can I afford to gift to children or grandchildren?
- Leaving an estate to my children, maybe, maybe not
- Concerns about my children will change over time
- My assets are for my kids, so let’s watch expenses
- Should we establish a foundation to help our community?
Health Concerns –
- My greatest risk; now that I think about it, I want to hang in there to see a grandchild’s wedding
- What if my spouse or I require serious care now or in 15 years? How much might that cost?
- Affluent people tend to live longer, thus increasing the chances for care; no fun having the children play caregiver
- Should I need care, I want quality care, perhaps 24/7 Home Care
- In the future, my spouse and I will become too frail to provide care for each other
I cannot control my future but I can execute various plans to provide options.
Long Term Care Planning can go a long way to preserve assets, preserve family harmony, preserve the retirement distribution plan and the allow the estate plan to play out.
LTC Insurance Activity
We have been dealing with economic turmoil for close to five months. Since this fall, long term care insurance purchases slowed considerably as the public was in shock over plunging investment values.
People are now asking ” what should I be focused on? My assets are down. How can I preserve what I have?”
People are now focused on managing risk.
In our senior years, our greatest single risk is the need for care over an extended period of time. People are now moving forward again with proactive long term care planning. Long term care insurance sales are gathering momentum.
I believe that this momentum will build in 2009 and 2010.
Compound Inflation Riders-Getting Expensive
One major long term care insurance carrier has commenced a national price increase initiative – targeting 5% compound inflation riders. For 50-60 year old, I am told that the price increases will be approximately 50% on those policies taking the 5% rider. Now is the time to lock in your 5% rider before other insurance carriers make similar price adjustments.
No Longer in Control
When one enters a Continuous Care Retirement Center or a Life Care Community, you give up your right to independently determine what care you may wish to have. At the time the community health staff and management believe that you need care, the staff will present you with a letter outlining your required care.
This outline may not be your outline!
I know this from experience. I have been dealing with this issue with my parents.
