As the baby boomer generation slouches toward retirement age, advisors who serve them are in an increasingly precarious position.
One problem is that the boomer clients are in the process of shifting from asset-accumulation to asset-withdrawal mode. Fortunately, this is likely to be a gradual migration, affording advisors time to woo “accumulator” clients to offset the boomers' drawdown.
However, a second looming issue gives advisors much less time to react: aging clients without long-term care (LTC) insurance. If such a client were to have an unexpected health care issue that required extended medical care — a stroke or a car accident, for instance — the assets that the advisor and client spent years accumulating could disappear in a flash.
No Cry of Wolf
If this sounds alarmist, take a quick poll of your clients who are between ages 50 and 70, in good health and the owners of $250,000 or more in assets. Ask them how they will pay for future LTC needs. Odds are almost all will respond, “Medicare pays for that!”
How wrong they are. In fact, less than 5 percent of the cost of nursing-home stays is covered by Medicare, and it covers even less of the cost of assisted living or home health care services. The criteria for Medicare-paid LTC are rigid, and needing assistance with the activities of daily living does not qualify. Your clients must need medically provided, skilled care. They also must have been hospitalized for the condition for at least 72 hours immediately before going into a nursing home.
According to David Duffrin of Northern States Brokerage, there are about 53 million current retirees, and 80 million baby boomers will join their ranks in the next 10 or so years. That translates into over 120 million who are prime candidates for LTC over the next 20 years. Statistics from medicaidlawyers.com indicate that 70 percent of Americans will eventually spend some time in a nursing home or similar facility. The MetLife Market Survey (2004) shows an average stay of 2.4 years. That means a lot of accumulated assets will be spent on LTC, and that does not include costs of home care, assisted living or other LTC options. In addition, if an advisor has managed a client's investments well, that might actually work against the client who would want to qualify for LTC under Medicaid.
That leaves two ways to pay for future LTC needs: out-of-pocket — something that very few can afford — or LTC insurance.
Selling LTC Insurance
According to Duffrin, the top reasons clients buy LTC insurance are:
- To preserve their independence and freedom by being able to stay at home or choose their care facility.
- To keep the burden of their care off of family members.
- Because they've had the experience of putting a loved one into a care facility.
- To preserve a spouse's standard of living.
However, the top reasons for reps to discuss LTC insurance are very different from the reasons that motivate clients to buy:
- To preserve and protect assets.
- As an integral part of estate planning.
- To ensure assets can be left to heirs.
Given these conflicting agendas, how should an advisor position himself to talk to clients about LTC? First, use a team approach. Work with your insurance specialist, wholesaler or advanced markets specialist. Then make sure to ask the right questions. Duffrin uses what he calls the “check-writing tolerance level” approach.
“Ask your client, ‘Is having to pay for LTC a big risk to your estate? Do you know nursing homes in your area cost X dollars per year? Would you have a problem — would it bother you — writing a check for that amount?’” he says. If there is a spouse, tell the client to multiply the costs by two and remind them that the figures are in current-day dollars. In 20 years the costs should more than double. This usually is enough to get their attention focused. Once an advisor has gained that attention, though, it's important to stick to discussing what matters to the client, not what the advisor thinks is important.
Things to Remember
Here is a list of frequently asked questions related to selling LTC insurance:
How Much Does It Cost?
Long-term care insurance premiums go up dramatically over time. Here's a sample of monthly LTC insurance premiums from a 2002 study prepared by Buck Consultants: At age 50, $99.56; at 55, $138.13; at 60, $200.30; and at 65, $258.20. Since these rates are from several years ago, actual premiums are 20 percent to 50 percent higher. The premiums cover a $200 daily benefit, with inflation protection, a three-year maximum benefit and a 90-day waiting period. Premiums include home health care, waiver of premium, informal care, respite care, adult day care and hospice care.
How Much Should Clients Pay for LTC Insurance?
The general guideline is that premiums should not exceed 7 percent of annual income. Be careful if you push that limit, because premiums are rising faster than incomes, and there are few, if any, fixed-premium LTC insurance policies out there. The costs of LTC have been skyrocketing. In 1996, according to an article at thehealthpages.com, a stay in a nursing home was $126 to $192 per day. In 2001, according to an AARP study, the average daily cost was about $150 per day, but costs in most areas were much higher. By 2003, according to a MetLife Market Survey, the average daily rate was $181. Compare the daily rates with the monthly premiums and LTC insurance can quickly become a bargain.
What's in It for the Advisor?
Long-term care insurance is a policy people buy and keep. Many times the sale involves the entire extended family and covers spouses and other family members on one plan, resulting in significant (15 percent to 30 percent or more) premium savings.
According to Duffrin, gross first-year commissions to your broker/dealer vary but tend to average 20 percent to 50 percent of the premium. In addition, there are renewal commissions of about 10 percent in years two through 10 and service fees of about 1 percent to 3 percent for the remaining life of the policy.
Lastly, the market is huge — 120 million strong over the next 20 years. If you're not presenting LTC to your clients, you can be sure someone else will.