As the famous economist, John Maynard Keynes, once said, after being pummeled by reporters for changing his mind on a policy recommendation, “When the facts change, I change my mind. What do you do?”
The other day I visited with a certified public accountant (CPA) whose opinions I highly value. I asked him about his professional and personal opinions on the issue of long-term care insurance (LTC/LTCI). As a CPA, his clientele consists of mostly people aged 60 years or older. I was interested in hearing his thoughts on this form of insurance usually aimed at people of that age group.
Kenneth W. Rudzinski
He responded by telling me he did not like LTCI, and would not recommend it to clients, for three main reasons: 1) Incidences of huge rate increases on in-force business, some as high as 90%; 2) insurance company lack of experience with LTC claims (and the effect on premiums), and 3) many high net worth (HNW) clients opt to self-insure.
Are these similar concerns you have voiced to yourself when you have been presented with the concept and costs of LTCI by your friendly financial adviser or insurance agent? If so, a few insurance carriers have listened and have recently created or upgraded products to address that first, big hurdle to you seriously considering LTCI as a form of asset protection for your lifetime of accumulated assets.
As age increases, so does LTC need
But first, let me present you with a staggering statistic. According to AARP, the lifetime probability of becoming disabled in at least two activities of daily living or of being cognitively impaired is 68% for people aged 65 years or older. If you and I and your spouse were having lunch, two of us statistically would potentially need to provide for LTC expenses in our lifetimes. Imagine then incurring an annual expense of $97,612 (national average annual cost for a private room in a licensed nursing facility) due to a seriously disabling condition, like Alzheimer’s disease or a stroke. If it is you that is the incapacitated partner, imagine how that expense might drain valuable retirement resources for your spouse.
Statistically we are all at risk for LTC, and the older we get the higher the risk. And, LTC expenses are potentially a major drain on our retirement assets designed to support our standard of living once earned income stops.
My CPA friend understands this, but he resists suggesting LTCI to his clients (and himself) because of the “unconscionable” premium increases LTCI carriers are imposing on the annual premiums for existing policies.
Breakdown of how LTC works
I shared with him the latest offerings by a couple of LTCI carriers that completely and forever eliminate this problem. The chassis for such products starts with a single premium (or multi-year pay, see below) life insurance policy. Let us call it SPLTCI for Single-Pay LTCI. Add to that an LTCI rider and you have the perfect marriage of providing benefits to someone for three main reasons –live, die or quit.
Let me give you an example. My CPA friend is 62 years old and his spouse is 61 years old. Instead of self-insuring $100,000 for LTC, he purchases a SPLTCI policy for each of them by depositing $100,000 for each of them (or perhaps $10,000 a year for 10 years, but the figures below assume a single-pay option). They choose an $80,000 return of premium (ROP) option, and a 3% compound cost of living (COLA). What does he get for this? Here is a summary:
- A $132,163 income tax-free death benefit to his named beneficiary/beneficiaries;
- An immediate $5,507/month LTC benefit payable for 6 years;
- Total immediate benefits of $427,442 ($5,507 X 12 X 6 = $427,442);
- Monthly and annual increase in benefits of 3% COLA; for example, by age 70 years, total benefits grow to $541,471, and by age 80, they grow to $727,692;
- $80,000 premium refund starting day one if he wishes to discontinue the policy;
- Benefits for all levels of LTC, such as home care, assisted living, nursing care, etc.;
- No deductible period–benefits start day one of eligibility; and
- No increase in the internal LTC expenses-ever. All benefits are guaranteed day one.
Of all the above, the last item is what many people considering LTCI want to hear. Instead of self-insuring and needing to retain $100,000 for LTC expenses, my CPA friend immediately leverages his $100,000 into $427,442 of LTC benefits, an almost 4.3 to 1 ratio. But if he cannot pay the lump sum amount, he can spread his payments over 2 years to 10 years. Because of the time value of money, the benefits will change and the ROP amounts will differ, but for many people who do not have a lump sum just sitting around, the multi-year payment structure can work well. Benefits and internal LTC expenses are still guaranteed on day 1, despite multi-year payments.
Multi-pay options
Among the few carriers offering such a product, one or two have been doing so for 20 plus years. The new twist on such LTCI products is the multi-pay option, making these guaranteed LTC products available to more people. This satisfied the second concern my CPA friend expressed about the experience of these carriers.
To comment on his third point, HNW people fully understand and utilize “leverage” in many things they do. Rather than to keep $500,000 or $1,000,000 locked away just to cover a LTC event, they can do the same with SPLTCI with $200,000 or $300,000, depending on their age and health status, and free up the balance for other uses.
Finally, I should add there are details, limitations, etc., about these LTCI products that space just does not permit me to cover here. That said, if you are wrestling with considering LTCI, in addition to looking at annual pay-for life products, ask your insurance specialist or financial adviser to share with you single-pay products, as well. Above all, if you want to avoid onerous premium increases, these products may be just what the doctor ordered.
The example used is for discussion purposes only, and does not represent the actual results of any specific product. Your results could differ considerably from those shown.
- References:
- For more information:
AARP. Beyond 50. 2003: A report to the nation on independent living and disability, 2003. Available at: http://assets.aarp.org/rgcenter/il/beyond_50_il_1.pdf.
Kenneth W. Rudzinski, CFP, CLU, ChFC, CRPC, CASL, CAP, a partner in the financial planning firm Heritage Financial Consultants LLC, is a registered representative and investment advisor representative with Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor in Wilmington, Del. Rudzinski offers insurance through Lincoln affiliates and other companies. This information should not be construed as legal or tax advice. You may want to consult a legal or tax advisor regarding this material as it relates to your personal circumstances. CRN-1202049-051815. Rudzinski can be reached at kenneth.rudzinski@lfg.com.
Disclosure: Rudzinski reports no relevant financial disclosures.
