Thinking Long Term

Long-term care is not an easy thing to talk about with aging clients. In fact, most folks would rather contemplate their deaths than illness or infirmity in old age. But just because they don't want to talk about long-term care doesn't mean your clients aren't worried about it. Indeed, a 2007 survey conducted by The Hartford Life Insurance Company in conjunction with Registered Rep. found that some 88 percent of advisors believe that their clients are very, or extremely concerned, about health-care and long-term care needs in retirement.

This shouldn't come as much of a surprise. As you may have heard, baby boomers are living longer and health care is getting more expensive. According to a report released by insurance industry trade group LIMRA in 2007, only 19 percent of men ,and 9 percent of women, could fund five years in a nursing home without relying on the value of their homes. In addition, 31 percent of men, and 40 percent of women, reported they could not afford a single year of such care.

That's not going to cut it. Today, roughly 9 million Americans over the age of 65 need care — either at home, in an assisted-living facility or in a skilled nursing home. By 2020, that number will jump to 12 million, according to the U.S. Department of Health and Human Services. Seventy percent of them, according to medicaidlawyers.com, will spend an average of 2 1/2 years living in a nursing home or assisted- living facility.

“I recommend it for all of my clients,” says Cecelia Wynette Fairfax, a certified financial planner in Riverside, Calif. “We have a duty to at least tell people what might be needed,” she says. “Because you don't want to be in a situation where you did not help a potential client's, or current client's, loved one.”

Keeping It Simple

Today, only 10 percent of Americans have actually bought long-term care coverage, according to Peter Gelbwaks, a long-term care insurance expert and chairman of Gelbwaks Insurance Services Inc. (which was recently acquired by LTC Global). But interest seems to be growing. Sales of individual long-term care insurance ticked higher in the first two quarters of this year after four years of declines, according to LIMRA data. Total premium for the first two quarters was $304.6 million, with more than 144,000 new policies sold.

Sales of long-term care insurance slumped in the early part of the decade because consumers and advisors were put off by the cost and complexity of the policies, Gelbwaks and others say. In response, insurers have been developing new kinds of coverage, and trying to make coverage more affordable. In particular, they have begun targeting younger individuals, who are often eligible for “good health” discounts, and offering discounts to couples. They are also rolling out shorter-term coverage, and allowing customers to adjust the term of coverage and benefits over time, starting small, and raising coverage if their circumstances allow. Finally, they're creating combination policies that tack long-term care riders onto life insurance and annuity products, and writing more work-site (or employer sponsored) long-term care insurance.

Cecelia Wynette Fairfax says long-term care insurance is, in fact, getting easier to sell as her clients get older — and as long-term care insurance gets more mainstream media attention. (In June of this year, a Newsweek story written by Jane Bryant Quinn basically stated that yes, you and your parents need long-term care insurance, and other media outlets are giving the topic more serious coverage too.)

So that it's more affordable, Fairfax typically starts recommending long-term care insurance to clients when they hit age 40, and she particularly likes the policies for couples — married and unmarried. “If the benefit is not used up by one participant, and the other person is still healthy, you can roll over their benefits,” she explains. She typically asks about her clients' family history of illness before recommending a specific policy. “If someone has a family history of Alzheimer's or dementia, then I may recommend a four-year plan,” she says. “But usually I recommend around two to three years.”

In 2007, on average, a 55-year-old individual could expect to pay about $1,027 a year for a $150-a-day benefit (covering three years, and including a 5 percent compound inflation benefit — assuming the person qualifies for both spousal and preferred health discounts), according to the American Association for Long-term Care Insurance. If the individual waits until he reaches the age of 65, that sum would jump to $1,939 a year.

These days, carriers are selling more policies that offer three to five years of coverage, with a $100 to $150 daily benefit — generally accepted in the industry as adequate minimum coverage. It used to be that most policies offered unlimited lifetime benefits, which was enormously expensive, says Gelbwaks. And he says that was overkill (no pun intended). “Over 92 percent of people who buy long-term care policies need no more than three years of coverage,” he says. “Selling unlimited lifetime benefits is like selling insurance against falling out of a plane.”

Despite some of the other hybrid or combination innovations (life insurance and annuities combined with long-term care riders) now on the market, traditional long-term care policies still account for about 90 percent of sales, because they are less expensive, says Gelbwaks. Only about 5 percent of policies are combination policies. For the latter, you have to have enough cash to plunk down a one-time premium of $50,000 to $100,000. Then, if you need long-term care, you get the full death benefit back in cash, tax free, to cover that care; if you don't need long-term care, that money goes to your heirs.

Getting Help

Of course, long-term care insurance is still a very complex product, and many advisors say you've got to partner with an insurance agent who specializes in long-term care in order to get the best policy for your client. Fairfax says she uses a specialist, who takes an override on the commission (but she claims not to know exactly how much that specialist gets paid). She takes 90 percent of the annual premium in the first year, and 2 percent to 10 percent of renewal premiums after that.

Jesse Sloam, the executive director of the American Association for Long Term Care says these specialists are essential because they can help financial advisors understand and explain the products to their clients, and help advisors identify the various companies' sweet spots: which companies offer the best discounts for certain types of clients, and which companies are doing the most aggressive health underwriting (providing coverage for people with diabetes or other illnesses). “Some companies have made a strategic decision to focus on younger people. Some are more competitive on older couples,” says Sloam.

But another option is to specialize in long-term care yourself. Sam Gott, who works through a hybrid registered investment advisor and broker/dealer in San Antonio, Texas, has a certified financial-planner designation, is certified in long-term care and is a chartered life underwriter, among other designations. He says it's a time-consuming business, but he believes in the product: He bought unlimited coverage for himself at 55 at a cost of $2,500 a year.

Gott doesn't recommend long-term care insurance to all of his clients — only those with between $250,000 and $1 million in assets. “If you have over $1 million in cash, it's kind of dicey whether you really need long-term care,” he says. “And those who have less than $250,000 can't really afford it.” He tends to wait until a client is getting close to 60 to recommend that they buy a policy.

It's a hard sell, says Gott. “It takes two to three appointments, a lot of effort and a lot of time,” he says. “Most people think, ‘oh, my children will take care of me.’ First you have to get past that, then there's another appointment to talk about the different companies. Then you have to help them understand it, fill out the paperwork.” But the commissions aren't too shabby: He gets 35 to 50 percent of the first-year premium, which is typically at least $1,000, another 5 to 8 percent each subsequent year a premium is paid for the next 10 years, and then his commission drops down to 2 percent.

It sounds like his hard work pays off in the end.

THE BIG FIVE