Phyllis Shelton

How can any middle- or upper-income consumer believe that long term care insurance is a luxury, not a necessity? Yet we see a single-digit market penetration for long term care insurance staring into the face of 80 million baby boomers starting to turn 65!

Having been in this market for more than 20 years, I do wish the objections would change—at least that would make it more interesting. Yet they stay the same.

As an industry, we’ve allowed people to tell us that:

1. They don’t want long term care insurance because they are never going to a nursing home. Instead of us telling them this can be the only thing that keeps people out of nursing homes by providing money to hire help at home.

2. They are going to self-insure. Without input from us about the true cost of doing that by calculating care at future costs and the lost investment opportunity of pulling those funds out, particularly if it is a bad time to do so.

3. They’re too young. Without us explaining they will pay more for coverage the longer they wait because they will have to buy a larger benefit due to inflation and that there’s a good chance they won’t be able to qualify medically for a plan if they wait.

4. They can’t afford the premium because of the bad economy. Instead of us telling them they simply cannot afford not to protect their retirement with LTCI.

As baby boomers transition from the accumulation phase to the distribution phase, advisors are in demand to construct an income stream that will last 20 to 30 years—and even longer. Is there enough in the proverbial nest egg? Can a financial plan that guarantees one won’t outlive her money be constructed for people who spend more years in retirement than they work?

The answer is absolutely not, if the need to plan for long term care is ignored. Let’s take the gloves off. Do we care about our clients or not? Do we care about the person we see at the grocery store, sit next to at church and/or go to PTA meetings with? Our neighbors, our friends and, yes, our family? Are we talking about how essential it is to have this need taken care of in order to enjoy retirement? Because planning for an income to last 30 years means you don’t want to have a bump in the road.

Here’s a news flash: Long term care isn’t a bump in the road. It’s an earthquake. The resulting crater will swallow the best-laid retirement plan. Table 1 illustrates approximately how fast a couple can rip through $500,000 when only one of them needs care at today’s cost of about $75,000 a year for 10 hours of home care.

However, in an economy similar to the one we have endured recently, we can change the investment yield to 4 percent and Table 2 is a more nearly accurate picture of how this could look.

Oh, the client has $5 million dollars and can self-insure? Since when has any financial planner ever told a client with $5 million to forget about homeowner’s insurance and pay full price for replacing a home? To pay full price for hospital and doctor bills? To pay full price for real estate, vehicles, art, jewelry and whatever you do, be sure to pay top dollar for the new swimming pool?

However, I think there is a misconception about just how many Americans have several million dollars. The Financial Research Corporation says that less than 5 percent of households ages 45 to 74 have more than $1 million.

Are you starting to see how important it is to get to Americans with worksite long term care insurance while they are young enough to afford the premium and healthy enough to pass underwriting?

And for those who do have a few million, I agree 100 percent with Harley Gordon, a founding member of the National Academy of Elder Law Attorneys, that long term care insurance is really income protection, not asset protection. The person with $3 million who plans to earn 5 percent in retirement income of $150,000 had better have a great plan if half of that income has to pay for caregivers starting next month because he had a severe stroke. And what happens when the $3 million shrinks to $1.5 million, as many have seen in the recent economic downturn? And if investment earnings shrink to 3 percent, not 5 percent? And the real clincher is if the 5 or 6 percent growth rate over the last 20 years continues, long term care costs will triple in the next 20 years. In 2030, we can be looking at more than $200,000 a year, not $75,000 a year.

That growth rate can’t continue, you say? I think something called the rule of supply and demand says it can. The demand for long term care will be greater than ever in the history of the world with an aging population and in this country with 80 million baby boomers entering the care recipient years. The supply of caregivers is already at an all-time low.

It Can’t Possibly Happen to Me
When your client denies that anything will ever happen, try asking when the last time was that his nightly news station reported on a non-celebrity having a massive stroke? Not exactly news, since at least 700,000 people in the United States have a stroke every year, with one out of four being under age 65 (Centers for Disease Control and Prevention Statistics).

My favorite cousin while I was growing up was Carolyn. I loved it when she would babysit me because she would show me her beautiful dance dresses. She had every color and was the best dancer I’d ever seen. Her brown eyes sparkled with happiness when she danced and she always had her most beautiful smile for me. She had a massive stroke at age 61 and has been paralyzed on the right side of her body and without speech for nine years. Her mind is fine. I know she remembers those dancing days.

Most people need our help an it’s our job to be sure they understand they need our help. Since when do we wait for people to walk up to us and say they need life insurance, disability income insurance or retirement planning services? The difference here is that long term care insurance can be much easier to prospect for. Especially if you are a baby boomer, you will find that most of your peers are experiencing caregiving responsibilities for a family member and have learned the hard way that it isn’t covered by anything except Medicaid, which brings a plethora of limitations.

I continue to believe that long term care is the real health care crisis in America and we only have a few years to get long term care insurance to the masses in time to make a difference.

Medicaid is destroying state budgets like a computer virus, and it is a driving force behind the budget shortfalls that most states are facing today.

• State administered Medicaid is the nation’s primary funding source for many needing long term care; in 2008, 42 percent of the $215 billion spent for long term care services in this country was paid by Medicaid.¹
• Medicaid consumes an average of 20 percent of state budgets today² and that is projected to grow to 35 percent by 2030.³
• The biggest driver behind the growth in the Medicaid budget is long term care, which consumes one-third of our Medicaid dollars, and get this-by 2030, states are expected to be spending half of their Medicaid dollars on long term care!⁴
• Last, a typical scenario for states is that almost two-thirds of long term care dollars go to the aged and disabled, who represent only one-fourth of Medicaid recipients.⁵

Most Americans are facing a critical shortage of retirement savings and income. With savings so low and the odds of needing care so high, you can see a high probability of Americans turning to Medicaid for long term care support-unless we do something fast.

Consider that we have 155 million people who are employed in the United States and 38 million people over age 65 today.^6,7 This low ratio of taxpayers compared to every resident with the potential of needing Medicaid dollars for long term care creates an untenable situation.

Fortunately, there is a solution to head off this perfect storm, but it will only be successful if we work together-starting today.

As an insurance professional who is equipped to sell long term care insurance, you have a unique opportunity to make a difference by educating your clients about the necessity to plan ahead for long term care.

The Partnership for Long Term Care paves the way for this essential planning. By purchasing a long term care insurance policy that meets their state’s LTC partnership criteria, policyholders who need to turn to Medicaid for help can protect assets equal to the benefits they paid for that policy rather than spending down to Medicaid asset requirements, which is about $2,000 for an individual. (To see exact numbers for your state, you can go to my website-www.ltcconsultants.com-and click on “2010 Updates,” which is located in the lower right corner of the home page, then click on “Medicaid” and you will be taken to a chart with the numbers for all 50 states.)

Quick Medicaid lesson: Some states divide the assets in half and give the healthy spouse that half up to a maximum of $109,560 for 2010. Some states also have a minimum of $21,912 (example: $30,000 in assets means the healthy spouse will get $21,912, not $15,000.) Other states give the healthy spouse the maximum, no questions asked. To know how your state behaves, look at the second column in the chart I referred to earlier, located on my website. If the $21,912 number is there, you know the state applies the minimum as I explained in my $30,000 example. If the $109,560 is there, it’s one of the more “liberal” states where the healthy spouse is automatically given that amount.

Regardless of which method is used, after the proper amount is allocated to the healthy spouse, the remaining assets have to be spent down for the spouse who needs long term care-and that’s typically $2,000.

Partnership plans change that game significantly, and following are some examples:

Example 1: A single person applying for Medicaid’s long term care benefit must spend assets down to $2,000. If he applied for Medicaid after receiving $100,000 in long term care insurance benefits, he would be able to keep $102,000 in assets.

Example 2: A couple with $200,000 and one Medicaid applicant in a state that uses the 50/50 allocation. The healthy spouse could keep half ($100,000) and the spouse who needs long term care would spend $98,000 down to the $2,000 an individual is allowed to keep. If they owned a partnership policy that paid $100,000 in benefits, it would not be necessary to spend down any assets when applying for Medicaid.

Here’s where it’s really cool. Let’s say they have $300,000 in assets. Half of that is $150,000, which exceeds the maximum. So the healthy spouse would keep the maximum of $109,560 plus the $100,000 provided by the asset protection feature of the partnership plan for a total of $209,560.

What if the policy had paid out $200,000 or $300,000? You can see there will be many situations in which no spend-down is required for the LTC spouse to move to Medicaid when the benefits in the policy are either exhausted or when the family can no longer make up the difference between what the benefits provide and the cost of care. (Only a couple of states require the benefits to be exhausted before applying for Medicaid-Montana and Oklahoma.)⁸

What are the requirements to have an approved partnership policy? (1) the policy must be tax-qualified per IRC 7702(b); and (2) applicants must purchase an inflation benefit* based on their age at application. The Deficit Reduction Act says it has to be compound up to age 61, some form of inflation ages 61 through 75, and no inflation benefit required at age 76 forward. However, most states have customized that to put in some minimum requirements. For example, here is what Oklahoma did:
• Under age 61: at least 3 percent compounded annually or a rate that is equal to the consumer price index for all items.
• Ages 61 through 75: automatic annual inflation of at least 3 percent simple or a rate that is equal to the consumer price index for all items.
• Age 76 or older: the insured is not required to purchase inflation protection. (The Oklahoma insurance commissioner may approve an alternative index to be used in place of the CPI or alternative inflation programs.)

Now listen carefully. What many people (and producers) don’t realize is that if they buy long term care insurance with the appropriate inflation benefit (based on the above figures) from an insurance company that is participating in the Oklahoma Long Term Care Partnership, they receive a partnership policy whether they asked for one or not-and whether or not you, the producer, meant to sell them one. Can you see how most LTC insurance policies sold will eventually be partnership policies?

Almost three million Oklahomans are over age 18, but only 2.3 percent of them (62,000) have long term care insurance.^9,10 This is a typical ratio of people over 18 compared to the number of LTC insurance policies sold in that state, with the highest being North Dakota with about a 7 percent market penetration.

As an insurance professional equipped to sell policies approved by your state’s long term care partnership, you have an extraordinary opportunity to change these numbers dramatically over the next decade, while enjoying a tremendous increase in your annual income.

The Partnership for Long-Term Care creates an unprecedented opportunity to educate clients and prospects that buying an approved long term care insurance plan provides private-pay choices when care is needed and asset protection when the insurance benefits run out and the insured has to turn to Medicaid for help.

So here’s the deal. Forty-six states went into the new fiscal year with a budget shortfall, which can only increase in severity as more baby boomers access Medicaid for their long term care.11 Helping as many people in your state as possible get long term care insurance in the next decade can provide much needed relief to the state budget and decrease the pressure to raise state taxes.

Wondering what your state is doing with the LTC partnership? Most states have implemented a partnership or are in some stage of implementation: Alabama, Arizona, Arkansas, Colorado, Florida, Georgia, Idaho, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Minnesota, Montana, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Vermont, Virginia, Wisconsin and Wyoming.

North Carolina and West Virginia have just filed the State Plan Amendment to their Medicaid program with the Center for Medicare and Medicaid Services (CMS) that is required to implement a partnership, so it will be several months before that approval is granted and the state can open the doors for carriers to send their policies in to be approved as partnership-compliant.

Vermont is still trying to get the state legislation passed to implement a partnership. It will be reintroduced in 2011.

Illinois and Washington haven’t submitted a state plan amendment yet, but it looks good that it may happen within a year.

States that aren’t close at all yet are Alaska, Delaware, Hawaii, Massachusetts, Michigan, Mississippi, New Mexico and Utah. If you’re wanting to try to find a medicare plan within these states then you will have to go private and look for the various plans available to you such as this provider for Medicare in Mississippi should you reside in Mississippi.

You must take a course to be able to sell partnership policies in your state and in other partnership states in which you hold a non-resident license. Please do not treat this course as just a requirement. Approach it as an opportunity to really solidify your foundation of knowledge about long term care and LTC insurance and the surrounding issues!

Most of us don’t take a course or study anything for any length of time unless we are forced to do so, so now that you are, make the most of it! You will sell a lot more if you are confident in your information, and your clients will love you for selling them the appropriate benefits with the asset protection feature added on as a bonus.

1. Centers for Medicare and Medicaid Services, 2008 numbers, released January 2010.
2. National Association of State Budget Officers, “2008 State Expenditure Report,” “Table 28: Medicaid Expenditures” and “Table 29: Medicaid Expenditures as a Percent of Total Expenditures,” fall 2009.
3. Deloitte Center for Health Solution, “Medicaid Long-Term Care: The Ticking Time Bomb,” 2010.
4. Ibid.
5. Kaiser Foundation State Medicaid Fact Sheets (www.kff.org).
6. Bureau of Labor Statistics, December 10, 2009.
7. Census Bureau.
8. State specific information contained in Phil Sullivan and Phyllis Shelton’s “Partnership Certification Training.”
9. NAIC, “2009 LTCI Experience Reports.”
10. Center of Budget and Policy Priorities, “Recession Continues to Batter State Budgets; State Responses Could Slow Recovery,” updated July 15, 2010, Elizabeth McNichol, Phil Oliff, and Nicholas Johnson.

There’s a little black lab at our house named Jed Clampett, whom we affectionately refer to as our Tennessee mini-lab. We rescued him from the woods where his mother had taught him to survive. Left to his own devices, he earned his Tennessee namesake’s reputation almost daily because he loves to hunt and he is very good at it. He is lightening fast and sneaks up on his prey like a stealth bomber. The little bunny or baby squirrel never knew what hit ’em.

Since we are all animal lovers around our place, that had to stop, and it stopped pretty much the day we put a bell on Mr. Jed. Now the baby animals in the forest can hear him and scamper quickly away when he goes into his stalking mode.

But before we took such drastic action, Jed was bringing home “presents” and the stinkier, the better. His favorite seemed to be the flattened squirrel. Sometimes I think it was road kill and he was just cleaning up the environment by bringing it home to his human family. Whatever he brought, he was so proud and would drop it on our front deck with a flourish, expecting the utmost praise.

Why am I regaling you with this tale? Because just as in any other insurance sale, there are good prospects and poor prospects. Just as with individual long term care insurance sales, you will find it necessary to train the referral sources that you develop for worksite about what a good prospect is for long term care insurance.

Ideally a prospect will satisfy the 40/40/40 rule: At least 40 percent of the employees are over age 40, have an income of $40,000-plus, and at least 40 percent are female. The income will vary based on geographic region; with high-cost areas, $40,000 is too low—you might even make that threshold more like $75,000 or more. Even in middle America, it’s becoming the norm to want 40 percent of the employees to have incomes in excess of $50,000, for two reasons:

1. Inflation. The cost of living is much higher today than when the 40/40/40 rule was originally set up a decade ago.
2. Premiums have increased significantly in the long term care insurance market, especially in the younger ages. Between 2006 and 2008, I saw premium for a 40-year-old couple increase about 22 percent when I did my annual premium comparison of about ten carriers.

Five developments are driving the higher premiums:
1. Longer life spans which make the 5 percent compound no max inflation benefit very scary to price when the average purchasing age in worksite LTCI is only 46. A guaranteed acceptance plan is really frightening to carriers as employees become more educated and finally understand what a gift that is, especially as it relates to the 5 percent compound no max inflation benefit.
2. Lower than anticipated lapse rates. In the early stages of long term care insurance, I heard an expected lapse rate of 15 percent thrown around. The lapse rate today could be better referred to as a death rate since it is well under 2 percent.
3. Lower than anticipated earnings on reserves. Rates set with an expectation of earning 7 percent on reserves are not going to be sufficient any way you look at it if earnings fall to 3 percent.
4. Better claims information. As long term care insurance has been around in a meaningful form now for at least 20 years, the actuaries have a better idea about benefit utilization and behavior and are able to use pricing methods other than the dartboard approach; and
5. NAIC regulation. Back in 2000 stiff penalties for any carrier practicing an inappropriate pricing pattern were instituted. I have found that it helps employers to be aware of this list of penalties as well so they are able to better trust the pricing of today’s carriers. Most states have passed it.

Characteristics of a Good
Worksite LTCI Prospect
Contrary to popular belief, there are many wonderful group prospects other than doctors and attorneys and similar white collar professionals. Here’s a checklist you can use when evaluating groups for long term care insurance:

• Does the owner feel paternalistic toward the employees and take care of them accordingly? (Or “maternalistic,” as one woman-owned conglomerate quickly corrected me.)
• Does the employer value the employees and consider turnover expensive?
• Do most of the employees have long tenure and seem loyal to the employer?
• Does the employer try to tie employees to the company with benefits?
• Is the company stable, i.e., no mergers, acquisitions, layoffs?
• Does the company already offer a great benefit package, including voluntary benefits?
• Is there good participation in the other voluntary benefits?
• Are many of the employees “planners” who are concerned about taking care of their families and planning for a successful retirement? Most important buyer characteristic!
• Do many of the employees have some college education? (Most LTCI purchasers have some education beyond high school.)
• Is the average age of the group 40 or older?
• Is there a significant number—i.e., 40 percent—of employees with an annual salary of $40,000 or more? (Customize for your area.)
• Are at least 40 percent of the employees female? (Women tend to drive the sale, but be careful—if the female percentage is too high, you run out of women who are decision-makers and the “I have to check with my husband” objection takes over.)
• Last but not least, it’s not a good idea to offer long term care insurance immediately after a health insurance rate increase.

If I had to pick one characteristic over the others, it would have to be whether or not the employees are planners. Are they buying lottery tickets on their way to work as a retirement planning tool, while refusing to invest in the 401(k)? Does “mutual fund” mean we’re all having a lot of fun? (Let’s all thank Jeff Foxworthy for a bit of humor with this definition.)

If they are investing in their retirement fund with pre-tax dollars regularly, plus participating in other voluntary products, you’ve got yourself a great worksite LTCI prospect.

My second  favorite characteristic is education. Generally, if employees are doing retirement planning, they are more highly educated than the general population, and that’s how they understand the need to plan.

A really refreshing aspect of the worksite LTCI market is that with qualified groups with employees who are educated and planners, you rarely hear complaints about the economy. Just the opposite, these employees understand the need to plan for long term care. Their focus is more on understanding the true cost of long term care and understanding how fast the cost of care is growing and becoming a very serious threat to their financial plan to not outlive their income.

Back to Jed Clampett. What type of prospect would I consider a flattened squirrel in this market? Here’s a partial list, and I think you will quickly get the idea:
• Uneducated: Municipalities (city and county employees) can fall into this category, as well as retail and service industries.
• An average age younger than 40, as you will typically attract a lot of young families. In a group with broader ages, many of these younger employees will enroll, but I’m convinced that is helped by some mentoring coming from the older employees who truly understand the importance of the long term care insurance benefit in general and of the underwriting break in particular.
• An average salary less than $40,000.
• Companies with the bulk of the employees not having access to email or regular communication channels.

Public schools for K-12 are challenging because these teachers have lower salaries, are younger and often in more entry-level teaching jobs, and the communication system can be much less efficient than in private schools or private industry.

Hospitals are especially challenging because it is so difficult to communicate with the employees who can afford long term care insurance, such as the nurses and staff physicians and other professionals.

However, just because a group isn’t a good prospect for a voluntary benefit offering to all employees doesn’t mean you can’t approach it to do an offering to the owners and executives.

Therefore, don’t overlook asking every business owner you meet about long term care insurance if you think he or she is health and financially qualified, because tax incentives for long term care insurance are better for business owners than for individuals.