Positioning the Need
Mr. and Mrs. Client, what do you think about the prospect of moving in with your children and/or “gifting” them a six-figure annual bill? This is a real and powerful question. If it doesn’t come to that, Mr. and Mrs. Client, the cost will chip away at the value you meant to leave your children by depleting your investment accounts. Most advisors are afraid to bring up the long term care discussion, but afterward find that their clients are very appreciative that they did. It strengthens the relationship between the advisor and client by tackling a very real need head-on.
From the client’s perspective, they have only a few choices without having a predetermined plan. They either withdraw the money to cover those expenses from their investment and savings accounts, or they burden their children with the task of care and/or providing the source of payment. Along the same lines, the advisor needs to be asked tough questions by the life insurance sales professional in order to relate to and realize the impact of the long term care need:
Mr. Advisor, what would happen if the spouse of your top client called you today: “John has had a stroke, he is in bad shape. He will need significant care. What is the plan?” Do they have a plan? Have you even offered them a plan?
The average cost for a private nursing home in 2014 was around $77,745 per year. In 20 years, assuming a modest 3.2 percent interest rate, that figure will be $145,970. Depending on what statistic you follow, there is about a 70 percent chance a person over the age of 65 will need long term care at some point, whether at a home or in an institution. With 76 million baby boomers turning 65 during the next 15 years, that is around 53 million people who will likely have a need. These statistics translate directly to an advisor’s book of business. Those clients over the age of 65 generally have the most assets and thus have the most impact on the advisor’s overall assets under management (AUM). Advisors need to have an interest in protecting those assets and, furthermore, need to understand how long term care planning can help them do that.
As a financial advisor or life insurance sales professional, it comes down to asking the tough questions to strike an emotional chord. Only then have you created enough discomfort to inspire action.
Quantifying the Value for the
Financial Advisor
As a life insurance professional, not only do you need to personalize the long term care need for the advisor, you need to quantify the value of providing it. Many advisors today are fee-based, and many more will be moving in that direction. What’s critical to their paycheck and their business is protecting their AUM. If you don’t plan for this need, Mr. Advisor, where do you think those funds are going to come from? They are likely going to come from your AUM, which is still invested across various asset classes. I use your AUM because it is important for the advisor to take ownership, and thus responsibility. Systematic withdrawals from a volatile portfolio can be devastating to an account value and can have a negative effect on the viability of a client’s retirement plan. Insurance isn’t taking away from a financial advisor’s AUM, it is protecting it. Once the advisor understands that insurance is about protecting his business, you will find he is open to opportunities to grow it. At that point the conversation can move beyond just long term care, and you have begun to form a valuable partnership.
Mr. Advisor, now that you have agreed that there is a need and you’d like to work with me on this project, let’s commit some time to it and define a revenue goal. Devoting 50 hours per year, less than an hour a week, I believe it is reasonable to generate between $50 and $100 thousand in gross dealer commissions. Does that sound like a good use of your time?
Long term care insurance is a way to protect AUM while a client is alive, but what happens when that client dies? Seventy percent of married women fire their financial professionals within one year of their husband’s death. If the spouse isn’t in the picture, children likely inherit a portion of that wealth after Uncle Sam takes his piece, fight over it, spend it, and/or use a different advisor for their planning needs going forward. An estimated $30 trillion in assets will flow from baby boomers to Generation X and Y over the next few decades. Mr. Advisor, you need a way to make your AUM sticky; a way to incorporate the entire family into the planning process. This will help solidify you as the family’s primary advisor, and there is no better way to do this than through life insurance planning. A way to lead into the life insurance conversation may be through an LTCI conversation or vice versa. Mr. Advisor, what if I told you there was a way to incorporate both long term care planning and life insurance planning into your book of business? From a liability standpoint, if you don’t offer these options to clients who are suitable, it may come back to haunt you—especially if the industry ends up moving to a common fiduciary standard.
Reviewing the Options
Let’s say we have identified a need and convinced an advisor that long term care/life insurance planning helps protect and grow his AUM, now what are the options? Stand-alone LTCI plans are expensive, and they seem to be only getting more costly as time goes on and carriers reassess their risks. On top of that, if a client doesn’t end up having a need, those premiums are lost. According to an article from The American Association for Long-Term Care Insurance, there is a 50 percent chance someone who buys a policy at age 60 will use his policy before he dies. So according to that statistic, it is a flip of a coin if he ends up needing that coverage. Hybrid LTCI products are a better solution than stand-alone policies, and we have seen some development in that space; however, when you compare those hybrid products to cash value (CV) life insurance policies with a long term care rider, the overall benefit is clearly in favor of the CV life insurance policy. If a client doesn’t need to accelerate the death benefit for long term care, then there still exists cash value and a death benefit that passes to a beneficiary on a tax-favored basis.
Two CV life insurance options that would work for this type of approach would be indexed universal life (IUL) or variable universal life (VUL). In that market there are three carriers that offer a long term care rider to their IUL/VUL lineup. We are talking about a true long term care rider, not critical illness, which is an important distinction to make. Two carriers have an indemnity style long term care rider, which can also be incorporated into trust planning as well as serving individual needs. The other has a reimbursement style long term care rider. A fee-based investment advisor will be able to understand and relate to IUL and VUL much more than a fixed product. Particularly with VUL, it gives the advisor the opportunity to manage the underlying investments and portfolio much like they do in other client accounts. VUL sits somewhere between the investment and insurance worlds, offering application to both as a registered investment product and an insurance product.
For the client, there are two primary advantages to using a CV life insurance policy with a long term care rider. The first is protection against both longevity and inflation, which are the primary risks facing retirees. For a couple who reaches age 65 there is a 50 percent chance one of them will live to age 94 and a 25 percent chance one of them will live to age 98. Permanent life insurance lasts for the duration of the client’s life, and the required premium payments remain predictable and steady. Due to their tie to the financial markets, indexed life and variable life are far more likely to keep up with inflationary pressures than a fixed product. The second advantage is offering the client the power of choice. Given all the factors that can come into play over a 30-year potential retirement period (age 65 to 95), isn’t it better to have a product with options? If a long term care need arises, the client can accelerate the death benefit. If supplemental income is needed instead of long term care, withdrawals and/or loans can be taken out against the cash value of the policy. If they don’t need either, then they have just hedged their risk against rising estate and/or income taxes and a death benefit goes to their beneficiaries on a tax-favored basis.
For positioning the actual sale, the long term care need can be addressed on a client’s primary life insurance policy if he doesn’t already have an LTCI policy in place, or sold as a secondary policy specifically to address long term care planning. If a client already has an LTCI product he has been paying premiums on, is it enough? Does he need something more to supplement that pool of funds?
Conclusion
Bridging the gap between the life insurance world and the investment world is a difficult task. As life insurance professionals, we have not done a good enough job of conveying the value to advisors. In the institutional channel, fewer than 4 percent of advisors sell life insurance on an ongoing basis. For independents and banks that number is higher, but still not where we need it. These penetration rates haven’t changed for 30 years. Especially for fee-based advisors, we need to begin to speak their language and quantify the value for them as it relates to protecting and growing their AUM.
Cash value life insurance with a long term care rider is a great solution for both clients and advisors. For the advisor, it brings the spouse and children into the planning process and creates a value past the primary client’s death. It protects their business from not only an asset standpoint, but from a liability standpoint as well. For the client it is a great option to combat inflation and longevity, provide long term care funds if the need surfaces, and provide a wealth transfer vehicle for remaining funds on a tax-favored basis. The most important thing is that it gives the client and his family flexibility and security with a product that addresses multiple needs at the same time.
