Most of you reading this article don’t make the majority of your income by selling only long term care insurance. The financial professionals we work with generate the bulk of their income through assets under management first and a portfolio of insurance products either second, third or even fourth before they finally hit long term care coverage. What I would like to address here is what will happen to those assets under management or the client’s retirement income stream from those assets if or when a client has a long term care event.
Those of us who specialize in the long term care space are always amazed at all the reasons a financial professional or a client avoids the topic of insurance planning for a long term care event: The belief that it won’t happen to them; they are healthy; they have enough to self-insure. That last one is my personal favorite. A good friend and colleague told me that self-insuring (properly self-funding) is really “unsuring.” When you plan to use part of your income-generating portfolio to cover your future long term care needs, you are unsure of how long you will have to save, unsure of your rate of return and unsure of many other events that come up over time.
We’ve all heard the reasons a client might give you for why they won’t need long term care. Instead, let’s focus on the consequences of not leveraging insurance to pay for a long term care event and the potential effect on a client’s income-generating portfolio—and the income stream they generate from that portfolio during retirement. This is especially impactful when you need to pull sizable amounts of income from this portfolio during a down market to pay for long term care expenses.
Such a long term care event could impact the client’s portfolio and their spouse’s ability to draw the same amount of income from this portfolio going into the future. Also consider the impact on you as the client’s advisor, both from a perspective of assets under management and on your ability to retain these assets within your practice when they pass on to the beneficiaries.
For example, if your client has an “unsure” plan for long term care expenses, and does have the need arise, they could potentially need to withdraw significant funds from their portfolio; the national average for long term care in 20 years is $100,000 to $211,000 (https://nationwidefinancialltcmap.hvsfinancial.com/). A four-year claim could potentially remove $400,000 or more. How would this impact the ability of their spouse to maintain their standard of living? How much will this reduce your assets under management or impact your client’s estate plans?
You can help your clients mitigate unwanted outcomes by showing them a plan using long term care coverage to “self-assure” with a guaranteed stream of leveraged benefits vs. “self-insuring” with a dollar-for-dollar reduction from their portfolio.
Consider the hypothetical experience of a couple with a retirement nest egg of $2 million. They want to use it as a source of income, but they’re conservative in their investment outlook. They also want to leave behind some funds for their children and the charities that they’ve supported their entire lives. They start out taking four percent per year against these assets (the blue bars). For the first 12 years, everything is going fine with market ups and downs that they are comfortable with. When they turn 78, there are a couple years of market downturns and they decide that they’re spending less, so they freeze their annual draw at $85,000. When the husband is 80, he has a long term care event (such as a serious fall, a stroke, etc.) that limits his abilities and requires them to find professional care for him. This ends up costing them $120,000 (the orange bars), which they have to pull from their portfolio because they have no other source of funds for long term care. As you can see, that extra $480,000 of expense has a significant impact on the portfolio (the green line). The husband passes away at age 84, and his spouse is seeing her portfolio dwindle to $825,996. A few years later, the widow has her own long term care event. She reduces her income substantially to $40,000 because she’ll be going to a facility. But the increase to pay for her care results in her running out of money in just over three years. This leaves nothing for her heirs and charities and nothing for the financial professional to continue managing.
Your clients may have a variety of goals that you will help them work toward over the years. Helping clients to build and grow their portfolio to meet their retirement goals will be a big part of this overall strategy. Make sure that you’re having the conversation with your clients around protecting the portfolio from the financial impact of a possible long term care event so you don’t find yourself explaining to their spouse why they no longer have an adequate income stream to maintain their standard of living—or to the beneficiaries why their inheritance was eroded by an “unsured” long term care event.
This material is not a recommendation to buy or sell a financial product or to adopt an investment strategy. Investors should discuss their specific situation with their financial professional.
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