In the spirit of education and awareness, it’s vital to understand the various sundry myths put forth by clients, and unfortunately sometimes by their advisors, on the concept of self-insuring themselves against the risks of long term care.
With millions of years of policy data from insurance carriers and an even greater array of statistics compiled by various government agencies and private entities, we know the risk of requiring long term care services at the end of one’s life is over 70 percent. For couples, this number soars to more than 90 percent, and single females (never married, divorced, widowed) are more than 79 percent. Rather than referring to the “chance” of requiring long term care, it’s more appropriate to use the word “probability.” After all, the numbers associated with this risk have simply become too overwhelming to ignore.
Many clients and, sadly, some of their financial advisors and/or estate planning attorneys think that insuring for long term care is something primarily for the middle class with only limited funds that require protection, and that more affluent clients can afford to self-insure against this risk.
As it turns out, many self-made affluent individuals who could certainly afford to insure against this risk often choose not to self-insure because they do not want to place their hard-earned fortunes at risk. Take, for example, a client from 1999, who was a retired orthopedic surgeon with three luxurious homes in Chicago, Scottsdale, and Palm Springs. According to his calculations, his annual expenses related to the upkeep of these homes, country club memberships, cars, and other ordinary life expenses exceeded $300,000 ($546,271 in 2023 dollars). Plus, this client could lay his hands on ten million dollars cash in just 24 hours’ time. The premium would be next to nothing for him. Some advisors or attorneys might have asked themselves, “Why am I even here? Why bother?”
However, this client understood the importance of having a plan in place. He knew that if his wife suddenly fell ill, he could care for her as a doctor. But as her husband, he would be a complete basket case. That’s why he was so earnest in his questions regarding the scope of the proposed policy. He knew it would take just a phone call to have a team of professionals put together a plan of care, find the caregivers, and even raise the commodes, lower the vanities, and put grab bars in the shower. And that’s exactly what he wanted.
For this client, it wasn’t about the money. He could afford to pay for the necessary services and even considered buying a barebones policy just to have access to all the services that the policy will offer. However, when looking at it from a dollars and cents point of view, why would he use his own money to pay for some services when he can use an insurance policy to pay for all of these services? This way, he is leveraging his money and protecting the estate he and his wife want to leave to their children and grandchildren as well as to charity.
This man knew exactly why he was purchasing this protection. In addition to affording himself, his wife, and their family the advantages of insuring their portfolio, he was also presenting a gift to all of them by eliminating the need for his children to become uncompensated informal caregivers and allowing them to be care managers who oversee the activities of professional caregivers. Unfortunately, not all clients have proven to be this insightful.
Why else should people of affluence purchase long term care insurance? People of affluence tend to avail themselves of better medical care, often have healthier lifestyles, and as a result tend to live longer lives. Studies show that the longer you live the more likely you will need long term care. As a result, the good health these clients enjoy may bring a greater chance of needing long term care in the future.
When affluent clients do require these care services, they will likely pay more for them than their middle-class contemporaries. Why? The reasons for this assumption are somewhat obvious when placed in context. The affluent tend to want better quality long term care, which translates into higher daily costs. Like most clients, the affluent are more likely to want to stay at home regardless of the associated cost to do so. They often live in conditions that some can only dream about, and do not want to sacrifice the quality of life to which they have become accustomed.
If deteriorating health conditions dictate that they leave their home, these very same affluent people are only going to enter the choicest of long term care facilities in the more upscale area of the municipality in which they reside. It is also reasonable to assume that they will insist upon a more costly private room if not a suite of rooms.
A review of associated demographics indicates affluent people may be less likely to receive care from their children because the education and upbringing these children have enjoyed may have thrust them into higher profile and/or demanding jobs. With fewer children being born and more women in the workforce, we have grown beyond the society portrayed by the Waltons. Multi-generational homes are largely a thing of the past, and the questions of dignity and self-determination loom even larger with this caste group.
Unfortunately, because these people of affluence are often healthier than other cohorts, they are also more prone to deny long term care will be part of their future. When dealing with clients like these, it’s important to become a denial-buster. Rather than bombarding them with the numbers associated with the risk of needing these long term care services, pivot and instead address the consequences of making the wrong decision to not purchase a LTCI policy.
Once we enter this realm, quietly begin asking them to consider the consequences and potential impact on their spouse, their children, their financial portfolio, and the very quality of life that they may have to give up when they can no longer cover escalating costs with their own money. The unfortunate reality is many families have to sacrifice assets to pay for professional long term care services that they can no longer provide to ailing loved ones.
Ask clients which of their assets they will liquidate to pay for these services, forcing them to consider selling off the boat, the vacation home, or some of their other prized collectibles.
A review of their portfolio and positioning long term care as an invasion of principal that will not recover with the passage of time (as it did after the market crashes of 1987 and 2008) will often provide the sobering reminder that pre-crisis planning is a far more economical way to protect their life and lifestyle than self-insurance.
While there are fewer carriers with traditional long term care products than 25 years ago, there is a more varied array of products offered by a smaller pool of carriers. For clients who do not want to risk paying for something that they may not avail themselves, it’s crucial to pivot and offer them additional life insurance coverage with a long term care or chronic illness rider. For some clients, a linked benefit, asset-based, hybrid, or combination product might make sense. The key is that these products all offer a stop-loss feature against the ravages of long term care and allow the policyholder to again avoid the potential pain of complete self-insurance.
There are three ways to pay for the long term care that the majority of us will likely require before we leave this earth: Be very rich (where self-insurance is possible, if not practical), be very poor (where the government steps in with Medicaid assistance), or be insured.
So, if you have a spare million dollars and no desire to leave a legacy, then self-insurance might be for you! As for the rest of us, we will continue to pay our long term care insurance premiums, even with the accompanying in-force rate actions, because the alternative of self-insurance is just so unappealing and ever increasingly expensive.