A majority of the population is going to need long-term care someday.
It's seldom easy, however, to convince clients that they should protect themselves with LTC insurance just when they're enjoying a healthy middle age, with more immediate financial priorities such as funding their children's education and planning their own dream retirement.
That's why, when we bring up the subject of LTC, we like to make it part of a conversation about an overall longevity plan.
Clients should think about buying LTC while they're in their mid-40s to mid-60s, when they can get the best rates and generally avoid the risk of an insurer turning them down due to health issues.
Yet "someday you might be in a nursing home," is the last thing someone still in the prime of life wants to hear, or even imagine as a possibility. A better conversation opener is: "You might live to be 100, so let's talk about how to make sure you don't run out of money."
Many clients prefer and will likely receive long-term care in their own home, aging in place in a familiar setting, rather than a nursing home. In that case, however, the client will need to be able to pay for in-home aides.
While many people mistakenly believe that Medicare will pay such expenses, Medicare pays only for skilled nursing care, after a hospital stay and only provides coverage for up to 100 days. Most LTC assistance is provided by non-skilled aides who help with daily activities such as eating, bathing, dressing, and transferring.
We often point out that LTC insurance performs multiple roles, providing an income source to pay for care and therefore protecting a client's portfolio, income, and estate — and it assures that they won't have to unduly burden family members with taking care of them. Clients don't want to make family their long-term care plan.
BETTER PRODUCTS NEEDED
Ideally, LTC should be part of an all-encompassing strategy of longevity planning. But consumers need to be educated on how it will help them, and the LTC insurance industry needs a wider range of products to address a diverse range of needs.
The current state of the LTC insurance business actually presents an opportunity to make some of these much-needed changes. With the mispricing that occurred over the past decades due to lower than expected interest rates on insurers' bond portfolios, lower than expected policy lapses and higher than expected claims experience, LTC policy issuers have had to raise premiums on existing policies.
That has led to a significant decline in sales of standalone traditional LTC policies, and a number of insurers have exited the business entirely. The resulting disarray, however, leaves a gap to fill with product alternatives.
Life insurance-based LTC products, which were previously overlooked due to the higher premiums, are now more popular than ever, particularly because the premium costs are guaranteed and the policies offer a risk hedge in the sense that if clients never need long-term care, there will still be a payoff in the form of a death benefit for their heirs.
More insurance companies are offering these products today and there are more multi-year payment options available than ever to help reach a wider range of consumers. These products include both life insurance policies with LTC riders and hybrid policies, which offer a cash surrender value along with an inflation-protection feature so that LTC benefits can increase over time.
Still, we should have more products that offer flexible ways of purchasing LTC insurance, such as policies that allow the consumer to rollover money from a retirement account into an annuity that makes automatic transfers into an LTC policy.
Consumers need to be more aware that there are such tax-favorable ways of buying LTC insurance. With a retirement account rollover, the money that goes into premiums could receive favorable tax treatment.
Consumers could also take advantage of the 1035 exchange provision in the tax code, which may allow holders of cash value life insurance and non-qualified annuities to exchange all or a portion of their contracts for LTC insurance.
Since many LTC benefits are tax-free, this gives the policy holder a payoff they wouldn't have received from the life insurance policy or the annuities.
Further, this is an opportune time for more employers to sponsor LTC policies and educate their employees about the importance of making long-term care planning a part of their financial wellbeing.
With people working into their 60s and even 70s, and employees seeing their parents living into their 90s or beyond, the need is growing for more comprehensive retirement planning that factors in long-term care expenses. We anticipate that, in the future, more insurance companies will offer LTC worksite products.
Traditional LTC offers tax advantages for both employers and employees. Employers may be able to deduct the premiums of traditional LTC policies for employees and spouses, just as they do with health insurance.
People with Health Savings Accounts (HSAs) can pay premiums with funds from their account. Since LTC is not available as a pretax cafeteria benefit, using HSA funds works very well for voluntary employer-sponsored offerings in which the insurer bills the employee, who then directs the HSA to pay the insurance company.
NO CRYSTAL BALL
There is no crystal ball to indicate what kind of care anyone will need if they are lucky enough to have a long life, and that's precisely why LTC insurance is a vital part of any long-term financial planning.
Ideally, someday there will be an entire ecosystem built around the expectation that many of us will become centenarians. We might even consider changing the name of LTC to longevity insurance.
Olin Wage is Senior Vice President, LTC, L&H Insurance & Benefits Advisor, Stephens Insurance, LLC.