Funding LTC insurance absent from cliets’ to-do list

Advisers are struggling to get clients — especially baby boomers — to think about funding long term care in the face of depleted investment portfolios.

Planning to pay for health care needs in retirement has taken a back seat to replenishing portfolios, paying their kids' tuition bills and a variety of other priorities that demand a stream of cash, advisers said.

“It's very difficult to get people to actually take the time to have a conversation about long term care, think it through and act on it,” said Holly Hunter, principal and owner of Hunter Advisor LLC in Portsmouth, N.H., which manages about $60 million.

“It's like cleaning the garage,” she said of her clients' attitudes on long term care. “It just doesn't feel urgent.”

Advisers said that they're thinking more about long term care insurance, but clients are bombarded with the immediate needs they face as they attempt to stretch their dollars, and can't even think about the expense of funding long term care.

That situation is all too familiar to Cynthia R. Haddad, an adviser at Bay Financial Associates LLC, a Waltham, Mass., firm that manages $750 million.

One of her clients has had a foot over the retirement threshold since her husband starting collecting his pension. The couple recently put off purchasing a long term care policy, as they are trying to protect their limited income stream as well as fund a special-needs trust for their disabled child.

“I've been working with these clients for years,” Ms. Haddad said. “Their priorities changed, the mortgage was paid, and all they wanted was to finish the kitchen and summer home. They didn't want to lose everything if something happened.”

The couple found the cost of most long term care insurance prohibitive and hesitated to buy a product with “use it or lose it” terms.

As a solution, Ms. Haddad recommended that they purchase a hybrid insurance product in the form of a pair of universal-life-insurance policies that came with an accelerated-death-benefit rider to help cover long term care needs.

“In effect, we just used life insurance dollars to enhance their protection needs and incorporate long term care insurance with life insurance,” Ms. Haddad said.

Hybrid long term care products, which combine coverage with either life insurance or an annuity, are among some of the newer innovations from insurers. In this case, however, the ability to cover the needs, rather than the new product design, was what helped Ms. Haddad make her decision.

As another option, clients can set aside a portion of money to help fund a tax-free municipal bond that will pay for coverage premiums through interest, which makes funding painless because clients won't be scrounging for new premium money each year, Ms. Hunter said.

“It's out of sight, out of mind, and if your portfolio is worth 40% less, you don't have to worry about where the money comes from,” she added.

Another option to find a way to pay for the cost of care is taking a reverse mortgage. But according to Ms. Hunter, that arrangement is less than ideal because the closing costs are formidable.

Still, even with clients whose portfolios have been depleted, the question of the right time to buy long term care coverage remains.

Ms. Hunter encourages clients to purchase that coverage when they're young enough to qualify for lower rates.

If clients cannot afford coverage, she encourages them to consider what needs to change so that they can.

“For someone to have the magical thinking that the market will come back and they'll feel differently about the purchase, they won't,” Ms. Hunter said, referring to clients who are waiting for the market to turn around.

“If the cost of care is $100,000 a year, and there is $700,000 between the two of you, you're not going to make it,” she said as an example.

THE COST OF COVERAGE

In order to approximate more accurately how much money needs to be set aside for a particular amount of care, advisers said, they use software, including MoneyGuidePro, a program from PIEtech Inc. in Powhatan, Va.

The software calculates the odds of a particular long term care plan's success for an individual client's situation and gives advisers an idea of what investors will get if they put down money for various levels of coverage and how a plan will fare when subjected to market whims.

The program has helped Charles Bennett Sachs, vice president of Evensky & Katz Wealth Management, strike a balance between a client's desired level of care and affordability. The Coral Gables, Fla., firm manages just below $600 million in assets.

“We look for the first minimal piece of coverage — not the full coverage — but what can offset the bite,” Mr. Sachs said.

The program's analysis has been “the best way we can come about peering into the future with so many unknowns” he added.

Following the market downturn, a number of Mr. Sachs' clients also had to tweak their plans.

“In some estimates, the cost of coverage goes up because the losses put you closer to the estimate where the plan may not work,” he said.

Rather than cutting back on long term care coverage, Mr. Sachs trims clients' expenses in other areas, reining in spending.

A spreadsheet-based program initially developed by Tom Hebrank, president of Advanced Planning Solutions Inc. in Marietta, Ga., allows advisers to model different scenarios for clients based on the degree to which they will use long term care.

A “low-use” situation might include a 65-year-old married couple living to their late 70s and only one spouse using assisted-living and nursing home care for a brief period. Based on today's costs and a 5% annual inflation rate, the cost is about $62,000 in Georgia, according to Mr. Hebrank.

However, in a “high-use” scenario, a married couple may live to their late 80s or early 90s and use assisted-living and nursing home care, which together could run as high as $1.8 million in Georgia, he added. Older age also puts clients at greater risk for cognitive problems, including dementia and Alzheim-er's, which can also raise the cost of care.

Still, even though clients want to manage the cost of long term care, Mr. Hebrank warns against going too cheap as advisers strive for common ground between top care and affordability.

“Nobody wants to overpay for the product,” he said. “But we've learned our lesson from low-cost policies sold in the 1990s that have resulted in numerous rate hikes.”

“If that price is too good to be true, be careful,” Mr. Hebrank added.

E-mail Darla Mercado at [email protected].