LTC insurance a hard sell to boomers

For Tori Fontenot, the clarion call to consider long-term-care insurance for herself and her husband came as she tried to coordinate care for her elderly mother.

“My mother had the means to stay home, as she wished, but I feel she would’ve been more willing to get help had she owned an insurance policy,” said Ms. Fontenot, chief executive of Woman’s Hospital in Baton Rouge, La.

The situation left Ms. Fontenot, who is in her mid-50s, pondering her own health care situation.

“I understood the value of long-term-care insurance, but I didn’t have enough of an impetus to go out looking for quotes,” she said.

It took a bit of reframing by the Fontenots’ adviser, Pete Bush of Horizon Wealth Management, to place the LTC need in its proper context for the couple, their two children and two grandchildren.

“We framed it in reference to the couple and their family: One person might require care, and that might drain the assets needed over the next 30 to 40 years,” Mr. Bush said.

“That’s when the light bulb went off,” Ms. Fontenot said. “I never again thought of LTC as insurance that provides funding for needs but rather as an insurance policy to make sure you’re protecting the assets you want to leave to your kids.”

Ms. Fontenot and her husband ended up purchasing policies from John Hancock Life Insurance Co. that have a six-year benefit period, inflation protection and a $100 daily benefit. The combined price tag was $3,850 per year.

The experiences of the Fontenots illustrate why long-term-care insurance is not an easy sell.

“The objection we hear frequently is this concern around “use it or lose it,’” said Katie Liebel, vice president of linked-benefit products at Genworth Financial Inc. Consumers are turned off by the prospect of purchasing the coverage and losing the money if they never get the care, she said.

Sales of LTC insurance (as measured by new annualized premiums) exceeded $465 million in 2009, down 23% from 2008, according to LIMRA, a financial services research and consulting organization. First-quarter-2010 sales exceeded $116 million, up 12% from the year-earlier period.

CLIENTS IN DENIAL

Regardless of economic conditions, however, clients are often reluctant to consider the possibility that one day, they may be unable to care for themselves, advisers said.

“I find long-term-care insurance is harder to sell than life insurance,” said John D. Haynes, an adviser with Haynes Financial Inc. “People can come to grips with dying, but somehow they think they’re immortal in terms of quality of life.”

Cost is another reason many clients avoid purchasing LTC insurance, advisers said. To overcome that hurdle, many advisers begin recommending LTC coverage to clients in their 50s, when rates are lower. For those with a family history of serious medical problems, some advisers recommend buying the insurance in their 40s. Indeed, many clients can find good deals and enjoy “preferred” underwriting status if they apply early.

For example, a 45-year-old purchasing a traditional individual policy will pay about $1,678 in annual premiums for a $200 daily benefit with inflation protection and a five-year benefit period, according to data from John Hancock Life.

If that same client waits until 65 to buy similar coverage, he or she will pay $7,874 in annual premiums, assuming an inflation rate of 4%.

Despite two decades of additional premiums, the earlier purchase is more cost-effective. For example, if our hypothetical client filed a claim at 80, he or she would have paid a total of $58,730 in premiums from 45. Had he or she waited until 65, however, the premium payments would have totaled $118,110.

Encouraging younger clients to buy coverage is a priority for Greg Olsen, a partner at Lenox Advisors Inc., who says his clients buy LTC coverage at 47, on average. At that age, he recommends a 10-pay LTC policy, which allows the client to pay down the policy over 10 years, as opposed to spreading those annual payments over decades. In New York, where his practice is based, residents receive a 20% state income tax credit for buying LTC insurance.

Mr. Olsen walks the talk: He purchased his 10-pay policy with Massachusetts Mutual Life Insurance Co. at 35. “We just wanted to bite the bullet,” he said. “I have five years to go, and once it’s done, it’s done.”

From the carriers’ perspective, 10-pay policies are risky. That’s because such policies are non- cancelable, and insurers have no way of knowing with certainty what the claim environment will be like down the road, noted Allen Schmitz, consulting actuary and principal with Milliman Inc.

In an effort to make LTC insurance more palatable to consumers, many carriers are developing so-called hybrid products, which combine life insurance or an annuity with LTC insurance. A provision in the Pension Protection Act of 2006 that went into effect in January allows for tax-free LTC payouts from hybrid annuities.

Major providers of hybrid products include Lincoln National Life Insurance Co., Genworth and Mutual of Omaha Insurance Co.

Sun Life Financial Inc. plans to release Sun Care, a product combining life insurance and long-term-care insurance, in the fourth quarter. It’s also eyeing the creation of an annuity-LTC hybrid.

HEALTH CARE REFORM

Insurers are looking for ways to cash in on the Community Living Assistance Services and Supports Act, a part of the health care reform that creates a taxpayer-subsidized federal long-term-care program. The bare-bones benefit is to pay $50 per day. Companies may come out with a supplemental product to add to the federal benefit, but that product probably won’t be available for a couple of years, Mr. Schmitz noted.

The key to the ultimate success of the market depends on awareness on the part of clients and their advisers, Mr. Schmitz added.

“They have to be aware of LTC and have to want to plan for that risk,” he said. “It’s really a matter of education, getting more people to sell it and having the right public policy with respect to long-term care. There aren’t any simple answers.”

E-mail Darla Mercado at [email protected].