Changing advisers’ long-term-care conversation

The following is an edited transcript of a March 20 webcast, “The Coming Crisis in Long-Term Care,” held in New York. InvestmentNews deputy editors Evan Cooper and Frederick P. Gabriel Jr. moderated.

InvestmentNews: Harley, tell us about the Corporation for Long-Term Care Certification and why you are so concerned about long-term care.

Mr. Gordon: I'm an attorney who focuses on elder law. The reason I got involved with the business of long-term care is that the people who came to see me all had resources. They were all well-off financially, but no one ever thought they'd need care over a period of years. When they did, they found out that nothing paid for it, and that caused an absolute catastrophe, financially.

So I started a professional designation to teach financial services professionals, as well as insurance professionals, how to engage clients in a discussion about long-term care and how disruptive the consequences of not having a plan for long-term care can be to the financial adviser's and the insurance professional's business models of having plans to generate income to protect families.

So far, the designation has about 20,000 graduates. We're not affiliated with any insurance company or any financial institution — and by the way, I'm not licensed to sell an insurance product. I think that's important for people to know.

InvestmentNews: Carolyn, tell us a bit about your background. You are one of the few advisers who is also a physician.

Ms. McClanahan: I did primary care and emergency medicine. In 2000, my husband and I tried to find a financial planner, and those in my area were more about doing investments, and not really about planning, so I went back to school for fun and fell in love with this incredible profession.

I believe we should all be giving back to our professions, and one of the things I recognize as a financial planner is that there are a lot of things financial planners could understand from the medical world that would help them do a better job as planners.

In the mid-2000s, I started speaking about how to find health insurance for uninsurable clients, and then how to increase clients' ability to get long-term-care, life and disability insurance. We found out about cleaning up their medical records and how to position them in the best possible way for those types of insurance products.

InvestmentNews: A number of insurance companies have dropped LTC coverage. They can't make an economic go of it even though there seems to be more of a need for such insurance as longevity increases. Is this indeed a crisis? What problems do each of you see, and what kinds of solutions should advisers be thinking of?

IT WON’T HAPPEN TO ME

Mr. Gordon: I don't like the word “crisis.” It reminds me of cable television — everything is a crisis. The more you tell people things are a crisis, the more they just tune out. If we talk about long-term care as just another catastrophe that's going to drop on my head; I won't want to deal with it.

Very few people are aware of the need for long-term-care insurance. If they are aware, they don't want to discuss it. And even if they're not aware of it and made aware, they deeply believe that the most awful things in life will happen to someone else.

As a result, you can do all the studies you want and print all of the articles you want about the cost of care and what's going to happen to people as they age. Everyone who reads the stories will believe that whatever happens will happen to someone else.

It really comes down to an issue of education, and one thing that the long-term-care-insurance industry has not done a good job of is educating people about consequences. I'm not talking about the risk of needing care, because awareness of that doesn't motivate people. What I'm talking about is how serious the consequences of needing care will be — not for the person who needs the care, because he doesn't think it will happen to him, but specifically on the portfolio that he worked a lifetime to create to generate income to allow him to keep his commitments. We also don't talk enough about the other consequence, which would be the toll on the emotional and physical well-being of those people who have no choice but to put their lives aside to take care of a person who is chronically ill. When physical and cognitive impairments are so devastating that a person becomes absolutely compromised, other people's lives are put in jeopardy.

That's really the message here. It's not telling people that there's a crisis, because even if it is a crisis, it's a crisis for someone else.

InvestmentNews: Carolyn, in your experience, are people aware of the problem? Do they look away and think it will happen to someone else?

Ms. McClanahan: Harley is absolutely right in that people don't think it's going to happen to them. They know there's a possibility of something happening, and if an adviser is willing to address it clearly, they will talk about it, but you've got to know how to discuss it, and you've got to do it very, very carefully.

Specifically, though, to address the question of whether there is an LTC crisis, I have to say that I'm the optimistic sort. You go through dark periods, but the world generally responds to challenges and meets them. Right now, four out of 10 people over 85 have significant cognitive impairments. Considering that there are more than six million people in the United States over the age of 85, that's a lot of people we've got to take care of, and the number is going to go up significantly.

Thank goodness, there are a lot of hospitals and care organizations that are doing very innovative things to help people who need additional assistance, and hopefully, these initiatives will bring the cost down, but it's not a guarantee.

ADVISERS’ RESPONSIBILITY

Mr. Gordon: I agree, Carolyn. It's part of the responsibility of a financial services professional to bring the subject matter up — not to tell people that it's a crisis and not to tell people that a stroke is in their future, but to educate people, not about the risk of needing care but how severe the consequences would be to the financial viability of a family, as well as to its emotional and physical health.

There's no one better to deliver that message than a financial service professional. By telling a person, “Look, I don't think this will ever happen to you, but if it did, do you clearly understand how severe the consequences would be to the plans we put together to secure financial viability?” That's a very strong message.

InvestmentNews: Give us an idea of what the advisers should actually say. Give us the words, because it is such an uncomfortable area to talk about.

Mr. Gordon: The primary center of influence here is not the woman, because women understand what providing care does. She's only a center of influence if her husband, to give you an example, will listen to her. The real message to men must be this: “Should you need care over a period of years, it's going to violate your prime objectives.” For decent men, prime objectives are to protect and to provide for their family.

Providing care to people who are chronically ill will make healthy caregivers chronically ill. It will compel a child to put her life aside because she'll see her mother or father buckle from the responsibilities. It will devastate the relationship between the child who steps up to the plate and those who don't.

So here's another thing to understand. Long-term care doesn't bring families together; it tears them apart. Paying for care comes from two sources: out of your hide, which exacts an emotional and physical toll, and out of your pocketbook.

The problem with paying for care is that it calls for a wholesale reallocation of income, and income is exactly what the client wanted to support lifestyle. If the illness continues long enough, it almost always causes an unintended invasion of the investment portfolio, which leads to a disruption of every plan that clients put together with their adviser to secure financial viability.

That's pretty strong language but if financial advisers understand, I think they'll be able to deliver that, and maybe that will cause people of means to take action.

InvestmentNews: Harley, you said that elder lawyers deal with people who have resources. A lot of people think that they have enough money to cover whatever expenses come up and that they don't need specific LTC coverage.

Mr. Gordon: Of course they do. You know why? Because they think it's not going to happen to them.

InvestmentNews: Let's get specific. Should people who have $5 million in assets be worried about having enough to cover LTC expenses? Should their adviser?

Mr. Gordon: I mean no disrespect, but when a financial adviser says a client has enough assets to pay for the cost of care, he or she is really saying two things. First, they're saying that they don't want to discuss the subject, because they have no control over the subject matter and don't really understand it. They don't want to bring up a discussion that they can't control.

ASSETS DON’T PAY

Second, many, if not all, financial advisers and insurance professionals deeply believe that assets pay for care, which is interesting because in life, assets pay for very little. Assets are simply generators of income.

We don't live in a world of assets; we live in a world of cash flow. When I talk to people, I say that any money that goes into a 401(k) or an IRA or 403(b) is, in effect, the capital assets, the goal of which in the future is to generate income.

So when you ask about how much in assets someone needs to cover the cost of care, it's really a question of the income those assets generate. If you have someone with $3 million, that person is lucky if they get $150,000 out of it and another $40,000 in Social Security; so maybe income of $200,000 before taxes. How much of that is committed to lifestyle? Most of it, as most people will tell you. As a result, should you need care, you likely won't have sufficient cash flow to pay for that care, which means you go to your assets. And that causes a whole host of problems.

That's why advisers should be aware that assets don't pay for care; income does. And it's not an issue having anything to do with clients; it has to do with the business model.

InvestmentNews: Carolyn, how do you discuss the asset/income topic with clients?

Ms. McClanahan: I think this is where Harley and I differ a bit. I like to guide the conversation toward what people's risks are, what their lifestyle is, what their goals are for end-of-life. It's important for financial advisers, especially financial advisers of the future because investment management is going to become commoditized, to learn how to help people do real planning. Long-term-care planning is part of that and it's going to be so important, which is why advisers have to learn how to talk to people about their potential health issues. It's really not that hard.

In reality, I find that financial advisers who are comfortable talking about health issues discover that their clients are actually more willing to talk about their health issues than they are about their finances. And the reason for that is because they feel their finances should have been in their control and they feel stupid about what they've done. Health issues are really not in your control. So they'll tell you if they have hemorrhoids, but they won't tell you if they've made a bad investment; you've just got to feel comfortable asking about it.

At our firm, we have a long-term-care decision process. We go over the client's medical history and ask about the health problems they've had. We also ask about lifestyle factors. If a man is 50 and 150 pounds overweight and smokes like a fiend, his actual need for long-term care is not going to be that great, because he's more likely to have a stroke or some other health problem.

And even if that person has a stroke, their longevity afterward is likely not to be very long. But consider a healthy 60-year-old woman who runs marathons and is working on her second Ph.D. That woman has a higher long-term risk of Alzheimer's than our overweight man, believe it or not, because she's probably going to live very long, and four out of 10 people over 85 develop cognitive dementia.

InvestmentNews: It is one thing for advisers to raise the issue of health and ask questions, but how can they translate that into having a conversation with their clients about LTC insurance?

ACTION PLANS

Ms. McClanahan: We should all have conversations with all of our clients about long-term care, but not necessarily about long-term-care insurance. We should plan for what they're going to do about their long-term care, and for that, you take their health information and family history. If they have a history of longevity, it means they probably have good genes, and I suggest going to the Living to 100 website and using their calculator.

I have clients who told me they expected to live to 72, and after we put them through Living to 100, I can show them that their median life expectancy is 85. It really changes their perspective. And not only can you use this to have the long-term-care discussion, you can also use it for the retirement-planning-projection discussion.

COMFORT LEVEL

Mr. Gordon: Carolyn, I don't have to tell you that with your background in health and your credibility as a doctor, you have going for you what most financial advisers don't.

And on top of that, financial advisers tend to be transactional. Talking about insurance generally is a pain in the neck, but one of the reasons you're so successful is probably because people trust you, and you can bring up the issue and tell clients what would happen to them financially if something happened to them in the way of health.

It's really about giving advisers a comfort level. They have to believe that the subject matter has a direct impact on their business model of planning and generating income. Once they understand that, they need to be given a basic skill set about how to engage the client in a way that doesn't disrupt their flow. For you, Carolyn, this is part of your work flow, which is why you are a poster child for what advisers should be doing.

InvestmentNews: Let's get to the insurance part of it. How do you talk about that? What about costs and the kinds of insurance available?

PLAN, DON’T SELL

Mr. Gordon: It can't be a product discussion; it has to be a planning discussion. It is a planning discussion because if you talk product, people will be completely tuned out. They think that you're going to make a commission on it. They don't think it's going to happen to them, and so forth.

But if you take nothing else away from this webcast, remember that long-term care is a planning issue. And the plan is simply to educate a guy about what's going to happen to others. The plan then will be to mitigate those consequences to allow his family to supervise care, not provide it. That will protect the family to allow him to keep his financial commitments. And Carolyn, I think that's exactly what you're talking about.

Once that plan's together, because the client has allowed you to put the plan together, then you talk about viable funding sources, and that's when the subject of long-term-care insurance would come up.

Carolyn, is that a fair representation of how you would handle it?

Ms. McClanahan: Yes, that is.

Mr. Gordon: To me, if you talk about product, that's it. Your client will turn off, especially if they're guys, because they don't think it's going to happen to them and they will wonder why you're talking about insurance.

Ms. McClanahan: What I do next in our decision process is, after we've done the family history and say, “OK, you're going to have long longevity or you want to make certain that somebody takes care of you,” I ask about who will give the care. Two questions I always ask: “Who may you be responsible for taking care of in the next few years?” — because they may have parents that you haven't asked about, and that's going to weigh on their mind — and then, “Who's going to take care of you when you're in that position?”

To me, there are multiple ways to think about how you're going to get long-term care in the future. There are very few extended families anymore, but I know a lot of large extended families; they're all planning to take care of each other. In the case of childless couples, of which the numbers are increasing greatly, they don't have a plan in place, so you have to then bring up the next level of discussion.

SEVERE CONSEQUENCES

Mr. Gordon: The decent guys say that they don't want their kids to take care of them, and we tell them that they won't have a choice. That motivates them.

Again, that's an extension of what Carolyn was saying about people needing to understand the severe consequences of not taking action. And that action, again, is to put a plan together. Then we come to the issue of how to finance the plan. And here, advisers have to be prepared to deal with their own biases. Clients often will say that they have enough assets, and advisers typically agree. But they need to be taught that that's not necessarily the case.

Ms. McClanahan: I just have to add one thing. I once asked a client, “Are you OK with your kids' wiping your rear end?” Her response was: “I wiped their rear ends for years; it's their turn.” So people have warped perspectives on how things are going to turn out when they get older.

Mr. Gordon: You know what that client needs to understand — that this has nothing to do with her. If a client gives that kind of answer to an adviser, the adviser should say: “Tell me what taking care of you like that over a period of years will do to your daughter.” Then: “Tell me what you think it would do to your daughter's relationship with your other children who are not likely to help?”

That's how you talk to people — straight — and no one has that credibility more than financial advisers.

That's what we're trying to teach, and I hope that's what people start to take away from this webcast. Long-term care is worthy of everyone's time; it's not just a checklist question. It's worthy of your time because the lack of long-term-care preparation will disrupt your business model and have a devastating impact on your clients' families.

Let me give a take-away.

When you talk to people who haven't had a prior experience, and you ask them, “What do you think long-term care is?” they'll say, “It could be Parkinson's, MS or a nursing home.” The worst mistake we can make is to say “possibly,” because the client is thinking, “That won't happen to me.”

But you know what extended care is? You know what long-term care is? It's a life-changing event that has devastating consequences to others. It is no more or less serious than an unexpected death.

InvestmentNews: Do advisers believe that? Do they comprehend what you are saying?

Mr. Gordon: They do. We track the progress of our graduates, and they gain a confidence level they didn't have before. This isn't a push for the program, but I can tell you that the carriers we work with see financial advisers integrating this into their practice exactly the way Carolyn does.

InvestmentNews: Carolyn, when you explain long-term care the way we discussed, do people get it or is it still something that they don't understand?

Ms. McClanahan: Well, you have to realize that the large majority of my clients are physicians. They have seen a lot of what happens, so they do get it. And with clients who aren't physicians, we're also able to get the point across.

Where I have to disagree with Harley is that I think you need to let the client make the choice of whether to self-fund, if they have enough, or to buy a product. There are more products out there than traditional long-term-care insurance. There are more hybrid products coming into being, and those are more palatable to the high-net-worth clients we deal with.

Mr. Gordon: Ultimately, the client must make a decision, so the conversation is put in such a way that the client says to you, “I never thought about it like that; I don't want that to happen to my family.” Then you put a plan together that mitigates those consequences; then you talk about a product. But ultimately, the client must make the decision. It's up to the adviser to give them the options, and that's really the essence of consulting or advising. You're selling advice, not product.

The client, by the way, will look to you and ask whether the whole issue is important. It's up to the adviser to say that it is. Forget products; it's all a matter of whether you think this is serious. The adviser has enormous sway over decisions about these types of matters.

BIG PICTURE

InvestmentNews: When you do eventually get to the point when you are talking about a product, what do you say when clients ask about an insurance company being around in 20 or 30 years when they are going to need their coverage?

Mr. Gordon: First, I look at the big picture here and view what the LTC insurance industry is going through now as being similar to what the disability income industry went through 12 or 15 years ago.

At that time, there were too many disability income carriers chasing too small of a market. Carriers buy market share with lax underwriting and low prices, or just go after the wrong market to begin with. In many ways, the long-term-care-insurance industry was prodded with too many players. This will always be a niche market; it will never rise to the level of life insurance, even if it grows.

Since it's relatively small, it had the wrong target audience. The industry was focusing on fixed-income retirees — those who relied on Social Security and had modest income and modest assets. The insurers basically had to give it away. Well, that's a prescription for disaster.

There also was a misunderstanding about lapse rates. It turned out that very, very few people allow LTC coverage to lapse, which has made the last four or five years difficult for insurers, who have faced a dreadful environment for returns.

So now carriers are saying that LTC is not the focal point of what they're doing and that they can't make a legitimate return on their investment, so they're dropping out. Where you are now is where the DI industry wound up about 10 or 12 years ago — with four or five strong carriers.

RUNNING THE BOOK

With regard to the carriers that have left, like [Metropolitan Life Insurance Co.] or Prudential [Financial Inc.], no one should have any doubt that they will pay the claims. That's called running off the book. They'll run the book, but they just don't want to market LTC insurance anymore.

There are a core of strong players, supplemented by the so-called linked-asset-product bases coming into the market. [Pacific Life Insurance Co.] just came in with one. People should understand that this market has actually greatly stabilized over the last four or five years.

InvestmentNews: Carolyn, you don't sell insurance, but tell us about the choices you see and the ones that you think might work for certain clients.

Ms. McClanahan: The fact that I don't sell insurance actually adds a little more credibility when I recommend the product, because they know I'm not selling it and I make nothing on it. We charge flat retainers in our practice.

So when somebody has a long-term-care need and they want some type of insurance product, we use multiple agents. We'll use anybody the client wants to use, as long as I know that they know what they're doing with long-term care. But we try to figure out the best products currently on the market,

Unfortunately, most of my clients don't like the idea of putting their money in a long-term-care product that they might not use, so a lot of them have chosen to self-fund. But the new hybrid products that are coming out are much more palatable because if the money's not used, it's going to be left to children as some sort of inheritance.

InvestmentNews: Carolyn, can you also talk about other strategies to offer long-term care that don't include LTC insurance? What are some other options of which advisers should be aware?

Ms. McClanahan: I think you're going to see more and more of this. For instance, one of our local hospitals is starting to create what I think are called green communities, where more and more people — and companies — are creating small-group homes.

I know of other people who are planning to build a central meeting area and have small apartments where they'll have a live-in nurse take care of four different couples.

LOOKING AT ALTERNATIVES

With the number of baby boomers retiring and developing Alzheimer's, we're going to have to come up with alternative ways of taking care of people with a need.

InvestmentNews: Are you saying that these four couples got together and agreed to pool resources, build a community house, live together and somehow have a nurse on the premises?

Ms. McClanahan: Yes, that's what they're planning on doing. And I think high-net-worth couples have the resources to do that if the homes being built are modest. They're not going to build palatial estates for this; it's going to be reasonable places that will be more affordable to everybody.

InvestmentNews: Harley, have you seen insurance companies or others coming up with something as an alternative to traditional LTC policies?

Mr. Gordon: Well, a spinoff of that are these continuing-care retirement communities, which are lifestyle-based. They have living facilities on what they refer to as campuses. There's independent living, which you buy into for anywhere from $250,000 to $500,000. It's not buying a condominium or buying shares in a co-op; it's a license to live there.

If you need more care, you can go to assisted living, and if you ever need skilled-nursing-facility care, it's on the same campus. That's a choice.

These green communities, which I've heard of, also are choices. The question is, what's going to finance them? Are they going to be self-funded or do you want to share or move the responsibility to a carrier?

With regard to products, I think those that are coming into ascendancy will be so-called link-based products or asset-based products. A classic example is a policy that takes a lump sum of money — say, $50,000 — and provides an immediate doubling, so $50,000 becomes $100,000. If you ever need care, you have $100,000 worth of coverage because the death benefit becomes the funding. Many carriers will give you a leveraging opportunity, so that on top of the $100,000, you might have another $300,000 or $400,000 in benefits.

SMART MOVE

Policies like that are presented to financial advisers not as a way of taking assets out of management but as bringing assets in from low-cost alternatives such as CDs and money markets, which are paying nothing. The adviser can offer a client twice what they're getting on a CD, and if the client says that what he's buying is life insurance, the adviser can tell him that he'll get his money back.

These policies allow you to get your money back, sometimes after a minimum of 15 years and sometimes whenever you want. There's no lost investment opportunity, and if you never use the policy, you've got a return on your investment. So it's a very smart move for people who want to self-insure, because if they never use it, they get their money back. You're also going to see policies that go to lump sums of money or permit you to take percentages.

It's now a smaller, viable market, but clearly, the carriers that are in it — Genworth [Financial Inc.], John Hancock [Financial Services Inc.], Mutual of Omaha [Insurance Co.], Lincoln Financial Group, OneAmerica [Financial Partners Inc.] and another three or four — have been around for a long time. LTC is really part of their core business, so it's in their best interest to keep the policy and make sure it's viable.

InvestmentNews: Is the LTC coverage in these policies as good as what a traditional LTC policy provides?

Mr. Gordon: There are certain limitations. These policies don't offer inflation protection; you can get it, but it becomes very, very expensive.

Those kinds of policies can be terrific for clients who tell you that they'll cover the cost out-of-pocket. You can explain to them as an investment: “You take $50,000; if you never use it, that's more money than you would have had keeping it in a CD. If you do use it, you get $100,000 in coverage. And for very short money, you can get another $300,000 or $400,000 on top of that for long-term care.” Now, you have to use the death benefit first, but that's OK because they are willing to use their own money.

But you see what they've done? They've capped their liability. Their first tranche of funds is the death benefit. The second tranche comes from the carrier, which makes it a nice alternative for those who say they want to cover the cost out-of-pocket.

These arrangements have be-come very, very popular. It's not a question of the policies; it's whether the advisers feel comfortable engaging in discussion on the subject of long-term care, and that's where Carolyn really has this down. It's become an integral part of her practice; it's an issue important enough to bring it up in the ordinary course of reviewing a portfolio for people nearing retirement.

HEALTH HISTORY

InvestmentNews: Carolyn, is there an ideal age to have this conversation with a client? Is it with someone who is 30, or do you wait until they are older?

Ms. McClanahan: I think this is where it's important to understand the client's health history. I've had younger clients who don't exactly have stellar health histories or good family histories; you have that conversation very, very early. In addition, underwriting for long-term-care insurance is so strict, if you wait too long for somebody who's overweight — considering that two-thirds of our population is overweight and most of us probably have a few of those clients — they may develop diabetes or some other condition. So I base the timing more on health and risk factors than I do age.

Mr. Gordon: I would base it on different factors, although I don't disagree with you.

If you have someone in their 30s, the first concern, I believe, is whether they have enough life insurance and disability income insurance.

And it's also harder to sell to someone in their 30s or 40s because they're not surrounded by illness; people in their 50s and 60s are — just turn on the 6:30 news. The illnesses you and I talked about are almost all lifestyle-driven, so when you see a friend of yours have a stroke or come down with Parkinson's or whatever it might be, that's a very strong incentive — not to buy the product, necessarily — but to engage in the discussion. People begin to see what would happen to their family if something happened to them. So clients are more primed to listen to this if they're in their mid- to late-50s or early 60s.

The other reason they're more willing to listen to this is because part of the discussion — and you mentioned it, Carolyn — is about what's going to happen to their ability to keep their financial commitments should they have to re-allocate the income from their investments to pay for care.

InvestmentNews: Do people think that even if they don't do anything, the government ultimately will pick up the tab for long-term care?

Mr. Gordon: Well, frankly, they don't think anything, because it's not going to happen to them, so what do they care?

You talk to guys and ask them what they think the chance of dying during working years; everyone would tell you zero. Everyone will say, “Look, if somebody falls off a roof, gee, bummer for him; that's not going to be me.”

DON’T SELL RISK

You can't sell risk to individuals. The first thing they're thinking is that if something does happen, there'll be some program. But they're not motivated to look into it, because I believe we've been using the wrong process with them. You don't talk to them about the risk of something happening. You bring guys back to what will motivate them, and that's protecting their families and providing for them.

Sure, people think someone else is going to cover it. You know what happens? They call me as a Medicaid planner, and here's the answer: Medicaid's not going to pay to keep you at home. Medicaid will pay for a skilled nursing home, but for people of success, that's extremely expensive, because to get on Medicaid, you have to transfer your money. It creates an immediate tax on qualified funds and a delayed tax that just expanded.

InvestmentNews: But let's say that you spend all the money you have, and there is nothing left. Does the government cover long-term care then?

Mr. Gordon: Yes, but only for people with very limited assets or income. The problem is among the people who have some degree of wealth, and those people would be required to spend all their money down in order to qualify. A long-term-care policy would be appropriate for them, but for someone with $800,000 in assets, it's a hard sell. The issue is that it's very expensive to pay for care with your own money, because you have to accelerate the drawdown of funds that you want to keep in place and draw from over a period of time. And if your clients start having to pay for care out of their pocket, they get into market-timing issues. If they needed care in 2009 and 2010, they would have actualized losses. See, those are things that clients will listen to if it's presented by their adviser and they think the adviser is serious.

InvestmentNews: Carolyn, are there any policies that you particularly like right now?

Ms. McClanahan: I don't know all that's out there, and since I don't want to favor one or another, I'll pass on that one.

Mr. Gordon: I'd like to talk a bit about the cost of policies and reduced benefits.

The cost now reflects the fact that these are whole-life policies. In the past, this product was sold, in my opinion, as term insurance, and term insurance lapses. These policies don't lapse. So you're talking about companies' pricing the products in a way that becomes actuarially sound, and therefore the companies can make money and therefore be in business to pay.

So that means the target market is different and it's why you're not going to have a whole lot of people with less than $45,000 or $50,000 buying these products. Even if they wanted to, I'm not sure advisers would agree to it.

With regard to reducing benefits, I think you're talking about some companies that don't actually ask for a price increase but eliminate 5% compounding, for example. In other words, they're trying to limit their exposure because the policies just don't lapse anymore.

But having said that, there are some very solid companies around who are selling more traditional policies. As for linked products, I can tell you there are products from One America, Lincoln Financial, Genworth, John Hancock and New York Life [Insurance Co.]. I hope I'm not leaving anyone out. You know what they all share in common? They're A or A-plus companies, so they're solid.

And by the way, historically, these carriers have paid their claims. The vast majority of these policies pay. Once in a while, you run into issues, and they tend to end up in the newspaper.

Now remember, I'm not licensed to sell the product, but I am involved with the industry from an educational point of view, and my company is not supported by any carrier, nor do we receive any financial assistance.

LTC PROVIDERS

Ms. McClanahan: I have a question for you, Harley. About 10 years ago, John Hancock and Genworth were highly rated and wonderful companies, and now their great policies are starting to have trouble. How do you know what these companies are going to look like in the future?

Mr. Gordon: I can't guarantee that you or anyone else won't get hit by a car. But I can tell you that past performance is usually indicative. If you look at the payment history of Genworth or Hancock — they've been in this business for 30 years. Or look at MetLife; they've been in it since at least the mid-1980s. When you take a look at their claims-paying ability, they're there. Take a look at their reserves.

This is the due diligence, right or wrong, that advisers should be doing in the first place. If you do due diligence, you'll see these carriers have adequate reserves. What they're dealing with now is an existing book that was not priced correctly for any number of factors. The policies going forward are priced to reflect the risk, which means you're right — they're more expensive; you need a different market. And that market is the same market that buys life insurance, particularly whole life, and those who buy disability income. That market is business owners who have big cash flow and who need that going into retirement.

When you redefine the market and when you do due diligence, you find the carriers I just mentioned and others like Mutual of Omaha and [Massachusetts Mutual Life Insurance Co.]. By the way, do you know who's had substantial growth? [The Northwestern Mutual Life Insurance Co.]. That policy is expensive, but they do a good job of explaining it to their high-net-worth customers.

InvestmentNews: Carolyn, is there anything in the new health care law that will affect long-term care — or anything else from a public-policy point of view that will address this issue?

CLASS PROVISIONS

Ms. McClanahan: There are two things the law started with. One was the CLASS [Community Living Assistance Services and Supports] provisions, which provided basically for a federal long-term-care-insurance program, and it was a disaster to begin with. This was Ted Kennedy's baby. He died during the construction of the law, and so, of course, they had to put it in there and pass it.

Thank goodness, there's been wisdom there, and this part is off the drawing board right now. They have the option to put it back on later, but most likely, that's not going to happen.

The second thing, though, is that there are going to be significant changes in how Medicaid pays for long-term care, and there is a very strong push to have Medicaid pay for taking care of people in their homes as opposed to requiring them to move into facilities and get skilled care.

InvestmentNews: But wouldn't that be on a state-by-state basis?

Ms. McClanahan: That's not known yet. Originally, the federal government was going to name all the benefits, but a few months ago they decided to punt this back to the states, so most likely, this is going to be on a state-by-state basis.

Mr. Gordon: Of all the advisers I've talked to, very few understand the health care act.

You're absolutely dead-on. There's going to be a major push to expand Medicaid and, with regard to long-term care, it's to keep people in the community. That's the Home and Community Based Waiver Program.

LIMITED RESOURCES

Recently there were a few studies to find out whether Medicaid is going to crowd out the market for long-term-care insurance. One said that if the entire Medicaid program collapsed, you would not increase long-term-care-insurance production by more than 2.7%. The fact of the matter is that the vast majority of people who go on Medicaid have very, very limited resources. Sure, you're always going to have wealthy people who abuse it, but with the way the products are priced now, for the people who can afford it, getting on Medicaid would be too expensive. You'd have to shift your assets and you'd lose all your income once you're on Medicaid. So Medicaid is really not an issue when it comes to whether or not long-term-care insurance is viable.

By the way, Medicaid's going to be there. There are some survivalists who think the whole system is collapsing. That's baloney. It will be there. It will be means-tested. The taxes will be higher, but it's a safety net.

I believe the question in the industry is whether the product is priced correctly and whether you have the right market, which is the mass affluent and the wealthy, and, perhaps most importantly, whether you have the right message. Carolyn is one of a handful of advisers who have the right message. People listen to advisers. They may not listen to the long-term-care-insurance industry, but they listen to advisers, and it starts with whether you think the subject is important enough so that you devote a little time to integrate it into a discussion of retirement.

InvestmentNews: Let's go back to the discussion part again. If a client is never going to bring up the subject because, according to Harley, they think it will never happen to them, how do you even broach it? Do you say, “Hey, let's talk about something”? Carolyn, what do you do to start the discussion?

Ms. McClanahan: Well, we break our planning into four different parts throughout the year, and the first quarter of every year is when we discuss insurance — property/casualty, life, disability, long-term-care insurance and health insurance. We have a spreadsheet, which we review with the client, and long-term care is right there. They see it, and it brings up the discussion.

InvestmentNews: So it is on sort of a checklist, and then they start talking about it?

Ms. McClanahan: Correct.

Mr. Gordon: This is how we present it to the advisers:

“Any questions, Evan, on the retirement portfolio, any questions on where we're going with this?” the adviser would ask. And you would say no.

This is the first thing I would ask: “I haven't asked you this in a while. What's important to you? By that, I mean what responsibilities do you now have you didn't have 10 or 15 years ago? What responsibilities do you see going into the future?”

That's a critical question because people will take action to protect people they love.

RAISING THE SUBJECT

“So, Evan, tell me what the responsibilities are” — and here's the pivot, which I think is what you're looking for — “because I need to talk to you about how severe the consequences would be to your wife and children emotionally and physically if you lived a long life and ever needed care. I'm not scaring you, Evan, I'm just bringing something to your attention if you ever needed care for a period of years. I also need to talk to you about how disruptive paying for that care would be or how it would disrupt the plan we put together to secure financial viability, allow you to keep your promises, keep your tax plan in place.”

That's a wonderful pivot that doesn't scare them and doesn't talk about product. It simply brings the subject matter to their attention, and you can engage them from that point on. And this is what we teach people, in many ways very similar to what Carolyn is doing.

InvestmentNews: Where can our listeners go to get the tools and technologies out there to help them figure out the right solution? Is there any technological help that they can get in figuring this out?

Ms. McClanahan: I think that's one of the problem areas in our profession. I speak at a ton of [Financial Planning Association], [National Association of Personal Financial Advisors] and [American Association of Certified Public Accountants] meetings on how to have these conversations. You don't need to be a doctor to ask the very basic health care questions that you need to ask in financial planning.

Mr. Gordon: Our course is geared to the culture of the financial adviser, which is planning. It's geared to the whole concept of providing income.

TRANSACTIONAL TENDENCIES

What's really difficult for a lot of advisers, no offense, is that they tend to be transactional. It's not that they don't want to recommend life insurance, it's just kind of messy — you've got to take an application, fill out this, get that — so insurance tends to be more difficult because it's not a quick transaction. It's an emotional and connective sale.

Advisers need to understand how long-term care will have an impact on their business model. If they think it will, then they'll want to learn about it, and there are some resources. We like to think that the [Corporation for Long-Term Care Certification] program, which several carriers have supported, has been successful because it gives advisers a framework in which to bring up the discussion in a way that's consistent and respectful of their culture.

It all comes down to this: Long-term care will disrupt an adviser's business model. If your business model is putting plans together for retirement, paying for care will disrupt it. If your plan is to help your client protect their family, then a need for care will disrupt that plan, too. Once advisers begin to understand that, then they'll proactively discuss it.

InvestmentNews: Have either of you ever seen a video that shows this in action; an adviser talking to a client about long-term care?

Mr. Gordon: I haven't. Someone asked me to do it, but we haven't. But it's a pretty good idea. I'll probably do it after the call.

InvestmentNews: We are reaching the end of our discussion, but before we go, would each of you briefly mention a take-away for advisers.

Mr. Gordon: I believe — and I think a lot of people believe — this should be part of what advisers do. You have a relationship with clients that very few people, other than doctors, have. But this is a responsibility that I think that you owe, not to your clients, but to your clients' families.

If you think it's important enough, then go get educated.

InvestmentNews: Carolyn, we will give you the last word.

Ms. McClanahan: My husband likes to do that, too, all the time.

I think it's very important for advisers to feel comfortable talking about the soft side of planning. Since end-of-life and long-term-care situations are significant in everybody's life, become comfortable talking about those and, like Harley said, find the education to learn how to do that.

InvestmentNews.com/longterm