Will The Hybrid Life/LTC Policies Really Come Through For Your Clients?

Today’s blog is aimed at financial planners and insurance agents

Many financial advisors think that the Hybrid Life/LTC products are the perfect mix of current protection and future coverage in a product that is understandable (to them) for their clients.  At the risk of starting a firestorm among devotees of these products, I offer a challenge:  what will happen when the hybrid polices are called on to pay the bills for LTC? I realize many of you say they are for those who simply won’t buy LTCi, or plan to self insure–but is that the client’s opinion, or are you just defaulting to an easier-to-sell product?

This question was brought to my attention again recently when a financial planner called me about a client meeting he just concluded.  His clients had purchased such a life/LTC hybrid several years ago from their previous advisor.  During their annual review with their current advisor, they went through what the product would pay if they needed care at age 80 or later. This is when the client realized that there is no built in inflation with their plan for LTC.  They thought they had discussed inflation with their prior advisor, and they probably had if real traditional LTCi was discussed. However in the plan they purchased, there is no inflation coverage.

The cost of LTC could easily increase fourfold over the 30 years between the time they purchased the product and the time they need its’ benefits. This does not even take into account the potential increase in LTC inflation due to the multitude of baby boomers needing care and fewer workers willing to work for minimum wage.  At this point the planner pointed out to them the significant shortfall which would ruin their plan–almost as though they had not done anything to plan for LTC.

The planner was calling me to ask for quotes on a supplemental LTCi plan with 5% automatic compound inflation to potentially add to their existing plan.  As it turned out, the two premiums together (the hybrid product plus the supplemental plan) would cost more than if they had purchased traditional LTCi with automatic 5% compound inflation to start with.   Fortunately these clients are still healthy enough to get LTCi, but what if they weren’t?

We are just starting to see the problems concerning LTC in America. The baby boomers have always been a formidable force, and their impact on long term care will be no different – on average, 10,000 people turn age 65 in America every day; this will continue doing so for the next 18+ years. We do not have sufficient staff willing to work for near minimum wage, which will drive wage inflation at an increasing rate. LTC costs have been averaging 5% to 6% annually over the past 20 years, and that will likely increase faster in the future.

Baby boomers who think that they can protect assets by moving them and who think that  Medicaid will then take care of everything is like the sailor who throws out the life jackets to make the lifeboat lighter – is it really smart to count on only the life boat to save you when the storm comes along?  What makes you think the government will have the funds to pay for care for all the baby boomers?  Germany already has a 10 year look-back for their Medicaid type system, and England requires spousal impoverishment down to about $37,000 of assets.  When money is not available to pay the bills, similar steps will be taken here. Do you really want to tie yourself into depending on this future?

How many of your clients have the funds to self fund LTC, really? Certainly not the ones who think they are financially secure with $250,000 for their retirement. Even if they purchase an LTCi hybrid benefit of $10,000 a month – which certainly is a high benefit in today’s dollars – what will that be worth in 30 years when the cost of care may well be $32,000 a month? Will the difference come from their Social Security check, or from that $250,000 of retirement savings? Why do we fret over whether their assets will keep up with inflation, but ignore inflation related to LTC?

Perhaps if we actually explained the inflation concerns regarding LTC our clients would be far more willing to spend $2500 to $5000 a year for insurance. In many cases the yield on assets will easily cover this. Since not many people need LTC for 10 years or more we should be offering real, inflating coverage for 2-3 or 4 years, coverage that will keep up and actually pay for care, instead of taking the easy way out.

It seems “use it or lose it” and “let me show you something you can collect on – no matter what”, are easy ways to make a sale. Is that sale good for your client when they need it and you are retired, or is it the easy way to make a sale now and tell them everything will be okay?  And for those of you who say something is better than nothing, I disagree.  If your clients do not have the cash flow to pay for needed care, and must fall back on Medicaid, they will spend down to impoverishment (welfare), cash in their life insurance (including the hybrid you sold them), and stand in line for ever scarcer Medicaid benefits.  How is that better than nothing?

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