Most reps don't really discuss long-term-care insurance. Perhaps they should.
"It's uncomfortable to talk about death and tragedy," said Kevin Dunnigan, an Investment Centers of America Inc. rep at the $500 million Homestate Bank in Loveland, Colo. "But having to spend $10,000 per month, for five or 10 years, on long-term care, isn't comfortable either."
Some 70% of people over the age of 65 will need long-term care at some point in their lives, and that gets very expensive if you're not prepared for it. Even if you scrimp, a semiprivate room is still $6,000 per month and if your spouse is still at home paying for all the regular household expenses, too, that can wipe out a couple's finances fast. "It's the fastest-growing cost in our economy," said Dunnigan, who has made long-term-care insurance 21% of his million-dollar-plus production. "The government can't pay for it."
In fact, given the potential impact of a long-term illness on clients' assets, reps who do not discuss long-term-care insurance are leaving clients dangerously exposed. "Most people have a house and a car, and they think nothing of insuring both," Dunnigan said. "But there's only a one-in-1,200 chance you'll lose your house to a fire, and a one-in-240 chance that you'll have a serious car accident. There's a seven-in-10 chance you'll need long-term care."
Dunnigan's own mother received long-term care for five and a half years before she passed on, which cost about $10,000 per month. "She had LTCI," Dunnigan said. "If she didn't, the assets she wanted to leave her six kids would just have disappeared."
Dunnigan mostly serves 55-plus retirement-age clients, who are drawn to Colorado for the climate and outdoor lifestyle. His territory also includes a growing high-technology scene, which has attracted young families, and in turn grandparents wanting to be closer to the grandchildren. "The problem is that people are living longer, and Social Security isn't enough to provide people's income into their 90s," Dunnigan said. "I work with one married couple who are both over 100, and they both still drive."
Dunnigan focuses primarily on life-insurance-linked hybrid long-term-care insurance products and only works with diversified A++-rated insurers. Full-coverage long-term-care insurance is a harder sell because if you don't use it, you lose it. With the hybrid, if you don't use the money for long-term care, it goes to your heirs.
The way Dunnigan describes it, for someone with a little money lying around, buying the hybrid life/long-term-care insurance policy is a no-brainer. Take one 65-year-old client who had $50,000 sitting in a low-paying certificate of deposit that the client planned to pass on to his children. Instead he could put the money in a hybrid life insurance/long-term-care insurance vehicle that would pay $175,000 to heirs on his death.
"If he leaves the money in the CD, the client would have to wait 50 years for it to double," Dunnigan said. "With the hybrid policy, he converts it into more than three times its value."
If the client needs long-term care, the hybrid will pay out 4%, or $6,800 per month, until the entire $175,000 death benefit is gone. "The client will need long-term care, he'll die, or both," Dunnigan said. "Either way, he's turning $50,000 into $175,000, and there's zero tax. Can I say the same to clients with money in stocks or bonds? No. And they would have no long-term-care provisions."
The tax efficiency makes the hybrid life/long-term-care insurance policy a particularly good deal, he said. "If the client doesn't use the long-term-care insurance, the heirs get three times the original money tax-free." Moreover, clients who have set aside money this way for heirs can spend more of the rest of their retirement assets on themselves. That seals the deal 95% of the time, Dunnigan said. "I say, 'Tell me why you wouldn't do this!' "
Indeed, this benefit is so rich that Dunnigan expects it to be watered down in the next few years. The only reason not to buy one: the client needs that $50,000 for living expenses.
Not all clients will qualify for the insurance, which takes four to six weeks to underwrite. Indeed 30% of Dunnigan's clients get turned down, and it's embarrassing. "You can't insure a burning house," he shrugs. "I just have to tell clients it is what it is, and we did our best." But, for example, if a client has cancer surgery, they can wait five years and try again. If they can't get long-term-care insurance, clients are more likely to blame their old adviser than Dunnigan. "They look back at whom they used to work with, and they get mad that they weren't told about this when they were healthy," he said.
Clients in their 60s can buy long-term-care insurance without going bust, but it makes sense to plan ahead when the risk is lower. That's why Dunnigan, 49, and his wife, 47, are buying the policy now. "If you imagine what long-term-care costs will be in 20 years, it's pretty scary," he said. "I'm getting it while I can, and because I know I can pay in X dollars, and my children will get Y dollars." Dunnigan plans to pay $12,000 per year for 15 years into a $1 million policy. "I end up paying in $180,000, and my heirs will be paid $1 million when I die," he said.
Most of Dunnigan's long-term-care insurance sales come from existing-client referrals, and he sees this product as fertile territory for other advisers. "Most of this business is just sitting there in their books," Dunnigan said. "I think 20% of existing clients would be a good goal to shoot for. The need is there."
While insurance plays a prominent role in Dunnigan's practice, he maintains a good product mix. Most of his assets are in a mix of investments and variable annuities, which he likes for their death benefits more than their living benefits. "I've always had a broad base of products," Dunnigan said. "The only thing about the future that we know is that we don't know. Just focusing on stocks and bonds misses a huge part of what people are concerned about."
Long-term-care insurance is not for everyone. "If you don't have enough assets to comfortably afford premiums with your returns, if you have no heirs, or if you're hereditarily likely to die in your 60s, LTCI is not a good move," Dunnigan said. "But the discussion should be had with almost everybody."
Dunnigan reckons that clients with $300,000 or more of investable assets should be able to pay premiums with investment returns they will not really miss. A healthy couple in their 70s that buys a fairly high deductible long-term-care insurance policy should expect to pay around $6,000 per year for it.
The high deductible works out best in many cases because people usually do not suddenly need drastic health care. Rather, it's a steady decline. "Most people stay at home first, so I recommend a zero-day deductible for home health and a 90-day deductible for a long-term-care stay." Ninety days might take a $30,000 chunk out of a client's estate, but bear in mind that the average stay in a long-term-care facility is three years.
Couples can also buy a "shared care" rider on their long-term-care insurance policy that would pay long-term-care insurance for three years to cover each spouse. But if one spouse does not need it, then the other spouse can get six years of benefit.