Why Long-Term Care Can Be a Tough Sell

Bank Investment Consultant

Natalie Shamley, a financial planner for Investment Centers of America Inc.'s brokerage operation at Home State Bank in Loveland, Colo., does not sell much long-term-care insurance, but she routinely brings it up with clients, using her own situation as an example.

Her 71-year-old mother has had a series of strokes and is receiving payments from the policy she bought when Ms. Shamley's father died seven years ago.

"My mother cared for her mother for a number of years, and it really took a toll on her," Ms. Shamley said. "She wanted to make sure that I wouldn't have to face the same burden."

Though the premiums, at $2,300 a year, were expensive, her mother has been drawing benefits since September, and the payouts have already made up the premiums she paid, Ms. Shamley said. "It doesn't take long to get it all back."The story is compelling but not easy to translate into sales, she said. "People haven't been as receptive as I'd hoped, and I'm having to offer it to younger and younger clients so it's affordable." Only 15 of her clients have bought policies in the past two years. "No one likes the thought of writing the check or using the policy."

The experience is typical. Long-term-care insurance sales in banks are so slight that Limra International Inc. does not even bother to break them out, though it does record overall sales. Selling the insurance is challenging, because the product is both complex and expensive. And as much as people do not like to contemplate illness, they fear nursing-home care even more.

As a result, most bank representatives do not even bother to sell long-term-care insurance. But the few who do argue that it is an important part of financial planning, and that it may well be an adviser's fiduciary duty to at least raise the concept when they talk with clients. After all, health care can become an increasingly expensive part of clients' expenses as they age, and not planning ahead for these costs can put a client's hard-earned nest egg at risk.

Without some kind of provision for a serious medical problem, clients can face catastrophic results. In a recent AARP survey of Americans over the age of 45, most respondents underestimated, or simply did not know, what long-term care costs. They often say that public programs will fill the void, but that is not the case. Medicare covers hospital stays and medical care, but not long-term care itself; Medicaid kicks in after 100 days, but it is designed only to help those who are down to their last $6,000 or less.

And the costs can be astronomical. Last year the national average cost for a year in a semi-private room at a nursing home was more than $62,000. A year of home care — with a home health aide visiting on average three days a week — cost almost $16,000.

About 9 million people over 65 and over needed long-term care last year, and that number may increase to 12 million in 2020, according to the Department of Health and Human Services.

However, just as smokers ignore the risk of cancer, clients do not want to believe they will need long-term care insurance.

"If you have a family history of needing long-term care, that's one thing," Ms. Shamley said. "But if your father is 96 and still living at home, it's a hard sell."

Nonetheless, Kevin Dunnigan, Ms. Shamley's planning partner at Home State, said it is a conversation advisers should not avoid. Talking about long-term care with clients is no more unpleasant and certainly as important as talking to them about making a will or the possibility of running out of money, he said.

"Nobody wants to talk about dying or the prospect of needing long-term care," Mr. Dunnigan said. "But you have to look them in the eye and talk to them about it."

Mr. Dunnigan's mother is drawing on a long-term-care policy that was purchased several years ago. "The difference has been huge for my mother," he said. "If she hadn't had long-term-care insurance, she would already have run out of money. As it is, she's been collecting on her policy for five years."

Ms. Shamley said people who recently retired seem to be most receptive to discussing long-term-care insurance, since they are starting to think seriously about what to do with the rest of their lives, and insurance is definitely a part of the process.

But age is only one factor influencing a client's need for long-term care. Single people are more likely to need care from a paid provider, because they may not have a family to fall back on, and statistically, women spend more time in long-term care — 3.7 years on average, according to AARP, compared with 2.2 years for men — because they live longer.

That means that a lot of people are going to need access to some form of long-term care. According to AARP, 60% of people ages 65 and older will need care, for an average of three years.

Most people understandably prefer to receive care at home, and the use of home- and community-based services is growing, but public assistance remains weighted toward institutional care.

"Almost everyone who buys long-term-care insurance does so for the option of being cared for at home," Mr. Dunnigan said. "But it's also for their sense of dignity and to protect the assets they've spent 35 years building up from being washed away."

Like his mother, Mr. Dunnigan's father-in-law is collecting on a long-term-care policy, and without coverage, he may have wound up in a nursing home, which would not be the best place for a man who is physically but not mentally impaired.

David Petruzelli, a financial adviser at Hampden Bank in Springfield, Mass., said the availability of home care can be of particular concern to clients who do not have children and cannot rely on family help.

Mr. Petruzelli generally brings up long-term-care insurance with clients who have $300,000 or more of assets and are between the ages of 45 and 65. The lower end of that age range may seem young, but the premiums for such clients will be much lower, and they will generally be in a better position to factor those premiums into a plan as much as 20 years before having to convert them to income, he said.

"The big hindrance to sales is that people don't understand why they have to start paying now and then onward for the rest of their lives," he said. "But the key is to start when long-term-care insurance premiums are lower. You have to talk about their future spending and make sure paying premiums is not going to take away from that."

Mr. Dunnigan said risk tolerance also has a lot to do with how likely certain clients are to buy the insurance. Some people will see it as an investment, especially if family members have tended to live a long time, while others will view it as an investment in protecting their assets, he said.

"I just discussed it with a $650,000 client of mine whose wife's parents are both well into their 90s," he said. "He understands that the same could happen to his wife, and he wants to make sure there is money left over for his kids, too."

While long-term care is famously expensive, clients often have an exaggerated notion of how steep the premiums are.

"You need to look properly at pricing," said Martin Siesta, a senior financial planner at Compass Wealth Management LLC in Maplewood, N.J. "Genworth, John Hancock, and MetLife all looked expensive in the past, but they have proved able to maintain their obligations, while companies that quoted lower premiums have had to raise rates drastically, and still they make it difficult to claim income."

Premiums usually run from $2,000 to $8,000 a year, depending on the client's age and whether the policy covers a spouse. Ms. Shamley recently ran the numbers for a couple, both age 68, and the premium for a joint policy was $5,000.