Financial advisors do a really good job of planning for the early phases of retirement. But when it comes to talking to their clients about long-term care, they do a really bad job, according to an executive at annuities and life insurance provider Brighthouse Financial.
“You assume that your clients are not going to spend as much money in their 80s and you are forgetting about the cost of healthcare and the cost of long-term care (LTC),” Melissa Cox, senior vice president, head of life and LTC distribution, told advisors during a presentation last week at the Raymond James Women’s Symposium.
Cox pointed out that women on average live five years longer than men and make up two-thirds of the patients in LTC facilities, and they typically need care one and a half years more than men at an annual cost of $105,000 for three years, the average length of care, she said. She further noted that 61% of caregivers are women and caregivers have an annual out-of-pocket cost of about $7,500, outside of LTC expenses.
Cox said 75% of women and 64% of men will have an LTC event. “So, assuming that, you all have 100 households, that means 139 of your 200 clients are going to need LTC. That’s a big number,” she said, noting that could lead to an $85 million erosion of your asset under management “because they are going to spend money from the portfolio that you managed to pay for their care if they don’t have LTC insurance.”
So, why aren’t advisors talking to clients more about LTC? Cox believes there are two reasons. One, she said, is they assume their clients are going to self-insure because they are wealthy and can afford it. “The problem is in the assumption, because if you’re not having that conversation you’re not going to find out that even though they could self-insure they probably don’t want to because wealthy people understand the leverage of using somebody else’s money.”
The second reason is because the topic is uncomfortable, Cox said. “You’re afraid it’s going to be an emotional conversation instead of a financial one. And so, you don’t know how to bring it up to the client,” she said.
But Cox said the conversation is no different than when advisors talk to clients about reallocating their portfolio and the location of assets.
Cox cautioned that if advisors choose not to use LTC, they should opt for indemnity healthcare coverage over reimbursement policies. Indemnity plans, she said, have a 90-day elimination period—the time between the onset of illness and the actual payment of benefits. For example, if the monthly benefit is $10,000, the client will not get any benefits for the first three months, but in the fourth month, she will receive the full $10,000 regardless of expenses.
On the other hand, a reimbursement plan does not have an elimination period. It begins payment of benefits in the first month, but it only pays the cost of care and holds onto the balance for future expenses. For example, if the client submits a bill for $4,000 from that monthly $10,000 policy, the insurance carrier will reimburse her for $4,000 and keep $6,000, and that happens monthly, Cox said, noting that the problem is money is being left on the table because 72% of people who need care need it for less than four years.
Cox said the longer a client waits to get LTC insurance, the more costly it becomes. She said a 55-year-old, non-smoking female in a domestic partnership would qualify for the couple’s discount. “If you take $100,000 lump sum, one time, it’s going to buy you $6,000 monthly benefit for a six-year period; if you wait five years, it’s going to cost $110,000; if you wait until age 65, it’s going to cost $130,000; and if you wait until age 70, it’s going to cost $173,000 for that same $6,000 monthly benefit,” she said. “Don’t wait!”