Who is the largest payer of long-term care assistance? It’s the general public who fund long-term care from personal savings and through public assistance programs. But the numbers bear out that CPAs and advisors are doing a poor job of referring their clients to asset protection long-term care programs. Why is this?
Because of the way the U.S. healthcare system is set up, a long-term care event could devastate family retirement savings. Last year the long-term care insurers paid out $3.3 billion in claims but that figure only equated to 6 percent of total claims paid – a percentage that pales in comparison to the real costs born by the general public. Twenty-seven percent, or $30 billion, of all long-term care expenses are paid out of savings accounts, a major contributing reason for people going into bankruptcy. Another $42 billion was paid by Medicaid, and Medicare paid $15 billion.
In our litigious society, the reality of long-term care insurance (LTCI) being treated as a fiduciary item has arrived. Disgruntled beneficiaries whose inheritances have been depleted by the expense their parents bore funding their long-term care experiences are successfully arguing and receiving monetary judgments from advisors who are not bringing up the subject of future liability planning. It is becoming a question of fiduciary responsibility to recommend asset protection.
For example: It is projected that a 50-year-old person today is going to spend more than $1 million a year upon needing long-term care assistance when they are 85. Do you really want to make a negative million dollar decision for your clients if they lose this amount to the lack of asset protection? Are CPAs making these kinds of client assessments or does the CPA really not care whether a client should self insure the risk of a future long-term care event or transfer that risk to an insurance company?
Statistic: Forty percent of those needing long-term care (LTC) are under age 65.
Do CPAs recommend long-term care insurance? Tax and audit professionals are focused on fee planning in their core competencies. They make few financial planning referrals because their firm does not have a team planning approach outside of their core business model. These CPAs usually do not recommend LTCI. The CPA who is a multi-disciplinary advisor is looking for programs of opportunity in a broader environment that incorporates financial services and wealth management. This group usually will have an in house expert or a very close strategic alliance with an advanced planning insurance broker and will try to incorporate long-term care planning into their practice. These CPAs do recommend LTCI and are proactive inserting this item in their financial plan for clients.
Because women generally outlive men by an average of seven years, they face a 50 percent greater likelihood than men of entering a nursing home after age 65.
However, just 18 percent of women who responded to a study on the financial literacy of women have talked with their spouse or partner about long-term care insurance. Most women do not want to be a burden on their children. Yet about three-quarters of respondents have not had serious discussions with their children about long-term care insurance.
How does the CPA connect with the aging baby boomer client on matters of long-term care and asset protection planning when 71 percent of all caregivers are women who are related to the in need relative? Advisors are not connecting with women and long-term care at all! We believe there is reluctance among CPAs to discuss transferring risk to insurance companies because somehow it is an uncomfortable conversation to have. But the numbers are compelling and advisors need to sit up and take notice.
To plan for a future liability in combination with a plan for retirement income is the kind of creative planning clients are expecting. CPA advisors should know and should be making their clients aware that it is not the decision of the client to buy LTC insurance, it is the decision of the carrier whether they will offer the client a contract. When we surveyed our clients with the question, “Would you think it to be a good idea that we do future liability planning alongside of future income planning so that if you need medical or assistance to live in your home in the future, that expense would not come out of your retirement savings account?” When you say it with inflection, it is not as long a sentence as it appears and it is a very responsible question for an advisor to ask. The overwhelming response from our clients was extremely favorable with the most common reasonable accompanying question being “How much does it cost?” In other words, how much of my $20k 401k contribution am I going to be spending in order to protect it? The direct response is; “Based on information analyzed as to costs associated with a long-term care event, you can spend $3k per year for 20 years based on your age and risk factor probabilities or you can spend between $50k-$250k annually, for an average of five years, on your care? Which program can you best afford to fund?” When you consider the potential spend down of assets, you begin to understand the fiduciary aspects associated with prudent advice when the client is told to self insures these kinds of risk.
On the other hand, high net worth clients will not pay for something without recognizing its perceived value. If I can fund future liability events from cash flow, why should I spend money on insurance I do not need? Here is the question for our high net worth clients; “Do you have an asset protection plan in place that covers the downside risk of investment loss due to a future medical liability or long-term care event?” That question enables me to have the conversation about long-term care insurance with high net worth people. And these facts bear me out.
If the client has a $5 million investment portfolio returning 9 percent per year, his/her income from investments is projected to be $450,000 before taxes. If a future liability occurred and the cost of an assistance related liability was $150,000, the cost to the client would be $150,000 plus the loss of investment income at 9 percent. The total loss of principal plus interest for one year is $163,500, for three years the cost is $490,500. This is not how high net worth people plan, they do not leave these kinds of gaps that can effectuate loss. To transfer the risk, the cost is $6,000 for this married couple in their mid-50’s. If we do the math correctly, they would have to pay premiums for 25 years to equal one year’s cost for care. Their premiums would never exceed the cost of two years worth of care. No matter what one does with his or her money, the cost for care is always going to be the same, $163,000 is always going to be greater then $6,000, high net worth or not.
It is our clients call to make, but if we connect our recommendations to the larger picture of asset protection, our message for risk transference becomes more powerful. From the financial data presented, Americans are paying 94 percent of the costs associated with long-term care expenses either in the form of public assistance or from savings. The majority of caretakers are our mothers, wives and daughters. These are alarming figures moving forward and given medical inflation outpacing other inflationary indices, CPAs should be aware of their fiduciary responsibility to make relationships with long-term care insurance specialists so their clients can be better served in this area of asset protection and they will be protected from litigious beneficiaries.
About Barry Goldwater
Barry Goldwater is the Principal of the Financial Resource Group and a 20-year veteran of the insurance industry. He focuses not only on working with the business and affluent clients of CPAs and attorneys, but also in helping CPA's form and develop a business model to include financial services. He can be reached at 617-527-9736,or at [email protected]. His web sites are http://www.frg-creative.com or www.goldwaterfinancial.net