WHAT’S ENOUGH LTCI PROTECTION?
We long term care insurance specialists used to advise prospects to insure against the catastrophic event…a stay of many years in a nursing facility. This often meant recommending a plan with five years to lifetime protection, a robust daily benefit and five percent compound inflation.
However, this strategy only works now for the very wealthy. Premiums for long term care insurance have tripled over the last twenty years. Prospects are now either unwilling or unable to insure against the catastrophic event. They focus on the high premium, ignoring the high cost of care, and believe a robust policy is a bad value and potentially a waste of money.
This has required an adjustment by long term care insurance specialists. We are still in the process of making this adjustment. We’re inconsistent in our perception of how much coverage is enough. Agents are comfortable selling a life insurance policy with a $ 50,000 death benefit. But no way would they sell a long term care insurance policy with a $ 50,000 pool of money. Why? The need for a robust life insurance policy is probably greater for most families than the need for a robust long term care insurance policy.
The average life insurance policy has a death benefit of $ 130,000. The average long term care insurance policy will in time have a pool of money at least between $ 350,000 and $ 500,000. Are we still overselling? I doubt it, but we have to adjust our recommendations to what our prospects are willing to buy. If they are only willing to buy an average of a $ 130,000 life insurance death benefit, they may be only willing to buy an average of a $ 130,000 long term care insurance benefit.
Furthermore, like life insurance, people may be willing to purchase more than one policy during their lifetime. Must we only sell one long term care insurance policy to a client, or can we add protection as the client ages?
We now know that less than ten percent of long term care scenarios last longer than five years, and that more than three-fourths of long term care scenarios last less than three years. We also know that only seventy percent of those over age sixty-five will have a long term care event. This means that overall, only about fifteen percent of those we sell will need care for more than three years.
In addition, we also know that only about twenty percent of claims cover care in a nursing facility, and that an increasing number of claims are for home care and assisted living facility care. The home care and assisted living facility care costs average roughly one-half of nursing facility costs. Yet we protect against the cost of a nursing facility, a place where maybe as little as ten percent of our clients will reside in the future.
If that isn’t enough, check out the inflation rate of home health care. It has been slightly more than one percent over the past ten years. I believe that this inflation rate will rise in the future because of the lack of caregivers, but my best guess is that the average increase over the next twenty-five years will not exceed three percent for home health care and four percent for assisted living facility care. I may be proven wrong, but I believe that a 3% compound or a 5% simple inflation rider will adequately protect clients against the increasing cost of home care and assisted living facility care.
The average sale for long term care insurance has only risen by one percent per year over the last twenty-five years. That’s an indication of severe price resistance in the face of a tripling of the cost. We need to recognize this fact and adjust our options accordingly.
So with these assumptions, what’s enough long term care insurance protection? In my view, a policy would cover the average cost of home health care or assisted living facility care in your area for three years with a 3% compound or 5% simple inflation rider. The daily benefit could vary from $ 120 to $ 170, depending on the costs of care in your area. In most cases, an initial pool of money in the $ 100,000 to $ 150,000 range will protect the vast majority of your clients.
Is this too much long term care insurance protection? In many cases, it is. The goal here is to spread some of the risk. The prospect may have pensions, investments, other sources of income, and may only be comfortable with a certain monthly premium. The key is, sell something! If nothing is bought, no risk is spread. If nothing is bought, you have failed!
Louis H. Brownstone is the Chairman of Northstar Network Insurance Agency, Inc. and a certified in Long Term Care specialist. Louis is recognized as an industry leader, with articles appearing frequently in California Broker Magazine and other industry publications and events. Read More…