Much has been written and will continue to be written about the changes to Medicaid under the Deficit Reduction Act of 2005 (DRA 2005) and its affect on, among other things, the potential for long-term care insurance (LTCI) as an attractive and suitable financing tool in our clients' and our planning arsenals. While there continues to be active debate on the need for the Act from some of our colleagues (mostly in the elder bar community), and in some cases litigation about the way in which the law was enacted, we can draw at least two conclusions from it. First, the changes under the act are decidedly consumer-unfriendly as they relate to the Medicaid asset transfer strategies sometimes used in the past. Second, the act's changes represent the greatest LTCI marketing opportunity in recent memory.
These changes and their impact represent an extraordinary opportunity to the LTCI producer. Only time will tell, however, if we, as an industry, take full advantage of it.
Many studies have shown us that the LTCI marketing industry has not been able to build the market share it should. In fact, recent reports from one industry association show that while nearly half of all Americans will need LTC at some point, only about 15% of those over age 65 (and not on Medicaid) currently own an LTCI policy.
When we consider the risks of needing LTC, and more important, the potential impact on loved ones of such a need for care (especially when compared with other kinds of risk management — i.e. risk to loss of home, autos, etc.), it boggles the mind to think that so many of that prime age group would remain uninsured for the LTC risk.
The question is why. Why would so many people allow such a prevalent and potentially devastating risk to go unchecked (or, more to the point, remain self-insured)?
The answer may be in the way LTCI has been sold.
One thing we and many of our producers have learned in the past is that people simply do not respond to often-quoted statistics in a way that makes them want to solve an LTC problem with LTCI. The LTCI sales process might seem to be helped by the use of statistics to motivate people to purchase coverage. Market reality, however, has shown us that nothing could be further from the truth. We could go on about the statistical facts involved, but people often seem to believe that there is no way those statistics will apply to them. They believe it won't happen to them.
Challenge: It's up to the producer to help the prospect understand that it is at least possible that the prospect will need care sometime in his or her lifetime.
Another lesson we and many of our producers have learned is that people either consciously or unconsciously see LTCI as "nursing home" insurance, instead of coverage that offers help in many care settings. Some people actually believe they may need care at some point in their lives. But anytime I ask a group in a seminar setting to raise their hands if they would prefer to receive care in a nursing facility setting, no hands go up. If the prospect equates LTCI to "nursing home" insurance, and they never plan to spend a day in a nursing home, they will conclude that there is no need for the insurance!
Challenge: It is up to the producer to educate the prospect on the various settings in which one can receive LTCI benefits, including the most attractive and desired option — at home or in a community-based setting.
Challenge vs. Opportunity
Both of these challenges represent opportunities for the producer who can educate his prospects about the advantages of LTCI.
One thing our more successful producers tell us works for them is positioning LTCI as another form of risk management — perhaps the most important one to consider in the context of the prospect's overall retirement and estate planning. At the same time that these producers discuss the financial consequences of the LTC need, they also spend time talking to the prospect about the topic that is often not discussed in an LTCI interview — the non-financial consequences.
They ask questions like:
• "What is the potential impact to your loved ones' quality of life if you need long-term care?"
• "Would your spouse be able to lift you out of bed and help you get in and out of the shower, if necessary?"
• "You mention that your daughter has offered to take care of you if you need care … have you considered the impact that caring for you might have on her and her family? If she is working full-time, will she need to go to part-time to make the time necessary to care for you? Would her employer allow that? If she is working part-time, would she need to quit her job? What kind of impact do you think either of those scenarios might have on her and her family?"
Having this kind of frank conversation with a prospect has helped many of our producers help the prospects understand that a long-term care need has both financial and non-financial consequences and that having an adequate LTC plan (whether including LTCI or not) in place will help preserve family harmony and keep the prospect from becoming a burden to his or her loved ones.
Another way of getting the prospect to open up about his or her feelings about LTCI is to simply ask! When meeting prospects for the first time, Phil Gallant, CSA, likes to ask, "Why do you want it (LTCI)?"
He believes there are only two "main" answers to the question — one simply gets prospects to open up about why they feel LTCI is already their preferred funding source for LTC planning. The other presumes they haven't bought into LTCI yet but are open to discussing it. Phil believes that if they have agreed to an interview, LTCI is a tool they've considered. If they respond, "I don't know if I want LTCI or not," Phil usually asks, "If it were free, would you sign up?"
As you might imagine, the answer usually is "sure," and from then on he feels it's only a matter of drawing out why they feel LTCI, for the premium cost, is the best solution to their need. He then shows them how it may be the most cost-effective solution to their LTC planning need and helps them find the premium dollars to pay for it.
Finding The Money
Often, we find that prospects come to the realization that LTCI may be a suitable risk management (and family harmonization) tool for them, but struggle with the premium and how to pay for it. Here is an idea from one of our more successful producers: "SPIA Funding."
Single-premium immediate annuities (SPIAs), by their very nature as a device to guarantee an income for life, make for an ideal partner to LTCI premium funding. Let's assume prospects have $300,000 in liquid assets they would like to protect. Let's also assume that, with the exception of any potential rate increase on their LTCI policies (not likely, but possible), they would like to do a "one time asset transfer" into a vehicle that will pay the LTCI premiums automatically so they won't need to be bothered with "writing the check" each year.
We'll use a joint and survivor 50% annuity, so the full amount of the payment will be made each year while both annuitants are living but the benefit amount will be cut in half at the death of the first annuitant. We will do this, of course, because only one LTCI premium subsequently would be due after the first death.
We also will assume the clients are both 60 years of age, so the amount needed to generate an after-tax SPIA payment of approximately $5,000 a year (and $2,500 a year after the first annuitant's death) is about $93,000. This amount would generate approximately $6,500 a year, which after the "exclusion ratio" (presuming the money is non-qualified) and taxes in a 30% combined bracket would net out about $5,000 a year.
That means that the prospects could allocate a portion of their total asset base once (again, with the exception of any rate increase that could occur) and the remaining assets would be left intact to be used for other purposes. They are protected from the financial devastation of an LTC need.
Conclusion
Given the broad demographic changes taking place and legislative changes to Medicaid, a great opportunity presents itself for today's LTCI producers. Your continued success will be determined by the voracity and enthusiasm with which you attack this opportunity. The table has been set and it is up to each of you to sit down and eat — go to it and good selling!
Robert M. Vandy, CLU, ChFC, LUTCF, CSA, is director of business development for National Long Term Care Brokers, a subsidiary of New York Long-Term Care Brokers, Ltd. (NYLTCB), a nationally recognized long-term care, retirement, estate, and business planning firm. Mr. Vandy has more than 16 years of experience in insurance and financial services, having served in both field and home office marketing support and management capacities. Before joining NYLTCB in his current capacity supporting the NYLTCB network of more than 3,000 brokers, he spent four years as an adviser/producer and nine years in home and regional offices for two insurance carriers.