Here’s a question I’m sure you’ve been asked at least once: Is it better for young people, in the prime of their life, to concentrate on accumulating wealth, or to protect their resources with forms of insurance? When you really get into it, a fascinating discussion takes place, especially if you’re talking with other professionals.
We all come to the table with our own perspective, of course, influenced in no small part by our profession and personal experience. If you’re an investment advisor, for example, it is only natural that you’d place a greater emphasis on wealth accumulation than an insurance specialist would. The insurance professional might respond with a question of his or her own: Does it matter how much you can save, or the rate of return you can generate, if those assets are unprotected from catastrophic liabilities and can be taken from you in the blink of an eye?
The values and philosophies that underlie our answers are shaped by the society we live in. More and more consumers have difficulty accepting personal responsibility. If something is wrong with their life, their health, or their finances, clearly it is someone else’s responsibility and not due to choices they themselves have made!
After spending nearly seven years as a long-term care insurance (LTCI) specialist, I’m all too familiar with this finger-pointing mindset. When I meet with clients about the need to protect their assets against the devastating financial impact of long-term care costs, I run into one of these four objections:
1. That’s for old people and I’m not old!
2. That’s nursing home insurance and I’m not going to the nursing home!
3. It’s way too expensive and I can’t take on any more expenses right now.
4. Why should I worry about it? If I do need long-term care, the government will pick up the tab!
The last objection is perhaps the most problematic, because it contains a kernel of truth, concealed within layers of misunderstanding. Medicaid funds about 40% of long-term care costs in our country. Overburdened beyond all expectation, this combined federal and state program, designed to cover health care costs for people on welfare, has become our nation’s largest funding source for long-term care expenses.
The first wave of consumers who are living into their 80s, 90s, and past 100 are largely unequipped to last 20 years or more in retirement. They certainly didn’t take into consideration that they would be spending $6,000 a month of after-tax money to fund long-term custodial care.
After their personal savings have been depleted, these people and their families qualified for Medicaid. But Medicaid represents an enormous expenditure on an annual basis; in some states it’s as high as 30-40% of the annual budget. That’s why we’re seeing numerous state-sponsored initiatives urging people to take some ownership for their future and begin planning for long-term care costs today, with LTCI.
At this point, with Medicaid as a backup plan, the asset accumulation logic goes something like this: Aren’t I better off to invest my money now and make it work hard for me as long as possible, earning the maximum possible return, knowing that there’s a safety net in place to catch me anyway?
Without relevant personal experience or necessary education, few individuals will seek out long-term care planning on their own.
Education plays the critical role here. When you meet with a client (especially someone age 30 to 55) and ask them, “What do you expect to happen to your income earnings over the next 10, 20, or 30 years?” the vast majority will tell you that they expect to earn more as time goes on. Our ability to earn increases with age and experience — if things go as planned.
Life doesn’t always deliver on schedule, however. What would happen if your greatest asset — your ability to work and provide for yourself and your family — was suddenly taken away due to a health crisis? Anyone can have an accident. Anyone can suffer a stroke, or have a heart attack, or contract a debilitating disease. There are no age limits on these conditions.
That one question — what would you do if you could not accumulate any more wealth than you have right this minute — is, in my opinion, the reason why long-term care planning has experienced such tremendous (and unexpected) growth in the corporate marketplace as an employee benefit. Many young professionals in their 20s and 30s, after exposure to education that includes that pivotal question, are signing up for long-term care insurance coverage.
Young people see three clear value propositions in long-term care planning. First, they understand their earning potential is likely to increase, and they will never be younger or healthier then they are today. Second, they realize that accumulation means nothing if it’s not protected, so they see the critical need to hold onto whatever wealth they’ve managed to save thus far. And lastly, they are a generation of “Me,” and they want to have plans in place to secure the type of care they want to receive, when and where they want to receive it.
Is that the best use of their money? It is often said, and I must agree, that insurance and investments were never intended to show up in the same sentence on a comparative basis. If we try to view both insurance and investments the same way, it is impossible to draw a clear conclusion.
After all, insurance is one area where you’re hoping not to get a good return on your investment! If your home burns to the ground, will you rejoice over the $350,000 check from your homeowner’s insurance company, representing an X% return on your premiums paid?
Of course not. You will feel the loss of your home, your possessions, everything that hearth and home represents on an emotional and spiritual level. Even if you rebuild, it will never be the same — and the ROI of your insurance policy, even if it’s phenomenal, will not alleviate that loss.
In the same way, you hope you never ‘recoup’ the money you’ve paid into LTCI premiums. From an investment point of view, that money is clearly lost — a negative return — unless you are among the 50% of individuals who at some point in their life require skilled, intermediate, or custodial care. Typical major medical health insurance plans pay for skilled or intermediate care for a maximum of 100 days — after which the patient is on his or her own. Custodial care is not covered at all.
Funding this care will completely impoverish the average family within 14 months. Total depletion of resources is required before a person can access governmental programs (Medicaid specifically) to pay for even a portion of long-term care. Even then, Medicare and Medicaid usually pay only for the very place that you don’t want to go, a nursing home!
It doesn’t matter how savvy an investor you are, or how well you work the market, or how much you save. Let’s say I’m the world’s best investor and a hyper-compulsive saver, and I sock away $15,000 annually at a 40% return. I do this until I’ve accumulated $100,000 — not bad, considering my age of 35.
But then my penchant for fast cars catches up with me, and I’m in a horrible accident. There’s no way I will ever work again, much less have money to put in the market.
How long will it take me to burn through all that money? In New Jersey, where I live, long-term care costs average $6,000 a month. You can do the math: in less than 17 months, I’ll be flat broke.
Had I protected myself with an LTCI plan, I might not have accumulated as much wealth. I might have only $95,000 in savings because I spent $1,000 per year for LTCI premiums. But I would still have that $95,000, rather than seeing it drain away for long-term care costs.
Individuals who pursue long-term care coverage on their own often discover they’ve started the search too late: they’re uninsurable, because of age or health conditions. At this point, most of this discussion is over; there is no longer a choice to be made between accumulating wealth and protecting assets!
This is a tremendous risk exposure that many individuals find themselves in quite by surprise. There’s little, if any, consumer education on this topic out there, particularly if one searches for unbiased information.
This places a tremendous burden on us, as agents and advisors. We’re the ones our clients turn to, particularly when they’re struggling with questions like “Is it better to accumulate wealth or protect assets?” We are obligated to provide our clientele with clear, unbiased information and solutions that will enable them to accumulate assets and protect them — ensuring a future that meets and exceeds their expectations.
Michael FitzPatrick, CLTC, is co-founder and managing partner of The LTC Partnership, LLC. He is a member of AALTCI and NAIFA. His firm works with financial professionals to incorporate long-term care planning into their practice.