Standard financial planning tells us that high-net-worth individuals should self-insure for long-term-care expenses, such as support after an injury or illness, as well as extended stays in residential care facilities. While that may be the best practice for some, HNW clients should at least consider shifting the financial risks of long-term care. How do you determine what’s the right fit? Use the following tactics to guide you through the decision-making process.
Assume nothing. Your client may have $1 million in assets (or $2 million, $3 million, and so on), but talk with them before assuming that they should self-insure for long-term care. Your clients shouldn’t assume they have enough assets to self-insure without understanding the true cost of a long-term care event. If you don’t test these assumptions, your clients may end up taking losses they can’t recover.
Use income as an indicator. Many clients use income to cover their long-term care expenses, so consider liquidity, not solvency, when deciding if they should self-insure. Of course, your clients can sell assets from their portfolios to cover costs, but doing so can be expensive and jeopardize their overall financial planning strategies and future retirement income.
Be realistic about what they need. Long-term-care costs vary by geographic area and the level of care needed. For example, in Massachusetts, the average monthly nursing home bill can be upwards of $13,000 per month.
So, if your client has a monthly retirement income of $18,000 to support their lifestyle (including home, activities, hobbies, and charities) and long-term care costs $13,000 per month, only $5,000 remains to support their spouse’s lifestyle. That means your client may not be able to spend an additional $13,000 per month—perhaps indefinitely—and still meet all of their other financial obligations. They should consider other sources of long-term care funding, such as long-term care insurance, to cover part of the future costs.
Talk about legacy plans. Most high-net-worth clients have a legacy plan that dictates where they want their money to go after they die. Ensure your clients understand that self-insuring for long-term-care expenses will affect their legacy plan, and money they planned for family members or charities will instead cover health care.
Discuss alternative options. Self-insuring for long-term care won’t be the best choice for all of your clients. In that case, look at additional options.
- Traditional long-term-care insurance (LTCI). Due to higher-than-expected claims costs, the traditional long-term-care space has seen a decline in available products and an increase in pricing for new and existing coverage. And lifetime benefits have been replaced by much shorter benefit durations. That means even well-covered individuals may have to self-insure to a degree.
- Life insurance policy with a long-term-care rider. For those clients who want to self-insure for long-term care but don't want to reposition a large sum of assets, life insurance is a good alternative. A life insurance policy allows for annual premiums rather than single premiums. And because the policy is underwritten, its death benefits tend to exceed those of linked-benefit products.
- Linked-benefit products. These products combine the features of LTCI and universal life insurance, making them attractive for clients who are concerned about paying premiums and then never needing long-term care. By repositioning an existing asset, they can leverage that money for long-term care benefits, a death benefit if long-term care is never needed, or both. The policyholder maintains control of the assets, freeing up retirement assets for other uses.
Gain Confidence Through Planning
One of the most valuable things you can do for your clients is to help them secure their future and financial health. Your clients and their families will feel more at ease knowing that they have taken the right steps to position themselves for continued financial success and the best possible long-term care scenario. By understanding their options when it comes to long-term care planning now, they can rest assured they'll feel better knowing they will have the care and support they need in the future.