Why is accounting for unpaid help in any analysis of long-term care costs important?

Two reasons:

1. A great deal of help at home is unpaid - a spouse, a child, a friend; in fact, unpaid help is much more commonly used than paid help.  This represents a great burden on the helpers.  But the need for long-term care (whether it is needed and, if needed, how much help is needed) is uncertain.  In planning, it is critical to have an analysis of the likelihood and  magnitude of the needed help, both for the retiree and for the potential helpers.

2.  In any sale of long-term care insurance (be it policy or rider), a selling point often used is the pointing out to the prospective purchaser that the insurance can help him/her avoid being a burden on their family/friends.  But in many instances, depending on the amount of help needed as well as the premium for the insurance, there still may be a need for significant unpaid help.  An analysis of the insurance is critical to any retirement plan.

Why are long-term care costs so hard to predict?

There are a few reasons.  One, long-term care costs can vary from zero to well over a million dollars over the course of a client’s lifetime.  Two, long-term care costs are closely tied to the longevity of a client.  The longer a person lives, the more the chances of incurring a long-term care event.  A healthy person with a long expected lifespan will have more risk for long-term care costs than an unhealthy person with a short expected lifespan.  Third, a huge amount of actuarial calculations must take place to compute the probability distributions.  Fourth, an assessment of the longevity and propensity for long-term care of the client must be assessed. So a combination of the nature of long-term care costs and the work required to perform the computations is why these costs are hard to predict.

A long-term care policy from the client’s point of view

In my many years in insurance company actuarial departments, I have had the opportunity to participate in product development.  Always the concern was how profitable the products were as well as how much premium (and commission) will be generated (along with the questions of whether the product features will work on the administrative system and proposal system).  There were also questions of what interest rate and other guarantees were doable, as these were important pieces in the sales process.  Never was any talk given to how well the product performed from the point of view of the policyholder.  Did the product make the policyholder more well–off?

I have developed a program that gives vital information as to whether the purchase of long-term care insurance (either a policy or in a rider form)  is helpful to the client.  Let me explain the measures I use and how the results generally look.

I use a combination of three separate measures.  First, will the purchase of the product increase the chances that the client will meet goals, including the all-important goal of not outliving assets?  To answer this question, probability distributions of future long-term care costs are computed, customized to the client’s longevity and health profiles.  These distributions are then combined with many other aspects of the client’s financial situation (asset portfolio, investment/reinvestment/disinvestment assumptions, liabilities, expenses, tax and estate situations and many others) to compute the goal probability.  Then the process is repeated with long-term care insurance incorporated into the long-term care probability distributions.  The probabilities are compared.

The second measure is more detailed.  The measure addresses the questions: What are the chances that the client will spend less on long-term care costs over the client’s lifetime if the prospective insurance policy is purchased, as compared to not purchasing the insurance?  How much less?  For the chances of spending more, how much more?  The answer is displayed in a chart with the appropriate probabilities. 

So how do these comparisons usually work out?  For the first, the chances of success usually go down if the insurance is purchased.  Although unfortunate, the reduction is usually mild; say from 90% success chances without insurance to 86%( with insurance.  The second measure usually shows that about 65-85% of the time, the prospective insurance purchaser will pay less with insurance than without.  But the amount that they will save is usually on the small side.  On the other hand, if they do not purchase the insurance, 15-35% of the time they will pay more.  That  "extra" amount that they will have to pay can be huge.  Of course, this is the function of insurance, to protect against large losses.  The chart presents unbiased information about the policy, customized to the client, available nowhere else.  Often the client will see the big benefit of the insurance.


A third measure I recently developed deals with a major aspect of long-term care - how does the purchase of long-term care protection affect the amount of unpaid help to be provided by a spouse, by family and  by friends.  There are many articles as well as studies that talk about the great burden on the people close to the one who needs care.  My system actually quantifies this burden.  It produces a probability distribution of the amount of care that potentially could be provided by them, both with and without insurance (it assumes that care that would otherwise be provided by those close to the one who needs care will instead  be provided by professional care paid for by the insurance).  This analysis is only available through my program.  And just how well does the insurance reduce the burden for unpaid caregivers?  Contact me and I'll give you some interesting results!!

A few perils brought on by not incorporating the full range of your retiree client’s future health care costs into their retirement plans

Today’s retirement plans are often very sophisticated in many ways.  Estate plans, extensive asset analyses, what-if scenarios, tax analyses, spending broken down into much detail, percentage chances of meeting goals, and even a series of annual costs representing some of the health care costs your clients may incur are often parts of a modern retirement plan.  However, there is one critical component of costs that is mostly not fully recognized – the range of possible future health care costs, including the very variable long-term care costs.

Although all health care costs can significantly vary from year to year (hospital stays, the incurring of new chronic conditions and their associated prescription drug costs, and many others), the most variable is long-term care costs.  These long-term care costs can vary from zero to well over a million dollars over the course of your client’s lifetime.  It is impossible to pin down the costs to single amounts each year with any accuracy; the best that can be done is to produce probability distributions of future long-term care costs.

So, what can go wrong if the costs are depicted in the plan as something other than series of costs along with their associated probabilities of occurring?  Here are just a few:

1.       A long-term care event can easily exceed the amount assumed to be used for expenses in a given year.  The extra expenses can take a big bite out of the asset portfolio, leaving the client in a worse position than the plan’s projection.  The spending for all the previous years was calculated ignoring the long-term care event.   But the event may or may not occur, adding uncertainty that is not addressed in the retirement plan if probability distributions are not employed.

2.       The computation of the chances of success of the plan, including not outliving assets, is greatly influenced by long-term care costs.  My research shows that a computation of success without recognizing the full range of long-term care costs may be 90%; incorporating the full range of these costs can bring down the success rate down to under 50%!  The actual size of the asset portfolio is a key determinant of the impact of long-term care costs on success rates.  This is a complicated topic and I will have another blog on it.

3.       I can imagine the dissatisfaction of the clients who were expecting to not outlive assets but now find themselves in trouble because of long-term care costs (let alone their expected legacy!).  By recognizing these costs in the plan and adjusting spending, the chances of success can be computed more realistically. 

4.       The doozy is not to plan for the contingency that there will be someone who lives long with a long cognitive impairment. This often ruins the expected inheritance.  Incorporating probabilities of long-term care costs can give a more realistic picture of the size and chances of this contingency, as well as a more realistic picture of the client’s retirement.  Of course, to analyze this, the probabilities of living to various ages must be incorporated, preferably customized to the client’s health and longevity.

So what is the answer?  Prepare probability distributions of client’s health care costs, customizing them to the client’s longevity and health, and incorporating the distributions into the client’s retirement plans.

Does long-term care insurance solve the long-term care needs for your client? Does it help or hurt your client?

Will long-term care insurance solve all the client's long-term care needs?

In short, no. 

Besides the issue that less than half of the United States population is not insurable at all or at standard rates, and besides the issue that certain long-term care needs are not covered by long-term care insurance (such as only needing help with one Activity of Daily Living), this blog discusses the question of whether the purchase of long-term care insurance helps or hurts your client.

 

A few background comments: It is safe to say that the long-term care insurance industry is in a state of transition.  Many companies have stopped writing new policies.  Most companies that have blocks of in-force business have raised, and continue to raise premiums on previously issued blocks of business.  One major writer of long-term care insurance is now in liquidation due to their liabilities greatly exceeding their assets, and their policies have been taken over by State Guaranty Associations. 

 

The companies that continue to issue policies have, in response to low market interest rates, lower lapsation of policies than expected and other factors have tightened underwriting requirements, raised prices and introduced prices that differ by gender.  On the positive side, helped in part by tax law changes, new forms of long-term care coverage have emerged, such as long-term care riders on life insurance policies.

 

Much discussion and spirited debate over the pros and cons of long-term care insurance has taken place.  But with all this, there is the critical question I alluded to earlier and until now has yet to be answered:  How does the purchase of long-term care insurance affect the probability of a retiree successfully meeting the all-important retirement goal of not outliving assets? The answer is coming in an article (I’ll let you know where it will be published) that investigates this issue in detail and a future blog on how you can get the answer for your clients.  For now, I’ll just summarize the results for a hypothetical male aged 65 who is insurable and has a portfolio of $600,000 (yes, asset portfolio size matters in this analysis, and matters even more in the whole analysis of retiree long-term care costs).

 

The short answer is  - it's complicated!:

 

The purchase of long-term care insurance reduces the probability of this sample retiree successfully meeting the all-important retirement goal of not outliving assets.  But the amount of reduction is small.  Typically, if the chance of success is, say, 87% without the long-term care insurance, the chances reduce to 82%.  However, there are advantages to the purchase of long-term care for this sample retiree that may outweigh this calculation:

 

1.       An important measure of whether the purchase is appropriate is the possible range of costs the retiree may incur for the possible long-term care needs over the retiree’s lifetime.  There is about an 80% chance that the present value of these costs will be higher if the long-term care insurance policy is purchased (due to the premium payments, of course).  However, the difference in the present value (compared to not purchasing the insurance) is relatively small.  For the 20% of the time that the present value is smaller with the purchase, the difference in that present value is potentially huge.  Another way to state this is that if the client buys the insurance, he accepts a relatively small additional cost for long-term care costs over his lifetime, but protects against higher, potentially catastrophic long-term care costs (which really is what insurance is all about).

2.       If and when long-term care is needed, the insurance company can send someone out to visit the client, and help with assessing the need for long-term care services and with pointing the client in the right direction.  This is a great service for the client at a very stressful time.

3.       In certain locations in the United States, an assisted living facility may review the client’s financial situation before admittance.  This review may take time and add stress.  If the client has a policy, the review is often waived.

 

Note that this short answer is only for the hypothetical case mentioned above.  Different retiree profiles lead to possibly different conclusions.  It is necessary to tailor this analysis to the specifics of your client! 

 

 

 

 

 

 

 

 

 

 

Going the Medicaid Route to pay for long-term care - Is this your automatic last-resort option for your clients?

There are many places to look to find out how to prepare clients to get Medicaid to pay for long-term care costs, as well as some of the hardships involved.  In this blog I want to point out a couple of important points to ponder:

1. Will Medicaid still be covering these costs when it is needed?  For a client who is 60 years old, 80% of all long-term care costs occur after age 79,  So will Medicaid still be there 20,25 or 30 years from now?  It's better to adjust spending levels now to minimize the probability that Medicaid will be needed.

2. It is much better to know, for a given client's financial situation, what the probability is that the client will run out of money while alive and needing long-term care.  That probability should be computed, and if unacceptably high for the client, should cause a reexamination of the client's retirement strategies (in particular, the client's spending strategy - can it be lowered to lower the chances of running out of money while alive?)

What measures are useful in retirement planning besides the probability of goal success?

When analyzing whether a financial plan meets the retirement goals of the client, there are two measurements, other than the probability of whether the client meets goals, that I find useful.  They are both related to what I would call the "magnitude" of success.

One is the number of years the client is alive and without assets.  This I call the number of years "in ruin".  A plan with a 95% success rate, but with an average number of years of ruin of 7 for the 5% of the time the plan fails, might be not as good as a plan with a 90% success rate, but with an average number of years of ruin of 2 for the 10% of the time the plan fails (the client can decide which plan is better).

The other measure is, for the scenarios that are successful, the amount (either an average or a probability distribution) of assets remaining at the time of death.  This can be considered a potential "legacy" for the heirs of the client, or as a "margin of error" for the various scenarios.

These two additional measures gives a much fuller picture of the possible outcomes for the client.