In Plain Sight: An Important Tool for Advisors with Clients in Need of Long-Term Care
Financial advisors work diligently to help seniors achieve post-retirement safety and security. But there is one area of financial planning that has become so great a concern it has, literally, been labeled an American “crisis”: The Long-Term Care Crisis.
While news outlets, government agencies, and researchers ponder how to change the course of this crisis, there is one fact advisors need to know: selling a life insurance policy can be a solution for many seniors who need to fund long-term care services and supports.
But first, some background on the crisis:
The PBS Newshour ran the sobering feature, Why Long-Term Care for U.S. Seniors is Headed for ‘Crisis’, reporting that 70 percent of Americans age 65 or older will need some form of long-term care for at least three years during their lifetime.
A Yale University study called the long-term care crisis the “older brother” of the health care crisis, presumably because they have the same parents – ignorance and inaction. The report, citing a major public research survey, found that “two-thirds of Americans over 40 have done little or no planning for their care needs. Three-quarters think their spouse will care for them, and almost half think their children and grandchildren will care for them.”
A 2016 report by HealthView Services on the costs of long-term care estimated that a healthy couple aged 65 who retire today will need almost $300,000 to pay for their health care services, or more than half of their social benefits for the rest of their lives. The costs skyrocket when serious health conditions emerge.
The US Long-Term Commission’s 2013 report to the President and Congress outlined the severity of the crisis and categorically listed some 28 recommendations, of which almost none have been addressed.
Compounding this crisis is that long-term care insurance, which was popular among Baby Boomers just a few years ago, has largely gone away, with more than half the top insurers abandoning the market and raising premiums beyond the ability for policyholders to afford them. The high costs of health care delivery and the sustained low-interest rate environment have made it impossible for insurers to offer reasonably priced premiums.
How will Seniors Pay for Long-Term Care?
The need for costly long-term care services and supports can be unforeseen and immediate. For more than 75 percent of nursing home residents, entering the facility was relatively unexpected, with an injury or illness making it impractical to return home or care for themselves. And the first question they’re asked when arriving at a facility is a big one: “How do you plan to pay?”
The problem, of course, is that the majority of people haven’t planned to pay. The vast majority of Americans have neither budgeted nor saved for their own long-term care. And while Medicare (and the alphabet of supplemental plans) can cover a significant chunk of a senior’s health care costs, few realize that Medicare does not cover long-term care costs.
Medicaid, however, does cover long-term care costs (but, importantly, not all). But, in order to receive Medicaid, the senior has to exhaust a significant amount of their financial resources—retirement savings, inherited property, money in the bank, etc.
Importantly, in all but a handful of states, in order to qualify for Medicaid applicants are forced to terminate their life insurance policies to access any significant amount of cash value those policies may have in order to spend that money down before they are eligible for Medicaid. Even if the policy has little or no cash value, it is either impractical or impossible for the senior (or their spouse or children) to maintain the policy.
In other words, billions of dollars of life insurance are lapsed or surrendered by arcane Medicaid rules that force seniors to terminate their policies.
Advisors and the Long-Term Care Crisis
It is against this backdrop that financial advisors have to try to help seniors build a “nest-egg on top of a nest-egg” just so that long-term care needs can be met.
This is where selling a life insurance policy for its fair market value can be a life saver for seniors and their families. Selling – rather than terminating – a policy and using the proceeds from the sale to pay for long-term care has numerous benefits.
For one, having their own money means the senior can choose the level and type of care that best meets their needs. It may be most appropriate for the individual to receive care at an assisted living facility but, in most states, this isn’t an option for recipients of Medicaid. It may also mean that an elderly parent doesn’t have to move in with their adult children. It means, too, that they don’t have to rush to sell off assets just to pay for long-term care.
What's an Investor to Do When History Doesn't Repeat Itself?
We’re in an era of extremes. It seems a day doesn’t go by without the word “historical” popping up in the financial news.
The equities market and consumer debt are at historical highs. Interest rates and high-yield credit spreads are at historical lows. We haven’t seen even a 5% pull-back in the market this year—for the first time since 1995—and the DJIA is exhibiting its narrowest trading range in history. These are indeed historical times. And whether this fact has you filled with extreme optimism or extreme pessimism, you have some important decisions to make going forward.
There are theories about how we landed in this particular era of extremes, and most are rooted in the significant changes that have impacted both how we live and how we invest. At the top of the list are globalization, automation, and the largest aging population in history (yet another “historical” to add to the list). It’s said that the most dangerous words in investing are, “it’s different this time,” yet one has to wonder if, in fact, it really is different this time. Not just because of the historical market highs. After all, there always has been and always will be a new market high waiting around the corner. What’s different today is the sheer number and confluence of these extreme highs and lows—and their duration. It’s a situation no investor has experienced before, which can make these waters feel pretty daunting. History repeats itself, and investment strategies are largely built on that conviction. But what do we do when it doesn’t? When history fails to repeat itself, how can investors plan for tomorrow with confidence that they are positioned to protect their assets and gain a reasonable level of yield?
The first step is to recognize that, at least in many ways, the investment landscape really is different this time around. All you have to do is look at the numbers to be sure of that fact. And the catalysts I mentioned before—globalization, automation, and the aging population—aren’t going anywhere. If anything, the impact of each will only grow as time moves on. What that means is that there’s no way to predict what’s coming next. The only thing we know for certain is that predictability is a thing of the past (if it ever really existed at all). The result: you need to approach your portfolio differently than you ever have before.
Your goal, of course, is to find return given a risk tolerance. Current yield is an important part of total return and getting it is an elusive proposition in today’s market. If, like many people, you’re less than confident that the four major sectors that currently drive the equities market—healthcare, discretionary, tech, and financial—are poised to continue to rise at even close to recent rates, it may be wise to seek out alternatives to help drive yield without adding more risk to the equation.
But if alternatives are the wise path forward, which alternatives are the best options?
Real Estate Investment Trusts (REITs), Business Development Companies (BDCs), and energy stocks, traditionally the favored “non-correlated alternatives,” defied expectations when the stock market crashed in 2008, inconveniently revealing high correlations just as the equities market began its freefall. Anyone who was invested in these alternatives at the time knows all too well the devastating impact “non-correlated investments” can have on a portfolio, especially when they fail to do their job when it matters most.
Luckily, there is one alternative that can be counted on to remain uncorrelated to the traditional financial markets and, ultimately, deliver that precious yield: life insurance-based investments. And because this asset is literally built on one of the irreversible catalysts of change, the aging Baby Boomer population, owning life insurance may in fact be the ideal alternative to help investors generate non-correlated returns, regardless of where the market turns next. Even better, these investments typically deliver those returns with very low volatility.
What makes life insurance different is that, unlike typical alternative vehicles, secondary life insurance returns aren’t based on the economy. Instead, they are inherently non-correlated because returns are based solely on the longevity of the individual insureds.
As much as we would all love for the bull market to continue on its merry way, one thing history does tell us even today is that a bear market will come. It’s only a matter of when. As you strive to hedge your portfolios and prepare for the inevitable, life insurance-based investments are one tool that can help you achieve the three things you need most: diversification, low volatility, and yield.
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