How the risk of extended health events impacts your clients and your practice
By Bob KleinMr. Klein is the executive vice president of life sales distribution for Ash Brokerage’s life, long-term care and disability income sales. Over the last two decades, he’s had the opportunity to create business within the life insurance, linked benefit and group benefits markets, which have resulted in new revenue streams, as well as exceptional careers for dozens of professionals. He is a Chartered Life Underwriter® with life insurance licenses as well as Series 6,63 and 26 designations.
Over the last few years, staid financial publications like Barron’s and The Wall Street Journal have begun talking about the risk baby boomers face … having an extended health care event in retirement.
Since January 2011, when the first boomer turned 65, most of the news has been about America’s retirement income crisis; too many have saved too little for their “golden years,” and we fear our already-taxed government welfare system may fail altogether.
For most of you, helping mass-affluent and affluent clients save for retirement and build a quality retirement income strategy – and the resulting recurring revenue stream – has become the centerpiece of your practice.
And, for many of you, the discussion about how to protect your clients and your income from the risk of an extended health care event has become a normal course of business. While sales of long-term care insurance products (traditional, annuity or life insurance linked benefits, and life insurance riders) are not yet keeping pace with those of retirement vehicles, the dialogue around these risks has dramatically increased in the last decade.
Asset-Based Long Term Care
The client value-proposition for asset-based long-term care products has been widely shared in recent years. Unique to the financial services industry, these products provide a benefit to the client whether they have an extended health care event, if they change their mind and want their money back, or if they never need care and pass away.
On the LTC front, for a typical client between ages 50-70 there would be a leverage on their premium deposits between three and six times. That means, for a 60-year old female depositing $100,000 in a single pay, there would be more than $400,000 of assets to pay for LTC expenses, all of which are guaranteed against future rate increases.
Should the client never need care and pass away, her beneficiaries would receive one and a half to two times the deposit in a tax-free death benefit. And, if the client changes her mind at any point and wants the money back, depending on the carrier chosen, there would be 80-100 percent of the deposits available.
Asset based products have been in the market for more than 25 years. The value proposition to the client has been so strong that less than 2 percent of the contracts have been surrendered for their original deposit.
Missing in that conversation is the potential impact a client’s extended health care event may have on your practice. It may not only impact your income, but also your ability to sell your book of business at a market price, which is a common cornerstone of an advisor’s personal retirement strategy.
The goal of this position paper is to make you aware of those risks and introduce you to a concept that will allow you to protect your clients and your practice by insuring them from the extended heath-care risk.
- Starting in 2011, 10,000 Americans are turning age 65 each day. This trend will continue until the year 20301
- 70 percent of people who reach age 65 will require long-term care services at some point in their life2
- Health care costs continue to dramatically outpace inflation and will only rise as the demand increases
- The average annual cost of long-term care in a facility is now $92,000 but can be as high as $150,000
- For individuals wanting care in their home, those services are also high at an average of $46,000 per year3
- To-date, only 10 percent of those over the age of 65 (eligible retirees) are covered by a long-term care product to help defray these costs
- Medicare covers up to the first 100 days, but only if it is for rehabilitative care
- Medicaid could pay for long-term care services, but clients must spend their assets down to $2,000; a surviving spouse may keep up to $119,220
Top Two Customer Profiles
1. Retirees, age 55-75, who have already amassed their assets and are working, or have worked, with their advisor on a retirement income strategy
2. Individuals, age 45-60, who are still working, have excess income flow, and are actively saving and planning for retirement
Impact on Your Practice
- For a typical advisor managing $50 million of assets, assuming he or she has 100 clients and is earning 1 percent for managing the assets, and generating $500,000 of gross recurring revenue
- Conservatively, if 50 percent of the client base fits one of the two profiles for an extended health event, one-third to one-half of the advisor’s revenue stream may be at risk:
– If 50 clients meet the profile, and half of them need care during retirement, 25 clients are impacted
– Assuming the average cost of care at time of need is $150,000 and the average length of care is four years, the impacted clients would need at least $600,000 of available assets to fund the extended health care risk
– With 25 clients impacted, that would mean a total of $15 million of the advisor’s AUM, or $150,000 of annual revenue, is at risk
- For larger practices, these numbers scale and the impact is magnified
- A broker-dealer with 50 advisors, averaging the figures above, would have three-quarters of a billion dollars of assets at risk
Given these challenges, it might be prudent for advisors to look for outlets to off-load some of the risk by making clients aware of the need for LTC planning. Insurance carriers provide a number of options, but one in particular, asset-based long-term care, is well suited to lessen the risk to both client and advisor.
Because of its unique leverage for extended health costs, liquidity provisions, rate guarantees and benefits upon death, we’ll use asset-based long-term care to demonstrate how this solution can help clients retain more assets for their family’s future and maintain those invested assets in your practice.
Behind the Numbers:
- For the client profiles described above, typical asset-based long-term care products will provide four to five times leverage against extended health care expenses in retirement:
– 60- year old female, couples discount, 80 percent return on premium
➢ $100,000 single premium
➢ Day 1: $5,264/month benefit, $408,606 total pool
➢ At age 80: $9,508/month benefit, $737,988 total pool
– 50-year old male, couples discount, 80 percent return on premium
➢ $10,000 annual premium for 10 years
➢ Day 1: $5,546/month benefit, $430,508 total pool
➢ At age 80: $13,462/month benefit, $1,044,956 total pool
- Therefore, to guard against an estimated $15 million of AUM at risk, the advisor will only need to reposition $3.75 million of assets into the asset-based long-term care solution
- This creates $15 million of long-term care liquidity for clients, saves $112,500 of fee revenue for the advisor (1 percent on the $11,250,000 of assets no longer at risk), and creates $225,000 of additional gross revenue for the advisor from the purchase of the insurance coverage.
Given the market you’ve been managing through over the last decade, it’s very rare to find a solution that provides a true win-win scenario for both client and advisor. You should take action by speaking to your insurance solutions partner today. ◊
 2012 Social Security Administration Annual Performance Plan
 U.S. Department of Health and Human Services, National Clearinghouse for Long-Term Care Information, www.longtermcare.gov, September 2008
 Forbes.com, June 29, 2015, “U.S. Health Care Costs Rise Faster Than Inflation,” by Mike Patton
 2016 Genworth Cost of Care Survey
 Value based on a 6 percent gross commission