Pity the long-term-care insurer. With sales in decline for the fourth year running--down 8% last year alone, according to LIMRA--the industry is still facing an American public that's wary of these complex and pricey policies. The sales slowdown appears no different for financial planner Jeff Karelis, who sold a bumper crop of the polices in 2003 and has seen his sales dwindle ever since.

But for Karelis and a growing number of independent advisors like him, the numbers don't tell the whole story. "Basically," he says, "all of my clients already have a policy."

Huh?

To much surprise, but little fanfare, financial planners are carrying the LTCi industry's water, with the product appearing to move fastest through advisory firms. Although complete industry sales data is closely guarded, dozens of interviews and broad anecdotal evidence collected by Financial Planning all suggest that the the annual growth in LTCi sales fueled by independent financial advisors is well into double digits for the past few years.

By example, Karelis, a cofounder of advisory firm KPS Financial Consultants in Waltham, Mass., works with broker-dealer Commonwealth Financial Services, where LTCi sales were up 51% in 2006 alone. "We've seen double-digit growth year after year," says Karen Kappler, the firm's vice president for insurance. Commonwealth has been tracking LTCi sales since 1988. At Triad Advisors, a midsize broker-dealer in Atlanta, sales were up 15% last year and are already up 23% in 2007.

On the supply side, insurer MassMutual in Springfield, Mass., for example, reports that annual sales of LTCi through its advisor channel have grown an average 16.5% per year since 2001, with a 30% jump in 2005 alone.

The list goes on and on.

The news is more than welcome for insurers, who see nothing but room to grow. The bulk of the nation's 76 million baby boomers will soon reach age 65 and when they do, the federal government estimates that a whopping 60% of them will eventually need some kind of long-term care. But as it stands, only 7 million Americans actually have a policy that will cover those costs.

Much as these demographics suggest a need for LTCi, optimism for the industry is hard-fought, to say the least. After all, sales of the policies peaked at 754,000 in 2002 before spiraling down to 332,000 by the end of 2005, a protracted decline of nearly 50%.

After frustrating consumers with unanticipated rate hikes from 2001 to 2003--the main catalyst of the industry's recession--insurers are banking on financial planners to help these products recoup their momentum. As a result, insurers and broker-dealers have been quick to support planners' efforts, as they start to reach consensus on the role and value of LTCi policies in clients' financial plans.

ADVICE ADVANTAGE

Why are advisors having such success where insurers and their agents have failed? The answer reflects both the history of how insurers sold LTCi and the growing emphasis on advice, as planners continue their movement from sales to fees.

For years, LTCi providers relied on poorly trained agents and ineffective marketing strategies to convince a broad swath of consumers to buy expensive lifelong policies, regardless of how they suited the consumer's financial plan. At the same time, they promised that premiums for existing policies would remain stable throughout the client's life. But starting in 2001, a number of providers raised rates and some of those who did eventually exited the industry altogether. Not exactly a formula for developing trust.

Trust, however, has been the key to planners' success. "The industry didn't really think of consumers as their clients," says Ellen Eichelbaum, a corporate gerontologist in Northport, N.Y., who for years has trained insurance agents to sell LTCi. "They only had a sales technique," she says.

Clearly that wasn't enough. LTCi is a complex sell, and consumers appear much more likely to purchase from a trusted advisor who can explain not only the pros and cons of these policies, but also how they match each client's unique scenario. "The bulk of future LTCi business is going to come from planners and advisors," says Jesse Slome, president of the American Association for Long-Term Care Insurance (AALTCI), an industry group.

Since the typical policy has dozens of options and add-ons that can make for, literally, hundreds of permu-tations, advisors are pushing insurers to simplify policies. "We feel a lot of pressure," says Malcolm Cheung, vice president and actuary for long-term care at Prudential in New York. While more advisors seem to be selling LTCi, they "typically only sell a handful of policies each year," he says, "so they don't want to spend a ton of time working to understand them."

A SMOOTH SALE

In time, policies may get simpler. But for now, insurance companies and broker-dealers are responding with a raft of support and technology platforms to help advisors through the entire LTCi sales process--from comparing policies and features to shopping for competitive pricing and walking clients through the application and underwriting process.

For example, insurance broker LTCI Partners, based in Libertyville, Ill., provides an LTCi sales and application platform to advisors at 10 broker-dealers around the country. (LTCI Partners is now owned by National Financial Partners, a New York-based network of broker-dealers.) "We really try to simplify the process," says Managing Principle Tom Riekse Jr. His efforts seem to be paying off. Revenues at his firm grew by 25% last year and "most of that growth is due to accounts with new broker-dealer clients," Riekse says.

Insurer Penn Treaty, based in Allentown, Pa., helps advisors sell the company's policies through a proprietary platform, PersonaLTC. Penn Treaty teams independent advisors with LTCi specialists to help streamline the sales and application process. Commonwealth, too, provides a full range of support services to advisors. In addition to producing customized breakeven charts and analysis of how various long-term-care needs could affect a given client's financial plan, the B-D provides on-call product experts to answer questions from clients or advisors.

These firms also help advisors screen clients for medical conditions that could cause an application to be rejected. "You put both the client and the advisor in a bad position when the client is declined," says Kappler. Such rejection is not uncommon: In 2006, nearly 20% of applications from clients aged 60 to 69 and 42% of those from clients aged 70 to 79 were declined, reports the AALTCI. Although the number of declined applications has fallen with the average buyer's age, down to 59 from 70 a decade ago, there are still some conditions--a history of stroke, cognitive impairment or need for long-term care--that will almost automatically trigger a rejection. Prescreening clients can save them the emotional roller coaster of anticipating a need for long-term-care insurance, only to be rejected.

PRICING PROBLEMS

Advisors and consumers are partic-ularly sensitive to the value and pricing of LTCi policies. As a result, advisory firms are using stringent due diligence processes to vet LTCi products for both price and features long before planners actually present them. "We only use carriers who appear to be committed to the LTCi industry for the long term," says Commonwealth's Kappler, whose firm currently uses seven different product providers.

Both advisors and executives emphasize a company's record of raising premiums. While the top five LTCi wholesalers have never done so, the few remaining companies that have--notably Penn Treaty, Unum-Provident, Equitable Life and Mutual of Omaha--may struggle with advisors because of it. "It's all about finding a company that will keep its promise," says Karelis. "My biggest fear is picking a company for my clients that will end up raising rates."

Although the first long-term-care policy arrived on the market back in the 1960s, LTCi remained a cottage industry until strong sales growth in the mid- to late 1990s attracted many insurers to what was still a relatively new business line. But nearly all of them underpriced their policies and were forced to raise rates, with a good number leaving the business altogether.

What happened? "The actuaries were wrong!" says gerontologist Eichelbaum. Insurers had expected more policyholders to let their policies lapse, and fewer to claim benefits. Low long-term interest rates--good for homebuyers, but bad for bond-loving insurers--dug the hole even deeper.

Insurance behemoths like Conseco, TIAA-CREF and Transamerica raised rates and left the business, alienating thousands of policyholders who had been promised stable premiums--not a pretty picture for seniors on fixed incomes. "My mother bought a long-term-care policy 10 years ago that cost $1,500 a year," says Don Hart, chief executive of the United Church Foundation in New York. "Now she's paying $6,000 a year." The price of new policies has risen 30% to 40% since 2000.

After six years of turmoil, the industry has consolidated into five large insurers--Genworth, MetLife, John Hancock, Bankers Life & Casualty and MassMutual--that cover approximately 73% of the individual LTCi marketplace, according to Broker World 's 2006 LTCi survey. To ease concerns about future premium increases, most planners stick with these A-list carriers, none of which have raised rates in the past. "The industry's consolidation means deeper pools of policies and more resources available in the event that insurers still get the pricing wrong," says Michael Kitces, director of financial planning at Pinnacle Advisory Group in Columbia, Md. "It remains to be seen whether the insurers are profitable, but I don't worry a lot that they will default on claims."

According to LIMRA, the average individual policy sold in 2006 cost about $2,000 per year, with the average buyer ringing in at 59 years old. Premiums, of course, vary enormously depending on a client's age, rate class and desired level of benefits. AALTCI estimates that that average buyer could buy a five-year, inflation-protected policy with $130 per day in benefits for about $1,150 a year. At age 65, a first-time buyer of the same policy would pay $2,814.

While the planning community is still divided on whether policies are priced too high or too low, many believe that clients are getting a good deal. "There are reasons to not buy LTCi, but cost is not one of them," says Kitces. "Frankly, a rate increase implies that if you bought in the past, you got a good deal. In the worst-case scenario, insurers have to raise rates again, and that simply means you've been underbilled the entire time you've had coverage."

Dawn Helwig, a managing principal at the Chicago-based actuarial firm Milliman, agrees. "It's very likely that people who bought coverage five years ago are still paying less of a premium than if they reentered the market today" in the same rate class, she says. Cynthia Zalewski, a fee-only planner in Saratoga, N.Y., who spent more than five years as an insurance agent, believes that current policies are underpriced. "When I look at the price of care," she says, "I think the price of LTCi is too low."

MEDICAID MONSTER

Asset protection has historically been planners' primary sales pitch for LTCi policies, which ensure that clients won't annihilate assets set aside for retirement or for heirs. Wealthy clients, however, can self-insure. After all, the largest claim ever paid in the history of LTCi is $890,000--not out of reach for many clients. Even so, most wealthy clients don't see much attraction in taking the risk of having to purge so many assets.

A.J. Diliberto, director of client services at Newport Advisory in Newport Beach, Calif., works with a couple who recently bought LTCi even though they could liquidate their primary residence and vacation home if either, or both, ever needed long-term care. The couple loves their vacation home and wants to leave it to their children. "They figured, If we can afford the insurance, why risk it?'" Diliberto says.

Lately, though, the most compelling reason to purchase LTCi is shifting from asset protection to concerns over the quality of Medicaid-funded nursing home care. Stephen Moses, president of The Center for Long-Term Care Reform in Seattle, cautions consumers and advisors not to compare Medicaid to its better-funded siblings, Medicare and Social Security. "While Social Security and Medicare have spurious trust funds," he wrote in a 2005 report, "Medicaid draws its financing from general tax revenue without even the pretense of a trust fund." In other words, Medicaid programs are more vulnerable to economic changes than Medicare and Social Security.

"Nobody wants to talk about how the level of care could be different in the near future for Medicaid patients and private payers," says Zalewski. "But I've seen nursing home patients become second-class citizens when they spend all their assets and Medicaid kicks in."

"We tell our clients to steer clear of Medicaid, because it's underfunded," says Gary Lee Kieffner Jr., a planner at Brandon Financial Planning in Memphis, Tenn.

A robust LTCi policy can help clients avoid nursing homes--not to mention Medicaid--by staying in their homes as long as possible. Of all LTCi policies sold in 2005, 97% included home-care provisions. "Everyone wants to have choice and freedom over their care," says Zalewski. "If you want high-quality care, there isn't another option"--self-insure, or buy LTCi.

With advisors' confidence in LTCi on the rise, they are discouraging clients from taking the self-insurance route. For those clients who decline LTCi coverage, a popular way to force the issue is to have them sign statements acknowledging that they declined coverage against their advisor's recommendation. This helps planners minimize their liability as fiduciaries, and it can encourage honest conversations. "I tell clients that as a financial planner, I really don't care what your long-term-care plan is, so long as you have one," says Diliberto. But, "if a client decides to self-insure long-term care, I include a statement that reads, Our analysis suggests that this is a very risky strategy.'"

SIDEBAR: Best Buys

A few LTCi buying strategies can help clients save money while maximizing benefits.

Buy young, when premiums are less expensive. Some planners have already seen clients decline LTCi coverage, only to regret it later. "A client who was 64 in 2001 declined LTCi," says Saratoga, N.Y., planner Cynthia Zalewski. "Now at 70, he's been diagnosed with cancer and it's too late to buy affordable LTCi." The man's age and health mean annual premiums of more than $12,000.

Women are much more likely to need LTCi. According to the American Association for Long-Term Care Insurance (AATLCI), long-term-care insurers pay $2.50 in benefits for claims from women for every $1 they spend for men. That makes sense, considering that 72% of nursing home patients are women.

Avoid lifetime coverage. Until recently, policies with lifetime benefits accounted for the bulk of sales. But most consumers need only five years of coverage. According to the AALTCI, 5% of all policyholders exhaust four years of benefits. Among policyholders with five-year policies, just 1.5% exhaust their benefits.

Buy joint spousal coverage. Spousal discounts of 20% to 40% are available for both individual and "shared-care" policies. Insurers can afford such discounts because statistics show that spouses take care of each other as they age. "Whether you go on claim or not tends to be a function of whether you have a spouse or not," says Bill Hunt, president and CEO of Penn Treaty.

The best shared-care policies allow the couple to divide their total benefits at their own discretion. For example, if a couple has three years of benefits apiece, and the husband requires more than three years of care, he can tap into the wife's benefits and leave her the balance. Couples should buy enough coverage, however, to reasonably prevent one spouse from exhausting all the benefits and leaving the survivor--typically, the wife--unprotected.

Buy inflation protection. Of all the myriad policy riders, the most important is inflation protection. This rider escalates daily benefits annually to account for increases in long-term-care costs-which have been rising at twice the rate of inflation. The inflation rider comes in both compound-interest and simple-interest versions. The younger a client, the more important the more expensive compound-interest type becomes. "Most people don't need their policy for about 20 years," says AARP's Enid Kassner. "If you don't have that inflation protection, your benefits are not going to cover an adequate portion of your expenses."

Avoid FPOs. Kassner cautions buyers against Future Purchase Option riders. These give policyholders the right to add inflation protection to their coverage in the future. There's a catch: "Your premium starts low and, later on, the insurer offers you the option of upgrading your benefits," she says. "But then your premium also goes up because of the better benefit and your age. People may end up dropping their coverage later, when they can't afford the higher costs."

Look for Salvage. Any good policy will also contain a "salvage" feature, which guarantees that the insurer will extend the time it pays benefits if the policyholder hasn't used up every dollar of coverage. For example, if a policyholder is covered for three years at $200 per day, and uses only $100 per day for the three years, the insurer continues to pay until the unused benefits are exhausted.

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