Starting a conversation about planning for illness and decline in old age is difficult with any client. Those who fall into the high-net-worth category are no exception.
Nearly 60% of financial advisors working with clients with $1 million or more in investable assets say fewer than a quarter of their clients have a long-term care plan, according to a new Key Private Bank study.
So how can advisors persuade clients to start thinking about putting a plan in place?
Ask them if they've had family experience with the issue, suggests Chad Stevens, a vice president and senior financial planner at Key Private Bank based in Indianapolis.
"Recalling how someone in their family had to deal with long-term care can be a good motivator," Stevens says. "Clients are reminded they can avoid being caught unprepared by doing something now versus putting their head in the sand."
Asking clients what their preferences for long-term care are and discussing local costs is also effective, Stevens says.
A vast majority of advisors surveyed by Key Private Bank said their clients' first choice is to stay at home and remain independent, while moving into an assisted living facility was a close second. Receiving help from a personal aid or moving into a nursing home were far less preferable.
The median annual cost of a home health aide is almost $50,000, Stevens notes, citing a study by Genworth Financial, and the annual cost of a private room in an assisted living facility is close to $100,000.
Those costs are expected to increase to $66,000 and $131,000, by 2027, Genworth estimates.
Advisors should also consider showing clients the direct impact of a long-term care event on retirement funding, says Joel Redmond, a senior financial planner for Key Bank based in Syracuse, New York.
Quote"Making people aware of local costs for their long-term care preferences is a good way to get their attention," says Key Bank advisor Chad Stevens.
"Typically, financial planners will express someone’s readiness for retirement as a success probability," Redmond says. "If you show a client that their probability of being able to retire on $125,000 a year after taxes through age 95 is 77% based on Monte Carlo simulations of market behavior, that sounds fairly good.
"But if you then bake in the impact of a five-year LTC event at age 80 for one spouse and it drops to 66%, they can directly feel that impact — they’ve essentially gone from a passing grade to a failing grade on their retirement readiness exam.”
Advisors also face considerable difficulties getting clients to talk about long-term care with their children and family members, the survey found.
Stevens says he encourages advisors to use estate planning as a way to broach the topic before a debilitating event occurs. "That way families can discuss these issues when everyone is calm as opposed to a time of crisis," he says.
Soft questioning tends to work best when talking to clients about family issues, Redmond says.
"Who do you trust the most with these matters?" he asks clients. "Who do you want taking care of you if you need care? What do you see happening in your family if an event occurred? How would the relationships between you and your children, among the children themselves, and other loved ones change? If all paths involve an evil, what is the path representing the least of all those evils?"
As for the best way to pay for long-term care, nearly three-quarters of advisors surveyed recommend a hybrid long-term care and annuity policy, but more than half their clients prefer to self-insure.
Taking at least some of the risk off the table for LTC costs is a key consideration, Stevens says.
Hybrid policies have tended to work well for high-net-worth clients, according to Redmond. These life insurance/long-term care contracts issued by insurance companies provide a specific amount of LTC benefit to use if the client needs it, or life insurance death benefit if they don’t.
"Many states have policies like this that offer 100% return of premiums surrender-free from day one of the contract, so the money is liquid," Redmond notes. This strategy is very popular, largely because of the psychological freedom clients have when they know that this strategy only has three outcomes: you use the long-term care benefit; you use the life insurance death benefit or you get your money back."
Another effective strategy is to buy a life insurance contract with an accelerated death benefit rider, Redmond says.
"One advantage these contracts typically enjoy over the hybrid approach is that the benefits are not reimbursement-based so they aren’t tied to the actual LTC expenses incurred," he explains. "Once the appropriate medical provider has signed off that a chronic condition or cognitive event has occurred, these policies typically pay up to 2% of the death benefit per month, income tax-free. This can be very helpful for clients who don’t want to collect receipts for every expense or wait for reimbursement checks."