Advisors are missing an opportunity with long-term care insurance

By Andrew Rickard | January 12 2010 04:38PM

At The Insurance and Investment Convention in Montreal on Nov. 13, Kim Oliphant, Sales Director, western Quebec and Atlantic provinces at La Capitale, said that whenever she talks to advisors about long-term care insurance (LTC), she seldom encounters objections about the product's purpose or value. Given the aging population, most people understand how LTC could fit into a financial plan. "But I get that look," she said. "It's the same look I used to get when I was talking about CI (critical illness)."

Speaking with a picture of an ostrich with its head in the sand projected behind her, Ms. Oliphant said that advisors often claim that clients do not want to hear about living benefits like LTC. But in her opinion, it is the advisors who are not comfortable approaching the subject. "Clients are not any more excited about life insurance, but advisors still sell it," she said. "So it has more to do with the advisors."

Statistics compiled by the Life Insurance Marketing Research Association (LIMRA) show that there were only 7,847 long-term care policies sold in Canada in 2008. This actually marks a decline compared to 2007. In total, there were 60,000 LTC policies in force in Canada at the end of 2008, accounting for about $80 million in annual premiums. Noting that there are 85,000 advisors licensed to sell insurance in Canada, Ms. Oliphant believes that the product is currently undersold and there is a "huge opportunity" in this market.

She went on to sum up the basics of the product, namely that in order to qualify to receive a benefit under a LTC policy, one must be unable to perform two activities of daily living (ADL).

These ADLs include situations in which a client cannot bathe, eat, dress, or move from one place to another without assistance, or if he is incontinent, or suffers from a cognitive deficiency.

She notes that the latter accounts for 40% of all claims, and adds that while LTC is typically positioned as a product for the elderly, it can and does pay out at any age, for example in the case of someone who is recovering from a car accident, or a severe illness such as meningitis.

Unlike the critical illness market, where until recently insurance companies tried to out-do each other in certain sections of contract wording, Ms. Oliphant noted that there is no "war in definitions" in long term care insurance. She cited, as an example, the fact that the local community service centres in Quebec (the centres locaux de services communautaires, or CLSC), which provide health care services in that province, use the same terminology as the rest of the medical field.

Ms. Oliphant believes that advisors are doing a good job in planning for when their clients are in good health, and helping them accumulate assets for retirement, but suggests that they need to consider the financial impact that long term care costs could have on their clients' portfolios.

For a couple, there is a 64% chance that one of them will require some level of long-term care, and 20% of those who do need long-term care will need it for a period of more than five years. Given that a private room in a public facility costs about $1,500 a month, she asked the audience if they thought a typical middle class client would be able to afford that cost for several years.
Society has changed dramatically compared to the way it was in the earlier half of this century, said Ms. Oliphant, and that is the fundamental drive behind the need for products like LTC. Even in the 1950s and 1960s, most women did not work outside the home, and they took on the role of primary caregiver for sick or elderly relatives. Ms. Oliphant pointed out that birth rates were much higher in the past as well. "One of the kids would care for you," she said. But today she noted people are living longer and having few children. "Who will be able to step in to fill that need?"

She added that members of her own demographic, the so-called "sandwich generation" are particularly good prospects, since they may be willing to buy LTC for their elderly relatives. "We will care for our parents longer than we did our children," she said, noting that her own father-in-law had to retire early in order to care for her mother-in-law. He devoted so much time to looking after his wife that, for her nine-year period of dependency, he did not once leave the house to eat at a restaurant. "Not everyone can do this," she said, and LTC can provide the resources to help those who can't afford to quit their jobs.

The message advisors need to bring to the middle market, according to Ms. Oliphant, is that LTC is the most economical way to fund the cost of long-term care. She showed a spreadsheet that she created to help advisors simulate the impact that health care costs could have on retirement and non-registered assets, and the price of not having LTC in place. "Only one-and-a-half years worth of claim and you break even," noted Ms. Oliphant.

LTC need not be an all or nothing proposition, either. She said that even a small monthly indemnity can go a long way towards alleviating the burden of care. One advisor she knows sells $500 or $1000 of LTC coverage to all his clients so that even if the person remains at home, the family caregiver will have some money on hand to spend on respite care.

Ms. Oliphant also thinks the industry made a mistake when it first launched LTC because it ignored the very high net worth market on the grounds that they would simply prefer to pay health care costs out of pocket. "Do not assume that is what they want to do," she warns. Having built up a significant pool of assets, affluent clients may want to keep their wealth intact in order to pass it on to their heirs.

Advisors should also remember to account for inflation in health care costs. Medical expenses have increased at a rate of about six per cent a year, meaning they double every twelve years. "Have assets grown at the same rate?" she asks. Ms. Oliphant also reminded the audience of three key statistics, namely that 50% of all income taxes go to health care, 50% of health care expenses occur after the age of 65, and the number of people over the age of 65 will double in years to come. "We know all this, but are we talking to our clients about it? It's nothing new, but it is something we need to address," she said.