Why Do So Few People Have Long-Term Care Insurance? by Scott Stolz (week 23)

 

People’s fear about their financial health in retirement can be condensed into the one question almost every retiree seeks the answer to – “Will I Be OK?”  I’ve mentioned in several blogs that because no one knows how long you will live, what returns you will earn on your retirement portfolio and what unexpected expenses you will have; no one can answer that question with 100% certainty.  The goal therefore is to put strategies in place to protect against those 3 unknowns.  I refer to these strategies as building moats around a retirement portfolio.  I can protect myself against living too long by creating a guaranteed income for life.  I can protect against a deep and painful bear market by diversifying my portfolio and adding investments that are designed to protect against a large market decline.  But protecting against a large, unknown expense is trickier because that expense can be caused by many things and it can come at any time.  The goal therefore is to build a moat to protect against the events that can do the most damage to your financial plan.  That’s why we buy insurance on our home, car, and health.  While we don’t expect our house to burn down or to get in a serious accident, we know it is prudent to spend a smaller, known amount of money each year to protect against what could be a very big expense.

The most likely unknown expense in retirement is a need for long term care.  I mentioned in a previous blog that someone turning 65 today has a 70% chance of needing some kind of long term care service during their lifetime (Long-Term Care Expenses Can Blow Up any Retirement Plan - How I Solved for it by Scott Stolz (week 21).  Not only is this the most likely expense, but it’s also likely to be the largest expense.  Depending upon the type of care needed, it’s easy to ring up an annual expense of $50,000 - $100,000 for 5 years or more.  Try plugging that number into your financial plan and see what it does to your odds of being “OK.”

So that leads me to a question that perplexes me?  Why do so few people have any form of long-term care coverage?  A TIAA Institute report from this year estimated that only one out of every 7 people age 60+ have any type of private long-term care coverage (do-misperceptions-about-medicare-explain-low-demand_summary.pdf).  Let’s stop and think about this for a second.  Despite the fact that 7 out of 10 of us are going to have this expense, only one out of 7 of us is insured against it.  Why is that?

I have a few theories.  First and foremost, I think people seriously underestimate the size of the potential expense.  In addition, a different TIAA Institute report found that 60% of those surveyed believed that Medicare covers long-term care expenses.  It is not.  In addition, I think people assume that their family will be able to provide much of the care.  And maybe they can, but is that a good plan?

I also have to put much of the blame for the lack of coverage on the financial services industry.  The industry’s focus continues to be on helping clients accumulate a retirement portfolio.  And the industry is really good at that.  But most of the tools used to build a portfolio during accumulation are relatively useless during the decumulation phase where protection becomes more important than growth.  In addition, if there is one thing I learned early in my career is that one of the biggest fears of most financial advisors is looking ignorant in front of their clients.  This leads to a reluctance to address any topic they do not fully understand.  And long-term care is one of those topics.  A growing number of financial advisors call themselves fiduciaries.  I’ve always found that to be a strange word and I almost always need spell check to fix it for me, but the long and short of it is that one of biggest requirements of any fiduciary is that he or she puts the best interests of their client first.  There seems to be an assumption that as long as the advisor doesn’t sell products that pay a commission, he or she is automatically a fiduciary.  The reality is that this is just one requirement.  To truly be a fiduciary I must take care to give the best advice possible and make every reasonable effort to fully understand all of the aspects of that advice.  So how can any advisor that does not at least walk his or her clients through the risks and possible solutions for long term care actually live up to their fiduciary obligations?  If TIAA is right and only 14% of all people 60+ have any form of long-term care coverage, I certainly hope financial advisors have documented the long-term care discussion they had with the other 86% that elected to self-insure.  If not, we’re going to see a lot of ads on TV from attorneys soliciting individuals that were not “OK” because of a lack of long-term care coverage.