12 Ways Long-Term Care Risk Eats Your AUM

Whether you’re trying to sell retirement planning services, stocks, mutual funds or annuities, long-term care costs hover over your book of business like a hungry, remorseless demon.

Lincoln Financial found when it organized a survey of 1,003 U.S. adults last spring that just 35% of the participants with financial professionals had talked to those financial professionals about LTC planning.

About 27% of those survey participants with financial professionals said the financial professionals had never even raised the issue.

America’s Health Insurance Plans, a health insurance company group, says in a new report that only about 7.1 million U.S. residents have private long-term care insurance, with 6.3 million having stand-alone LTCI policies; 512,440 having life insurance policies that can accelerate the payment of benefits when the insureds need long-term care; and 286,873 having life insurance policies or annuities that offer extended benefits for insureds who need long-term care.

But the story behind the report is that, of course, $10 million or more of any client’s assets now under your management could end up in the long-term care kitty.

Long-term care planners already know that November is Long-Term Care Awareness Month.

Here are 12 reasons for investment advisors with a focus on AUM to think about long-term care risk, even if they’ve never even opened long-term care insurance brochures and have clients who are all under the age of 25.

1. Long-term care costs are a big drag on the economy.

Home care and facility-based care will account for about $342 billion in spending this year, or 1.3% of gross domestic product, according to the national health expenditure figures from the Office of the Actuary at the Centers for Medicare and Medicaid Services.

The amount spent directly on home care and facility-based care amounts to about half of what U.S. residents will put in personal savings.

2. Long-term care costs reduce what your clients have inherited or could inherit from their parents.

Dementia is just one of the conditions that can lead to a client needing care for a long time.

The average lifetime cost of care for a U.S. resident with dementia was about $393,000 in 2022, and people with dementia and their families paid about $280,000 of those costs out of their own pockets, according to data compiled by the Alzheimer’s Association.

EstateExec reports that the value of 58% of U.S. estates is less than $250,000, meaning that the typical lifetime cost of dementia care is bigger than the value of the typical estate.

Your clients may have come from families that were more affluent than average, but just 3% of U.S. estates have a value greater than $5 million.

That means the cost of care for dementia and other long-lasting conditions can easily be big enough to cause a noticeable dent in the bequests for children and grandchildren, even in affluent households.

3. The long-term care costs for people who end up needing care for many years may be difficult or impossible to insure.

Advisors’ clients are likely to have relatively high standards for what constitutes an acceptable level of care, and that means that the real bills could be big enough to get the attention of even clients with four homes and a private jet-share membership.

The Genworth Cost of Care survey, for example, shows that the annual cost of care ranged from less than $60,000 per year for eight hours per day of homemaker services at home in the Kansas City, Missouri, area — where average care costs tend to be low — up to about $218,000 per year for a private nursing home room in the Bridgeport, Connecticut, area — where costs tend to higher than in most of the country, other than in Alaska.

The cost of a room in an assisted living facility might be about $55,000 in Kansas City and about $75,000 in the Bridgeport area.

Once clients need care, they and their children are unlikely to be happy about using average-cost care, let alone shopping for the cheapest care. The kind of facility-based care that moderately affluent people in an area use is likely to cost more than the figures shown in the Genworth cost data.

The median cost of round-the-clock care provided by a home health aide is about $236,000, according to Care.com.

For clients used to a high quality of life, maintaining that level of quality while getting home care could mean adding at least $50,000 per year for additional staffers who can handle care management, cooking, shopping and errand-running services, and, possibly, multiplying the median figures by at least 1.5, to ensure that any employees get competitive wages, health benefits and vacation time.

Many clients will need no long-term care, or care that costs less than $100,000. But, for a 65-year-old widow who has a stroke, stays at a home for 20 years, and uses round-the-clock care, bills could easily average $500,000 or more per year, for 20 years, for a total of about $10 million.

The American Association for Long-Term Care Insurance reports that the typical cost of $165,000 in stand-alone long-term care insurance benefits, with 3% compound inflation benefits, for a 55-year-old couple starts at $5,025 per year.

New York Life shows that the initial lifetime maximum benefit available with its Secure Care 250 long-term care insurance policy is only $273,750.

The numbers mean the clients can use long-term care insurance and related products, such as life insurance policies and annuities designed with LTC needs in mind, as the base for LTC planning. But affluent clients should give some thought to other strategies for preparing for and managing catastrophic long-term care risk.

4. Fears about long-term care costs frighten clients away from putting money in annuities or other classes of assets that might reduce liquidity.

Reluctance to “lock up money” is one of the infamous barriers to increasing annuity sales.

One of the concerns is that clients will need a large amount of cash to pay for long-term care.

Many contracts allow for penalty-free withdrawals when clients use the cash to pay long-term care bills, but if clients don’t know that, silent worries about long-term care bills could quietly smother efforts to help clients use annuities in income planning.