Journal of Financial Planning: May 2016
There is arguably no other unexpected event in life that creates more lasting damages to a family than the need for long-term care later in life. Yet few financial advisers understand the serious emotional, physical, and financial consequences of providing for a family member who is so frail, so fragile that he or she is no longer safe. This article gives the financial professional insight into the often irreversible consequences of providing and paying for care.
The article has two goals: to give compelling reasons why you should proactively engage your client on the subject; and to suggest an innovative approach to discussing those consequences in a manner that compels the individual to take action. That action is not to purchase a product to mitigate the risk to the client, but rather to allow you to create a plan to protect the client’s family—those whom the client invited into his or her life and promised to take care of. If appropriate, an insurance product is recommended to fund that plan.
The Need for Care Is Caused by Impairments
There are two types of impairments, physical and cognitive. The former is defined as a chronic, debilitating illness such as Parkinson’s, multiple sclerosis, or stroke, which can be managed with drugs or therapy but cannot be cured. The latter is a marked decline in intellect to the point that the individual needs constant supervision. As the impairments progress, they compromise the client until he or she is no longer safe. It is this simple reality that causes two sets of serious consequences, not to the client because he or she will be provided for, but rather to those who have little choice but to put their lives aside to provide care.
The first set of consequences affects the client’s family. The demand for care quickly becomes all-consuming to caregivers resulting in severe emotional and physical stress. If there are children, it compels at least one to place his or her life aside. As it plays out, it impacts the relationship with a spouse and children. Then there are the siblings. Because care is rarely shared, it leads at a minimum to constant disagreements, and for many, complete estrangement. The result? Long-term care rarely brings families together—it tears them apart.
Second, paying for care causes a reallocation of resources starting with income. The considerable problem is that clients who have found success generally live on all—or close to all—of their income in retirement, as they did during working years. Shifting income to pay for care has a direct impact on the client’s ability to keep financial commitments, which may include:
- Helping a child who has not made the best decisions in life
- Providing for a child with special needs
- Helping pay for a grandchild’s education
- Lifestyle expenses, including a vacation home, boat, or club memberships
- Continuing commitments to charities
Although in theory, many of these expenses may be considered discretionary, in the world of some clients, they are often nondiscretionary.
If the illness lasts longs enough, it invariably leads to an invasion of portfolio capital, the purpose of which is to provide predictable streams of income. Using capital to pay for care results in unnecessary taxes, market timing, and liquidity issues. And just as important, every dollar used to pay for care is one dollar less toward keeping future commitments to the family, keeping commitments to charities, and providing a legacy to those whom the client loves.
In short, paying for care disrupts plans to: minimize or avoid taxes (free step-up is lost if capital assets are used to pay for care); avoid actualizing losses in a down market; prevent the liquidation of capital assets; maximize inheritances; and keep commitments to charities.
In no small way, the need for care disrupts your very business model.
Engaging Clients in a Discussion about Consequences
If you do engage your client on the subject, it’s likely based on the risk of needing care and attendant costs. The process can often be reduced to three steps:
Step 1: Risk-based. The individual is educated about the risk of needing care as he or she ages. Statistics are used to reinforce the statements.
Step 2: Client-centric. The focus is on the impact to the individual including: loss of independence; inability to choose where and how care is delivered; being a burden to the family; and the loss of assets paying for care.
Step 3: Product-driven. Long-term care insurance is positioned as protecting the individual. Owning the product allows the client to maintain independence, choose where care is provided (including a good nursing home if necessary), not be a burden, and protect assets.
This philosophy can be summed up as “risk-based selling.” The ultimate goal is to convince the client to buy a product to protect him or herself from a risk. Risk-based selling, however, is fundamentally flawed. It is based on the incorrect presumption that clients—particularly healthy men with no prior experience—are interested in being educated about the risk of care and what it costs. They are not, because men are generally genetically wired to dismiss risk.¹
How Risk-Based Selling Creates Cognitive Dissonance
Using the likelihood of chronic illness as a strategy to motivate your client to purchase a product has just the opposite effect; it creates cognitive dissonance. Cognitive dissonance is the level of discomfort experienced when one’s beliefs are undermined by facts to the contrary. Clients deal with discomfort in one of three ways:
- Ignore the facts that makes one feel uncomfortable.
- Rationalize behavior so the individual can continue current beliefs.
- Change behavior.
Cognitive behavior predicts, quite accurately it turns out, how healthy clients—particularly men—respond when the belief that care will never be needed is contradicted with statistics that it likely will.
Ignore the facts. Action taken: The client listens politely, confirms that he understands the risk and cost, compliments you on the presentation and then does … nothing.
Rationalize behavior. Action taken: The client says, “I won’t live a long life”; “I’ll never need care”; “I am not going to a nursing home”; or “I have sufficient assets to pay for care.” This confirms he believes he will not need care.
Change behavior. Action taken: None. No compelling reason has been given to motivate him to change behavior.
Changing the Focus of the Conversation
The proper approach is to educate your client not about a series of risks to him or her, but about a series of potentially irreversible consequences to his or her family. This is referred to as Consultative Engagement2 and it is based on educating clients about how a need for care would so substantially compromise their health, that they would no longer be able to execute their essential directives of providing for and protecting those whom they love, causing serious consequences.
What are those consequences?
- The client would be so compromised that those he or she promised to take care of would have no choice but to put their lives aside to take care of the client, resulting in great emotional and physical stress.
- Providing care would likely compel a child to put aside his or her life.
- Providing care could very well cause the children to never to speak to each other again.
- Paying for care would cause a reallocation of income, substantially threatening the client’s ability to keep financial commitments.
- Paying for care will disrupt every plan created to secure financial viability.
Clients would most likely perceive these consequences as serious enough to take action to mitigate them.
Creating and Funding the Plan
Once your client understands the severe consequences to those he or she loves, the next step is to create a plan to mitigate them. The plan is to allow your client to remain safe in the community (generally defined as at home or in an assisted living facility), while protecting the emotional, physical, and financial well-being of those whom the client loves. This is done by mitigating the two sets of consequences a need for care creates: (1) having others provide the care protects the emotional and physical well-being of the client’s family; and (2) providing a source of income to pay for care protects income and capital.
Once the plan is created the next question to the client is, “What do you think will fund it?” Let’s begin with a look at what you, other professionals, your clients, and the media likely believe motivates people to spend hard-earned money to purchase long-term care insurance. Is it to maintain independence? Choose where and how care is delivered? Not to be a burden? Protect assets? All of the above? None of the above?
The correct answer is none of the above. As discussed, clients, particularly healthy men, believe care will not be necessary. Risk-based selling, however, is predicated on the belief that people will buy insurance once they are educated about the risk and cost of care.
The better way to determine why people purchase long-term care insurance is to ask those who have purchased the product whether they plan to use it. The answer, of course, is no. The motivation is the same for those who purchased life and disability income insurance: not to protect them from an unexpected death or disability they believe will not happen, but to protect their families from the severe consequences if it did.
Long-term care insurance, in whatever form, should be positioned as nothing more than a funding source for the above plan, which in turn is used to pay for care, therefore mitigating the consequences of a long-term care event.
Harley Gordon is an elder law attorney and principle creator of the Certified in Long-Term Care (CLTC) professional designation. He is also the president and co-founder of Agent Review (AgentReview.net), a free website that connects consumers with credible education and agent reviews for the insurance industry.
- See: Sex on the Brain: The Biological Differences Between Men and Women, a 1998 book by Deborah Blum; “Sex Differences in the Brain,” by Doreen Kimura in the April 2002 issue of Scientific American; and “Gender Differences in Risk Assessment: Why Do Women Take Fewer Risks than Men?” by Christine R. Harris, Michael Jenkins, and Dale Glaser in the July 2006 issue of Judgment and Decision Making.
- Consultative EngagementTM is the proprietary sales system of the Certified in Long-Term Care (CLTC) program.
Learn more about why extended care is a critical component of your client’s portfolio and how to address this sensitive topic with them. Join author Harley Gordon and Jean Accius, Vice President of the Long-Term Services & Supports at AARP, for a webinar on May 18, 2016 at 2pm ET. Register today.