Potential Concerns and Risks for Traditional LTCi

Forbes contributor Wade Pfau is doing the world great good with his series of articles about the urgent need for long-term care (LTC) planning.

What I like so much about Mr. Pfau is his credibility. He is a highly qualified financial planner and academic at The American College.

Financial advisors are generally fee-based, not commission-based, like I am. Because he does not make commission from his advice, some may consider him to be more credible than agents who sell long-term care insurance (LTCi).

In his January 19, 2016 Forbes column titled, “Potential Concerns and Risks of Traditional LTCi” Mr. Pfau describes the history of long-term care insurance and the mistakes made with this product in the past.

Since he is not an LTCi specialist, I can’t fault him too much for not quite “getting the whole story” on what causes and caused past LTCi rate hikes.

An example is this “bait and switch” accusation, which is wrong: “Buying based on who offers the cheapest price is risky, since the company may be seeking upfront sales with the intention of increasing premiums later.” It’s more complicated than this. Carriers are not interested in making lots of sales now and suffering unhappy clients, bad public relations, and reduced sales later. This has never been their strategy.

With an average LTCi buying age of 57 and an average claim age 25 or more years later, plus ever changing mortality rates and demographics, no prior experience to go on, and required reserves earning unusually low interest rates for longer than anyone could have imagined, how could the earliest LTCi carriers realize that their assumptions would be so far off that significant rate increases could not be avoided?

Mr. Pfau does correctly state that today’s LTCi products are expected to have very stable rates.

He also correctly describes the public’s resistance to buying LTCi. He gives some good reasons but fails to point out the #1 reason people don’t buy LTCi: DENIAL! To be fair, however, he has mentioned denial in his prior columns.

Mr. Pfau does mention people sometimes lapse their LTCi shortly before they need to use it, due to cognitive decline. This doesn’t happen often, but I have seen and dealt with it, and it is highly upsetting. It is also highly avoidable. By and large, LTCi policies have very low lapse rates. The study Mr. Pfau refers to giving high lapse rates has been refuted.

It is up to policyholders to plan for the high odds of mental incapacity by appointing and empowering, not arguing with, trusted individuals to act on their behalf. I have learned that one of the earliest and most subtle indicators of mild cognitive impairment is making bad business decisions. Such bad decisions often go unnoticed, again, due to denial by the policyholder and family members.

Today’s LTCi policies, thankfully, have stronger protection against unintentional lapses.

I still love Wade Pfau and greatly appreciate his very clear writing and ability to make complicated concepts understandable. His articles are very factual, with very few flaws.