Friday, June 19, 2015

Narrowly Framing LTCi (Part 1)

Our good friend David Williams has written a blistering review of a recent WSJ article on why people aren't buying Long Term Care insurance (LTCi). Before addressing his concerns, I'll offer my own thoughts on the piece:

■ Based on the results of their study, Drs Olivia Mitchell and Daniel Gottlieb "found that many people regard long-term-care insurance as having no real value if ultimately the payouts aren’t needed.”

It's said that people rarely buy insurance: it must be sold (to them). This would certainly hold true regarding LTCi; as agents, we do a terrible job of selling it, which seems to validate this particular conclusion.

■ The article goes on to note that "instead of looking at long-term-care insurance primarily as financial protection, many people think of it as an investment—and a bad one at that." And they're right, of course: it is a terrible investment. But then, a dump truck is a lousy commuter vehicle, and my oven does a terrible job of washing my dishes (well, there was this one time I inadvertently left a plate in on the "self-clean" cycle, but that's another story).

Insurance is a risk-management tool, not an investment. No one expects to make a profit on their homeowner’s policy, either, but we still insure our homes. That's because, as David points out, the downside of a catastrophic loss far outweighs the cost of a policy.

■ The real meat of the article, though, and the part with which David seems most frustrated, is this:

"[O]ur research suggests that some consumers’ rejection of long-term-care insurance is based on what psychologists call “narrow framing,” or people’s tendency to exclude key factors when making decisions."

As the authors point out, this is often the case when faced with making a decision about something as complicated as LTCi. It is much easier to convince oneself that "if I can't understand it, I must not really need it." Something about "the path of least resistance" comes to mind.

Where I think the conclusions fall apart is this rather innocuous-sounding sentence: "[W]e believe that insurers could better position their products in the marketplace by providing more information to consumers regarding the high probability of needing care, and the high costs of such care."


For one thing, we already do that: look at any product brochure or marketing piece, and the stats are right there in big bold letters, charts and graphs. It seems to me that piling on would simply reinforce the "narrow framer" mindset.

The authors do get this one right: "focus more marketing toward adult children whose parents will likely require nursing-home care;" the idea being that they will pay for their parents’ policy as a means of preserving their parents' estate (and thus their own inheritance). The problem with this strategy is that you still have to get the parents' buy-in, and who's to say that they're not "narrow framers" themselves?

Finally, the article suggests that insurers should "emphasize policies that provide benefits in addition to protection for long-term-care costs. For example, more policies could include retirement income payouts or life insurance"

This skirts the issue, because the more benefits you throw on a plan, the more expensive it's going to be (whether broken out as riders or simply "baked into the cake"). Making LTCi more expensive seems counter-productive.

Interestingly, the article fails to mention one of the most valuable, easily understood benefits of LTCi, one which addresses pretty much all of their concerns: the Partnership Program. Pointing out that a properly constructed plan will help keep the Medicaid folks at bay makes for a very compelling argument that even "narrow framers" would find hard to resist.

Okay, so that's the WSJ; what about our friend David? Well, seeing as how this post is up to almost 700 words already, click here for Part 2.

UPDATE: David has graciously linked back to this post. Thanks, David!

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