Monday, June 22, 2015

Narrowly Framing LTCi (Part 2)

In Part 1, we took a detailed look at a recent WSJ piece on Long Term Care insurance and "narrow framers." Our friend David Williams has asked us to review his take on that article, and so we shall.

I have only a few quibbles with his analysis:

"Insurance is useful when it covers rare events that could be financially ruinous. But long-term care is a common need ... and the benefit structure doesn’t protect against catastrophic expenses."

I think this is overly simplistic: as I mentioned in Part 1, insurance as risk-management tool has more to do with the severity of the potential loss rather than the frequency (although that’s certainly a factor). This explains, in part, the popularity of co-pay health insurance plans vice HSA's: few of us would go broke paying for a simple doctor's visit or common prescription, but we've been conditioned to "let the insurance pay for it." Regular readers will spot the fallacy there.

More disturbing, though, is his contention that "the benefit structure [of LTCi} doesn’t protect against catastrophic expenses." This is a common misconception of how LTCI works and what it's really designed to do, and for that I blame not David, but my industry. The story we've been told to tell is that you buy LTCi to pay for care. This is correct, but misleading: there is no realistic way to buy a plan that will completely cover the costs of a major claim (or series of claims). Anyone that could afford to buy such a plan would be much better off self-insuring.

No, the role of LTCi is to supplement one's assets (and a Partnership-compliant plan is a terrific ally in that quest), and to buy "choice."

What does that mean, Henry, "choice?"

It means that having the ability to pay for care oneself opens up a lot more doors (as regards facility and resource availability) than folks dependent on Medicaid will see. Is that fair? Doesn't matter. Is that real? Yes.

David then writes about his own experience in considering a plan, and noted that what he was shown had very little in common with what he wanted. This is a failure of either David (for not sharing his vision with his agent) or the agent (for not listening to David). I don't know his agent, but I have a very difficult time believing that David was less than forthright and explicit in his request. On the other hand, I know from experience that clients are generally less knowledgeable about these plans than they might think (which is no indictment: they've been served a long line of carrier and industry propaganda). My very first step when asked about LTCI  by a client (or potential client) is to point them to our primer on when one should consider buying a plan, and what to look for.

David does describe his ideal plan: "a policy with a 5 year elimination period and no cap on the benefit period." Such a configuration does not, to my knowledge, exist, but it seems to me that there ought to have been some common ground between what the agent had available and what David wanted; unfortunately, that doesn't seem to have been the case (or so I inferred from the post). Does that make David a "narrow framer" (in the context of the WSJ post)? Hardly: in fact, he seemed crystal clear in what he wanted and not distracted by the minutiae.

Where I think he veered off course is in not considering other reasons to buy a plan, and I hope that he takes the opportunity to revisit that decision. I'd be happy to refer him to a pro.
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