Mary (not her real name) called me last Thursday. She was referred by Genworth because her agent is no longer in the business and she’s been assigned to BJFIM/Paradigm as an orphan policyholder. Unfortunately, she might as well have been orphaned when her agent sold her a policy in 1999. At the time she was 77 and the agent sold her a policy with the following benefits; $80/day, 90-day elimination period, unlimited benefit period and NO INFLATION PROTECTION! Mary’s annual premium is nearly $4,000 per year and is likely to increase slightly because of the upcoming Genworth in-force premium adjustment. She’s not very happy. How do you spell E & O’
Mary is now 85. She’s asking me for advice. She doesn’t have many options. Her only one with Genworth is to reduce the benefit period. Moving to a three year plan would only reduce the premium by 37%. I think I’m reasonably brave but I don’t have the courage to make that recommendation. Even if Mary is insurable I have no companies that will issue a policy at age 85. There may be an annuity based long-term care insurance solution but I haven’t had the opportunity to explore this possibility with her, however, she may not have the wherewithal for this alternative. What would you suggest to Mary’
In speaking with Genworth I learned that this scenario is all too common. Too many agents, past and present, refuse to accept the ‘physics’ of the long-term care risk. Historically, inflation in the long-term care sector exceeds consumer price inflation by two to one. It is bound to get worse as the caregiver shortage begins to bite even harder. I can’t imagine what this agent was thinking when she wrote this policy. This case was not written through our agency but I knew the agent. She wasn’t stupid but she was amazingly stubborn. She never did cotton to my insistence that compound inflation protection or even simple inflation protection at these older issues ages wasn’t an option; it was an imperative. I’m glad I’m not in the commission loop on this one!
I’ve seen this and other similar mistakes made on a number of insureds over the years. Agents who sell a policy with compound inflation protection but low-ball the daily benefit thinking that at 5% it will eventually ‘catch-up’ to what the client needs 25 or 30 years from now. Or, the agent who sells a policy to a 55-year-old with a daily benefit that is 50% higher than the current costs-of-care with no inflation protection thinking that this will be enough 25 or 30 years from now. Neither of these misconceived mathematical methods work, particularly if the intent is for the client to have enough money when they need it down the line.
If either of these techniques have been your practice, you may have time to fix the problem. Go back to your clients and suggest that they purchase a small additional policy, with 5% compounded inflation protection, to cover an inflation rate that has far exceeded expectations. Give them the choice to fill the gap that has been created. Don’t wait until it’s too late; don’t let your clients become Mary.
The formula for matching a benefit package to a prospect’s budget is simple and straightforward:
- Choose a daily benefit that matches the actual costs-of-care in the area that they live. According to most surveys (MetLife, Genworth & Prudential) California’s average cost is about $75,000 per year ($200 to $210 per day).
- Add 5% compounded inflation protection.
- Choose an elimination period that is affordable for the client when they are likely to need care. You must account for inflation in this calculation.
- Adjust the benefit period to fit the prospect’s budget. All you are doing is creating a ‘piece of money’ that they can use as they need the care.
- Add other benefits to suit the prospects needs and budget.
Keep in mind; it is better to go ’short and fat’ than ‘long and lean’.
We all make mistakes; some because we just don’t know and others because we get caught in pre-conceived notions that are incorrect. We can’t avoid all errors nor can we always get our customers to do what is right. Sometimes their rigid mindsets cause us to take the expedient path to the sale. For your own sake, document your files so if a problem arises, you can prove you made a good faith effort to explain the risk and options properly.
Mary doesn’t have any family in Los Angeles. She’s 85 and on her own. If she keeps her policy, at least it will cover something. However, it is unlikely to keep the promises made by the agent who sold it. All I can do is make the best recommendations I can under the circumstances and pray, as I do with all our policyholders, that Mary won’t need to use her policy.