The Sporkification of Long-Term Care Insurance

by Maxwell Schmitz

It just doesn't belong.

Sporks are great, but things have gotten out of hand. We have entered an era in the evolution of LTC insurance that I like to call "Sporkification." It's a time and place where hybrid products rule the day. The spork is good at two things--forking and spooning--and is great at neither.

Here we have the same philosophy being applied to insurance products, specifically in the long-term care insurance sector. Most sporkers love hybrid products because you are "guaranteed" to get some usage from it compared to a tax-qualified LTC plan which requires one of those ugly long-term care events in order to receive your benefits. However, it's rarely explained to the end consumer that they are essentially purchasing insurance for both an LTC event and their death. That's two policies! Two charges! One policy! I know what you're thinking, Dear Reader. "But Max, insurance for a specific event is soooo insurancey." HOGWASH! You failed to establish the need for LTC and subsequently overcharged the client by selling something they probably didn't need--more life insurance.

Now, normally I wouldn't get so uppity about someone not wanting to sell LTC. You do you, bro. (Even if it leaves your clients at a disadvantage in retirement...)

BUT people are still completely clueless when it comes to the actual risks of LTC--the rate of utilization, the cost of services, the duration, the inflation rates of services--and how each of those factors interact with their retirement income or their financial legacy.

As noted above, Sporkers (hybrid salespeople) are quick to downplay the actual need for LTC, but simultaneously love to highlight the onslaught of LTC premium increases that occurred on older business without ever explaining that the increases have been filed (and approved by departments of insurance everywhere) because (SURPRISE!) turns out people use LTC services at a much higher rate than originally anticipated. That's like saying, "I don't support charities because when pay their employees a living wage." WHAT?! 

Aside from the lack of an LTC CE requirement, undue market saturation of an unsuitable product definitions, and the overall antipathy against more appropriate products, my main issue with hybrid policies is the lack of inflation. With a Spork Policy you buy a fixed amount of face amount (death benefit), let's say $250k. You can then accelerate the death benefit for LTC needs at a clip of 2% per month. In this example that results in $5000/month for 50 months. Most buyers of these policies are in their 50s or 60s. So, what does $5000/month look like in 25 years, assuming a super modest 3% inflation rate? With most spork policies it looks like $5000--guaranteed 0% growth (not counting consumer inflation)! With a tax-qualified plan with 3% compound inflation it looks more like $10,000/month. Most Sporkers just ignore this side of the LTC conversation, and this is where they need to watch their back from a legal perspective. 

Hybrids do have a time and a place. For instance, single-premium hybrids are a great way to leverage lifetime benefits with one particular carrier (despite a wonky inflation rider). Another single-premium carrier has a truly meaning inflation rider that allows the policy to grow as if it were a tax-qualified LTC plan. Still another has a fantastic cash indemnity benefit (as opposed to the usual reimbursement plan). 

Outside of these examples, and assuming there's no need for further life insurance, it rarely makes sense to use a hybrid as a solution to the LTC problem. So, next time you're planning your LTC strategy just drop the spork and go to the silverware drawer like the sane and rational human you are.