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Long-term catastrophic care: a financial planning perspective.

Long-Term Catastrophic Care: A Financial Planning Perspective


This article uses responses to a mail questionnaire survey of financial planning

professionals to assess the state of the art in financial planning as it relates to long-term

catastrophic illnesses. The reported findings suggest that financial planners give

insufficient attention to protecting clients from the potentially devastating financial

consequences of long-term illness. Moreover, most clients of planners are generally

unaware of this problem. Resulting recommendations include development of better

insurance products and implementation of educational efforts in order to enhance

consumer awareness.


This article assesses the current state of the art in financial planning as it relates to long-term catastrophic illnesses.(1) Its findings are drawn from responses to a questionnaire mailed to a broad sample of practicing financial planners. The long-term care problem is described; information gathered from the survey of financial planning professionals is presented and analyzed; and a summary and recommendations follow.

The Problem

In March of 1987 the Subcommittee on Health and Long-Term Care of the House Select Committee on Aging released a report[5] revealing the extent to which Americans are vulnerable to financial devastation resulting from catastrophic illness. According to this report, some 20 million Americans will fall victim to catastrophic illness each year. Of those, one million will be forced into poverty within a year; 5 million will simply go without care; and countless others will suffer great financial hardship paying for the care they desperately need.

Source of the Problem

Why are so many people unprepared to deal with the financial problems associated with a catastrophic illness? The health coverage of all but a fraction of 1 percent of Americans does not cover long-term care costs which can easily run over $25,000 per year[6]. Medicare, which covers approximately 32 million elderly Americans, pays for doctors' services and acute care provided in the hospital, but does not cover long-term custodial care outside the hospital. Hospitalization and major medical insurance offered predominantly through employers provides health protection to approximately 150 million Americans. In most cases, this insurance mirrors the protection offered through Medicare; coverage is geared toward acute care in the hospital and little if any coverage is normally provided for long-term custodial care.

Medicaid pays for a broad range of medical and medically related services including long-term custodial nursing home care. However, to qualify for Medicaid a person must be virtually impoverished. Eligibility in most states requires a person to have less than $1,800 in annual income and $3,000 in assets.

Long-term care insurance is now offered by approximately 70 insurance companies.(2) Unfortunately, these policies have not been widely purchased; less than 1 percent of Americans are covered[6].

Current Solutions

For the overwhelming majority of Americans not covered by long-term care insurance, the costs of a catastrophic illness must be paid out of personal resources. Because most families cannot sustain the burden of these costs for any lenght of time, they end up spending themselves into poverty and relying on public assistance provided by Medicaid.

Ironically, the only widely advocated strategy for dealing with the financial consequences of an uninsured catastrophic illness is to qualify the afflicted individual for Medicaid by transferring his or her assets to another person or legal entity. One problem with this "artificial poverty" approach is that the asset transfer must be made at least two years prior to Medicaid application. A second problem is the adverse psychological impact on the patient that can result from transferring assets. Finally, there is a "stigma of welfare" attached to Medicaid that many people consider demeaning[6].

Survey of Financial Planning Professionals

What are financial planners doing about the catastrophic illness problem? To answer this question, in July of 1987 a questionnaire accompanied by a cover letter briefly explaining the purpose of the survey was sent to 1,248 financial planning professionals. The sample included 590 randomly selected members of the Institute of Certified Financial Planners, all 158 members of the National Association of Personal Financial Advisors, and 500 members of the Society of CLU and ChFC randomly selected by and with the cooperation of The American College. The sample is not scientifically based and is not reflective of the financial planning profession, but was selected on the basis of the availability of mailing lists. A guarantee of anonymity given respondents and the method of sample selection did not permit any tests for non-response bias. Although such bias is likely to exist, the authors believe that their objective of getting a feel for the "state of the art" as it relates to financial planning for long-term care is achieved using the respondents' opinions.

A majority of the survey statements elicited opinions regarding issues related to catastrophic illness. A seven-point semantic differential scale was used to allow the respondents to indicate their degree of "disagreement" or "agreement" with each of the statements. Other items in the questionnaire sought to profile the respondent and the respondent's client base. Only "closed-ended" questions were included in order to minimize the time required to complete the questionnaire, and thereby enhance the response rate. A total of 226 usable responses (an 18 percent response rate) were received.

Respondent Profile

The typical respondent was an experienced financial planning professional. Eighty-seven percent had practiced financial planning for four years or more and 62 percent had six or more years of experience. Respondents were well-educated: 87 percent held at least a bachelors degree, 34 percent held masters degrees, and 6 percent had earned doctorates. Eighty-four percent of the respondents were either CFP's of ChFC's and 39 percent held the designation of CLU. Investment management was noted as the area of greatest expertise by 41.6 percent of the respondents, followed by estate planning (19.5 percent) and tax planning (13.7 percent). Only 6.6 percent listed risk management as their area of greatest expertise. The respondents' typical client was described as over age 45 (78 percent), with income in excess of $50,000 (91 percent), and net worth in excess of $250,000 (81.5 percent).

Insurance Evaluation

Ninety-six percent of the respondents indicated that their financial plan included an evaluation of the client's insurance needs. Within the broad category of "insurance needs," however, there were significant differences in the level of attention given to the major types of risk exposures. As shown in the first column of data in Table 1, the great majority of respondents considered the traditional lines of insurance (life, disability, health, automobile, property, and liability) when evaluating a client's insurance needs. In contrast, only 38 percent of the respondents evaluated their client's long-term care insurance needs. Table 1 also indicates that many individuals were perceived to be underinsured in the area of long-term care. Indeed 96.2 percent of those respondents who evaluated long-term care insurance needs felt that their clients were underinsured in that area.

In addition to evaluating insurance needs, approximately 70 percent of the respondents sold insurance products. As expected, life insurance, disability insurance, and health insurance were sold by the majority of respondents while only a few (approximately 10 percent) sold property or liability insurance. Interestingly, 33 percent of the respondents indicated that their firms sell long-term care insurance.


Table 2 summarizes the responses to each of the 22 statements concerning long-term catastrophic illness. While randomly distributed in the original questionnaire, these statements have been grouped into five major categories in order to aid their interpretation. Each of these categories--seriousness of problem, attention by planners, client concern, long-term care insurance, and other techniques and approaches--is discussed separately. Where appropriate, the results of chi square tests are cited for differences in distributions based on client income, net worth, and age, as well as whether or not the planner's firm sells long-term care insurance.(3)

Seriousness of the Problem: As is evident from Table 2, 84 percent of respondents strongly agreed that inability to cover the cost of long-term catastrophic illness is a major national problem. Moreover, clients of financial planners are apparently not immune from the problem. Only 31 percent of the respondents felt strongly that most of their firm's clients had adequate resources or insurance to cover the cost of a long-term illness. As might be expected, client income and net worth had an important impact on responses to this statement. The chi square test found (.05 level) that those respondents whose clients had lower average income (less than $100,000 per year) more strongly believed that their clients lacked adequate resources to meet these long-term care costs than those respondents with upscale clients (average income greater than $100,000). A similar statistically significant finding resulted when the responses of planners with lower average client net worth (less than $500,000) were compared to those with higher client net worth.

Also of interest is the fact that respondent planners were reasonably well informed about coverage gaps in Medicare and major medical policies. They strongly disagreed with the statements suggesting that either Medicare or major medical adequately protect people against the cost of catastrophic illness.

Although one might expect those planners selling long-term care insurance to be better informed or to have stronger feelings concerning the seriousness of the catastrophic illness problem than those not selling long-term care insurance, a chi square test failed to show a statistically significant

difference between the responses of those two groups of planners. Likewise the age of the respondent's clients had no statistically significant impact on any of the opinions related to the seriousness of the catastrophic illness problem.

Attention by Planners: The next series of statements was designed to assess the amount of attention financial planners give to the risk of long-term catastrophic illness. Two important conclusions emerged. Respondents strongly agreed that "making sure that clients can cover the cost of long-term catastrophic illnesses is an important responsibility of a financial planner." They strongly disagreed that financial planners in general give sufficient attention to this issue. Although differences in client age, income, and net worth had no statistically significant impact on these responses, those selling long-term care insurance gave the planning profession significantly lower marks on giving adequate attention to the client's exposure to the risk of long-term catastrophic illness than did those respondents not selling long-term care insurance.

Client Concern: Are clients aware of or concerned about the financial implications of catastrophic illness? The third group of statements was designed to answer this question. Fifty-three percent of the respondents felt that protection against the financial consequences of an extended nursing home stay was an important concern of their clients. Not surprisingly, a chi square test revealed that client age had a significant influence on this result. Respondents with older clients (more than 50 percent over age 60) expressed much stronger agreement with the statement than did respondents with younger clients.

Despite their client's concern regarding a potential nursing home stay, the majority of the respondents felt their clients weren't aware of (64 percent) and didn't perceive a need for (54 percent) long-term care insurance. A chi square test revealed that neither client age, income, nor net worth had a statistically significant impact on responses to these statements.

Clients net worth did, however, have a statistically significant impact on the response to the statement: "Most of my clients feel that long-term care insurance is not worth the cost." While the responses in general were moderately in agreement with this statement, planners whose client net worth averaged greater than $500,000 tended to disagree slightly.

A chi square test of respondent perceptions of client concerns indicated that no statistically significant difference existed between the concerns of clients of planners that sell long-term care insurance and those that do not.

Long-Term Care Insurance: What do planners think about long-term care insurance as a technique for dealing with the problem of catastrophic illness? Although there was very strong agreement amongst respondents that most adults should be covered by long-term care insurance, their responses suggest confusion regarding the availability of private insurance policies that "adequately deal with the problem" and unfamiliarity with the typical long-term care insurance policy provisions. Apparently, many respondents had a vision of a long-term care policy that would deal with the problem of catastrophic illness, but they were not aware of the existence of such a policy.(4) Chi square tests indicated that neither client age, income, nor net worth had a statistically significant impact on these findings. As expected, however, respondents whose firms sell long-term care insurance were more familiar with policy provisions than non-selling respondents.

Other Techniques and Approaches

The final set of statements was designed to gather opinions regarding broad approaches for dealing with the financial problems associated with catastrophic illness. Private insurance was preferred over government programs, and group insurance was preferred over individual insurance as a means of covering the cost of catastrophic illness. Dread disease insurance was ruled out. Finally, a majority of respondents felt that an individual with a catastrophic illness should consider transferring assets to family members in order to qualify for Medicaid.

Statistical analysis of both client characteristics (age, income, and net worth) and whether or not the respondent planner sells long-term care insurance failed to disclose any statistically significant differences in responses to questions concerned with "other techniques and approaches" (questions 18 to 22 in Table 2).

Summary and Recommendations

Clearly, most Americans are not adequately protected against the cost of catastrophic illness. Medicare and most hospitalization and major medical policies provide little if any coverage of the cost of long-term custodial care, which is the largest component of the cost of catastrophic illness. Moreover, only a small fraction of the population is covered by long-term care insurance.

Based upon survey responses, financial planners strongly agreed that protecting clients against the cost of catastrophic illness is one of their major responsibilities. Unfortunately, they gave themselves very low marks on meeting this responsibility. Moreover, respondents felt that most of their clients did not have sufficient financial resources to cover the cost of a catastrophic illness and were generally unaware of the financial risk they were assuming.

The strategy of transferring assets in order to qualify for Medicaid was supported by a majority of respondents. Unfortunately, this "artificial poverty" strategy may be the only one available to avoid the depletion of the estate of an uninsured catastrophic illness victim. Those individuals who are philosophically opposed to Medicaid and who are unwilling to assume the financial risk of catastrophic illness should consider purchasing long-term care insurance. Indeed, respondents felt very strongly that most adults should be covered by this relatively new product. At the same time, respondents suggested that both planners and clients are apparently confused about the availability of understandable and affordable long-term care policies. Clearly, an opportunity exists for the insurance industry to expand the development and distribution of these policies.

Finally, the key to significant progress in combating the financial problems of catastrophic illness is increased public awareness. Until consumers realize the extent of their vulnerability to financial devastation at the hands of an uninsured catastrophic illness, meaningful progress in dealing with this major problem is unlikely. [Tabular Data 1 & 2 Omitted]

(1)A catastrophic illness is a chronic condition that requires long-term care--the provision of medical and personal (custodial) care services, outside the hospital, typically in a nursing home or at home, to functionally disabled individuals for an extended period. Illnesses requiring long-term care include: Alzheimer's disease, heart disease, Huntington's disease, Parkinson's disease, and stroke. (2)For a comprehensive comparison of the features available in many long-term care insurance policies, see [7, pp. 300-11]. (3)The chi square test of independence was repeatedly used to test the null hypothesis of an equality of proportions between sample groups. Results are highlighted in instances where the null hypothesis is rejected at the .05 level of significance. For a detailed discussion of this test, see [1, pp. 341--45]. (4)This result is not surprising. Consumer Reports found that many long-term care insurance policies were very expensive, severely limited in their coverage, or both, and that policy charges, waivers, and limitations confuse even the insurance agents who sell them [7].

References [1]Anderson, David R., Sweeney, Dennis J., and Williams, Thomas A., Statistics for Business and Economics, (St. Paul: West Publishing Co., 1984). [2]Boyd, Bruce, and Hoyos, Alyse, "Long-Term Care -- A Retirement Planning Issue," Benefits Quarterly, Vol. III, No. 4 (Fourth Quarter, 1987), pp. 1-9. [3]Findlay, Steven, "Finally, A Health-Cost Cap," U.S. News & World Report (June 13, 1988), pp. 63-64. [4]Nay, Tim, Legal Financial Planning Guide for Family, (Portland: Good Samaritan Hospital and Medical Center, 1987). [5]U.S. Congress, House. Select Committee on Aging, Subcommittee on Health and Long-Term Care, Paying the Price of Catastrophic Illness: From Accidents to Alzheimer's, 100th Congress, 1st Session, 1987. [6]U.S. Department of Health and Human Services, Report to Congress and The Secretary by The Task Force on Long-Term Health Care Policies, September, 1987. [7]"Who Can Afford a Nursing Home?," Consumer Reports (May 1988), pp. 300-11.

Peter W. Bacon is Professor of Finance and chairs the Department of Finance at Wright State University where Lawrence J. Gitman is Professor of Finance, Khurshid Ahmad is Associate Professor of Finance and Director of Insurance & Real Estate Programs, and M. Fall Ainina is Assistant Professor of Finance.
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Title Annotation:mail questionnaire survey
Author:Bacon, Peter W.; Gitman, Lawrence J.; Ahmad, Khurshid; Ainina, M. Fall
Publication:Journal of Risk and Insurance
Date:Mar 1, 1989
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