Posted May 12, 2020
After Allan Roth's 2/24/202 column cited on the previous page was offered as a resource on a Financial Planning Association on-line discussion in early March, 2020, I posted my critique there as a counterpoint and to provide a broader, more fact-based perspective. Mr. Roth finally got around to replying to the discussion, not with a thoughtful debate but with an arrogant, dismissive personal attack:
Allan Roth's Response - FPA All Member Open Forum 5/12/2020:
"Your comments would have had more credibility had you been forthcoming and started out by noting you sell long term care and your income is dependent on selling the product. I'm happy to explain the math to you. I would certainly recommend to any of your clients that placed good faith reliance on your representation that there would be no further rate increases get reimbursement from you should you be wrong. I'm happy to explain the math to you but you'd have to take off your salesperson hat and know how net present values work.
"My goal was to be as objective as possible on data that is very inconsistent. The presentation by the LTC insurance industry is very one sided such as touting the high costs and not mentioning the partial offset of expenditures avoided if one is in long-term care.
"I do not mean to hurt your income."
"My goal was to be as objective as possible on data that is very inconsistent. The presentation by the LTC insurance industry is very one sided such as touting the high costs and not mentioning the partial offset of expenditures avoided if one is in long-term care.
"I do not mean to hurt your income."
My On-Line Reply to Mr. Roth - 5/12/2020:
Well, look who finally weighed in, not with any meaningful information, but rather with an ad hominem attack on my professional credibility, ignoring my detailed, pointed criticisms simply because I earn commissions and didn't note that in the first sentence of my post.
My FPA bio is one click away for any and all to read - all 339 words, plus job history back to 1991, address, phone number, e-mail address, and website. Click on your FPA bio link, Mr. Roth: NOTHING. Or maybe everyone is supposed to assume you are a credible source on any and all subjects just because you have CFP, CPA, and MBA after your name? Suggesting that my credibility is lacking with a product (LTC insurance in all its forms) that I have studied and sold (yes, there's that evil word) for 28 years, specializing nearly exclusively in it for 20 years is as specious as me suggesting that you have no right to professionally comment on any insurance product because you're not licensed to sell insurance. So, let's address the actual issues that I raised:
I don't need you to "explain the math." I didn't criticize your math at all, in fact, I accepted your numbers and simply asked how you could have possibly reached the conclusions you did with your own net present value calculations.
For example:
How a 61% higher "net cost" is, using your words, "a bit more expensive"?!
Shall we review your math?
Why did you cop-out on calculating "the net [LTC] benefit after the cost of the premium" for your hybrid LTC example?
I'll walk you back through your own numbers which you simply failed to add-up because you don't really understand hybrid LTC insurance:
I never said, nor do I tell clients who purchase traditional LTC insurance, that "there would be no further rate increases."
I was attempting to provide some actuarial-sound (and sourced) facts (explained in great detail and corresponding with the information you also received and quoted from Jesse Slome) that the LTC insurance pricing fundamentals - looking forward - have changed. I won't repeat what is available to re-read (and link to) above, but you'll have to take off your confirmation bias blinders to understand the facts about and implications of old vs. new LTC pricing assumptions when providing fiduciary advice to clients.
No, they are still not guaranteed, but to directly quote from the 2016 Society of Actuaries LTCI Pricing Report cited (and linked-to above): "The 10% probability of a rate increase in 2014 [pricing point year] suggests that today's products really should be able to withstand marginal adverse experience without requiring a rate increase." The report also shows that if a premium increase is needed on 2014 pricing models the average amount would only be 10%. That is all AFTER pricing for a 0.7% lapse ratio, assuming 4.6% average long-term interest assumptions (current pricing is now assuming less than 4%), and with 70-times more claims duration data than in 2000. Want to dismiss me, fine, but read the SOA report, you'll learn something.
The fact is, Mr. Roth, your column was not objective at all. You brought significant bias to the subject, citing your own outdated, deeply-flawed, eight-year-old column to reinforce your animus with no attempt to look at any new data even after being pointed in the right direction by Mr. Slome, you mischaracterize your own comparative numbers between policy types, and you cherry-picked data sources that have no meaningful relevance to LTC insurance-funded, private pay care scenarios.
You pulled data from two studies that rely almost exclusively on care data from nursing homes which is not highly correlated at all to where most people actually get and would want to plan to get care: at home or in assisted living for as long as possible. I cite numerous facts related to actual LTC insurance claims data which is an excellent proxy for how people spend money on private-pay care services: at home or in assisted living for as long as possible either never ending up in a nursing home or for a compressed period of time at the very end of life.
Since you were attempting to evaluate LTC insurance, you should have used actual LTC insurance claims data as your baseline. Here's a helpful primer if you want to re-write your paper for a better grade: 33% of LTC insurance policyholders will collect at least $1 in LTC benefits; 20% of policyholders will be on claim more than a year; the average duration AFTER one-year is 5-years - so your 4-year assumption is close, but the probability is closer to 20% rather than 5% - that's four-times higher than you calculated.
Finally, the "partial-offset of expenditures" is ONLY measurably meaningful if a single person moves into a residential care facility. 80% of care is at home. 60-70% of LTC claims start at home and 50%-60% of LTC claims END at home. There is very little lifestyle "savings" for couples where one needs care at home on top of all or nearly all other living costs - or if one spouse stays at home while the other is in a facility. This of course is highly subjective and personal, which was my point, not to dismiss your comments about "offset of expenditures," but to draw some finer points that require detailed individual fact-finding and planning interaction vs. simply presuming generally that there would be "substantial" cost savings.
Here's the question I ask potential clients who are married/coupled with the understanding that home care is a probability and priority if possible: "If either one of you needed care, where will you get an EXTRA $3000-$5000 per month for part-time home care?" If you can cash-flow it, god bless you. Most can't or wouldn't want to have to ... especially if it's during a bear market like we're in now.
BTW, my income is just fine. I do not mean to hurt your feelings.
My FPA bio is one click away for any and all to read - all 339 words, plus job history back to 1991, address, phone number, e-mail address, and website. Click on your FPA bio link, Mr. Roth: NOTHING. Or maybe everyone is supposed to assume you are a credible source on any and all subjects just because you have CFP, CPA, and MBA after your name? Suggesting that my credibility is lacking with a product (LTC insurance in all its forms) that I have studied and sold (yes, there's that evil word) for 28 years, specializing nearly exclusively in it for 20 years is as specious as me suggesting that you have no right to professionally comment on any insurance product because you're not licensed to sell insurance. So, let's address the actual issues that I raised:
I don't need you to "explain the math." I didn't criticize your math at all, in fact, I accepted your numbers and simply asked how you could have possibly reached the conclusions you did with your own net present value calculations.
For example:
How a 61% higher "net cost" is, using your words, "a bit more expensive"?!
Shall we review your math?
- Comparing traditional LTC premiums of "$116,262" NPV to a hybrid LTC "net cost of $187,643 ($405,036 premium less the NPV of the $217,393 death benefit)" is a difference of $71,381.
- If you divide $71,381 into $116,262 you get a 61% higher NPV for the hybrid plan.
- I'm happy to explain long division to you.
- 61% is more than "a bit," but maybe that's a technical CFP, CPA, MBA term that you could explain to me.
Why did you cop-out on calculating "the net [LTC] benefit after the cost of the premium" for your hybrid LTC example?
I'll walk you back through your own numbers which you simply failed to add-up because you don't really understand hybrid LTC insurance:
- "Net cost of $187,643" for both Hybrid LTC policies if both die without a LTC claim.
- One spouse needs 1495 days of care (4 years) and receives "about $409,309 in benefits in today's dollars."
- $409,309 in "today's dollars" minus $187,643 in "net cost" equals: $221,666. (Vs. the traditional LTC with "a net benefit beyond the premiums of $276,083.)
- Again, some long division here, dividing the difference in these two net benefits after premiums equals 20% less net benefits from the hybrid plan than from traditional LTC ... well, OK, it's really 19.71%, but I'm a salesman, so I couldn't help but round up ...
- Now, here's why I think you gave up: you don't understand hybrid LTC insurance.
- The "net cost of $187,643" after accounting for the death benefit is the SAME whether you die or have a LTC claim - or if one spouse has a 4-year LTC claim and the other dies - because the first two year's of LTC benefits draw down the death benefit first. In other words, any claim lasting longer than 2 years has the SAME basic net cost as dying plus the net value of the balance of the "extended" LTC benefits which are reflected in your own numbers above.
I never said, nor do I tell clients who purchase traditional LTC insurance, that "there would be no further rate increases."
I was attempting to provide some actuarial-sound (and sourced) facts (explained in great detail and corresponding with the information you also received and quoted from Jesse Slome) that the LTC insurance pricing fundamentals - looking forward - have changed. I won't repeat what is available to re-read (and link to) above, but you'll have to take off your confirmation bias blinders to understand the facts about and implications of old vs. new LTC pricing assumptions when providing fiduciary advice to clients.
No, they are still not guaranteed, but to directly quote from the 2016 Society of Actuaries LTCI Pricing Report cited (and linked-to above): "The 10% probability of a rate increase in 2014 [pricing point year] suggests that today's products really should be able to withstand marginal adverse experience without requiring a rate increase." The report also shows that if a premium increase is needed on 2014 pricing models the average amount would only be 10%. That is all AFTER pricing for a 0.7% lapse ratio, assuming 4.6% average long-term interest assumptions (current pricing is now assuming less than 4%), and with 70-times more claims duration data than in 2000. Want to dismiss me, fine, but read the SOA report, you'll learn something.
The fact is, Mr. Roth, your column was not objective at all. You brought significant bias to the subject, citing your own outdated, deeply-flawed, eight-year-old column to reinforce your animus with no attempt to look at any new data even after being pointed in the right direction by Mr. Slome, you mischaracterize your own comparative numbers between policy types, and you cherry-picked data sources that have no meaningful relevance to LTC insurance-funded, private pay care scenarios.
You pulled data from two studies that rely almost exclusively on care data from nursing homes which is not highly correlated at all to where most people actually get and would want to plan to get care: at home or in assisted living for as long as possible. I cite numerous facts related to actual LTC insurance claims data which is an excellent proxy for how people spend money on private-pay care services: at home or in assisted living for as long as possible either never ending up in a nursing home or for a compressed period of time at the very end of life.
Since you were attempting to evaluate LTC insurance, you should have used actual LTC insurance claims data as your baseline. Here's a helpful primer if you want to re-write your paper for a better grade: 33% of LTC insurance policyholders will collect at least $1 in LTC benefits; 20% of policyholders will be on claim more than a year; the average duration AFTER one-year is 5-years - so your 4-year assumption is close, but the probability is closer to 20% rather than 5% - that's four-times higher than you calculated.
Finally, the "partial-offset of expenditures" is ONLY measurably meaningful if a single person moves into a residential care facility. 80% of care is at home. 60-70% of LTC claims start at home and 50%-60% of LTC claims END at home. There is very little lifestyle "savings" for couples where one needs care at home on top of all or nearly all other living costs - or if one spouse stays at home while the other is in a facility. This of course is highly subjective and personal, which was my point, not to dismiss your comments about "offset of expenditures," but to draw some finer points that require detailed individual fact-finding and planning interaction vs. simply presuming generally that there would be "substantial" cost savings.
Here's the question I ask potential clients who are married/coupled with the understanding that home care is a probability and priority if possible: "If either one of you needed care, where will you get an EXTRA $3000-$5000 per month for part-time home care?" If you can cash-flow it, god bless you. Most can't or wouldn't want to have to ... especially if it's during a bear market like we're in now.
BTW, my income is just fine. I do not mean to hurt your feelings.