by Cynthia Harrington
What happens when a client walks in and announces a sudden change in health?
Financial advisors find themselves answering this question more frequently as the Baby Boom generation ages. According to a study by the Institute for Health and Aging, half of the U.S. population lives with a chronic condition, another 41 million are limited in their daily activities, and 12 million are unable to go to school, work or live independently.
The response to a client’s announcement depends on a number of factors. If the illness is terminal, it’s different than if the result is a long-term disability. If the client has worked closely with her advisor, it is most likely that plans that are already in place will not need adjustments. “We tell clients that our estate planning starts with killing them off as soon as they walk out the door,” said Sidney Blum, CFP, CPA/PFS, ChFC, and director of financial advisory at Leonetti & Associates, in Buffalo Grove, Ill. “Then, if that doesn’t happen, everything else works.”
But perfect plans are not always in place.
In the case of a terminal illness, the focus of the planning shifts to a surviving spouse. Blum describes the case of a client who retired at age 60 and a few months later found out that he had terminal cancer. Blum, whose firm, Successful Financial Solutions, recently merged with Leonetti & Associates, took on greater responsibility for planning and for managing the investments for the client’s wife.
First, they liberalized the spouse’s access to the funds, focusing more on her needs than the children’s. “In this case, we did mostly post-death planning for a surviving spouse in her fifties,” said Blum. “That included considering how to take distributions from the IRAs, as well as coaching the wife on spending, because that was something the husband had always handled.”
There’s a much higher probability that advisors will be assisting clients who are incapacitated to some degree. Planning for that eventuality commands the attention of the legal profession. Both the definition of what it means to be incapacitated, as well as what actions should be taken as a result, are a matter of law.
To clarify these issues, Harold R. Evensky, CFP, principal of Evensky, Brown & Katz, in Coral Gables, Fla., prefers the revocable trust to the living will or health care power of attorney. “We’re big believers in revocable trusts because the document spells out exactly the conditions for incapacity, as well as what is needed for us to release any funds,” he said.
If the illness prompts a long-term disability, the client’s family faces the question of how to pay for the care. “The ones at highest risk — those with modest assets — are people we tend not to see,” said Evensky. “We are big believers in long-term care insurance. Most of our clients can self-insure, but some want the extra security blanket of this insurance and we don’t talk them out of it.”
From a shaky start, long-term care insurance has improved. Kenneth A. Grubb has overseen some of the changes as senior vice president of the Long-Term Care Division for New York Life Insurance, in Austin, Texas, as well as in his post as chair of the Health Insurance Association of America’s Long-Term Care Committee. The inclusion of coverage for home health care and assisted-living facilities did the most to broaden the appeal of this insurance. “When these policies were first introduced, they covered the costs of nursing homes,” said Grubb. “No one wants to go into a nursing home, so no one wanted to talk about the coverage.”
Other factors drive the current sales of long-term care. The industry is finding more ethnic participation and from groups that previously presumed that the family would provide any care that relatives needed. But the facts of working wives and mobile children cross all American demographic groups.
There was also the perception that policies were too expensive. Early target markets were pre- and post-retirees. “For a 60- or 70-year old, the premiums are relatively expensive at between $3,000 and $6,000 a year,” said Grubb. “But the same coverage for a 20- to 30-year-old would be several hundred a year.”
Cost is one factor that highlights the importance of personal and financial planning in choosing long-term care insurance. Planning is also critical to making the choice. Since long-term care is medically underwritten, once an illness hits, it’s too late. “A projected 60 percent of people are going to need some sort of long-term care,” said Grubb. “And not just older people either — 40 percent of those needing services are under the age of 65.”
The financial issues represent only part of the response needed in a health crisis. Helping the client and family deal with the emotional impact is a big part of the advisor’s role. “Our main role is to calm the client down and help them realize there’s nothing to worry about,” said Evensky. “Once we’re past the initial crisis we focus on the planning issues.”
Evensky said that they start on the easiest things. They make sure that all the appropriate persons are on the list authorizing the hospital to release information about the patient. They review all the estate documents, change the names on titles to assets, and make sure that the desired gifting is up to date. If there’s time and adequate emotional stability, they suggest a family retreat, during which the client can share her vision for what she would like to see for her and her family’s future. In most cases, investment planning is not considered. “We usually don’t know what will happen with the client or when,” said Evensky. “Certainly we wouldn’t want to sell assets and take the gain, if we are about to be able to get stepped-up basis.”
Helping clients through crises demands the full range of an advisor’s skills. Sometimes advisors need to communicate unwelcome news. One of Blum’s clients changed his estate plan to grant an annual income to a woman who had nursed him when he became ill after his divorce. “The children were hurt because they thought they were going to get more,” Blum said.
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