Westland Financial Services

A Case to Share September 6, 2018

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Best Practice
Call Westland to discuss a case – we will gather information and then research options to recommend what  we feel is the best solution for your client.
 
Case 1) 
Recent discussion with a money manager and financial planning team who were evaluating a recommendation to address LTC Risk for a couple…
Husband (72) wife (62) second marriage $3,600,000 investment portfolio.  He had a solid LTC plan in place already and were evaluating options to address her LTC Risk.
After looking at many LTC options we created a LTC plan for presentation and it included a recommendation for re-positioning $140,000 into MoneyGuard for her with 3% inflation and that he keep his current plan.  She would receive the couples discount and have over $1,000,000 for care at age 85 (our target benefit after 23 years of inflation adjustment).
Effect on portfolio was net worth at age 100 would go from an estimated $9,200,000 to $8,700,000 using financial planner and money manager assumptions.

However, with a hypothetical LTC event factored in at age 85 and no insurance, portfolio value at his age 100 could drop portfolio value to an estimated $6,300,000 at age 100 for surviving spouse.

Money manager made the following comments to Financial Planning Team.

This may be an oversimplification, but it appears that the break-even on their expected rate of return for growth assets is around age 86 or so…if she goes to LTC. Obviously one doesn’t buy a MoneyGuard or similar policy for the death benefit, so the only remaining issue is at what point she would need LTC benefits, and how long that may last. If she lives beyond 86 and doesn’t need LTC, then the opportunity cost becomes greater than the potential of the LTC policy.

At that point, it becomes more of a non-financial decision about peace of mind and longevity risk. If I were making the decision for my own policy, I’d evaluate the possibility of needing the LTC, based upon family history, health, etc.
MY RESPONSE: It should be noted that everything in the MoneyGuard policy will be guaranteed by Lincoln vs. an expected rate of return that is hypothetical in your assumptions. Even with family history in her favor, you never know when something might happen, like a stroke, other debilitating sickness or accident.
There are many schools of thought on these issues and I appreciate your input. Some people are much more comfortable with self-insuring. However, as a holistic financial planning team, would you be okay with a recommendation not to purchase some protection and an event happened? I guess the answer could be Yes, if it never happens or happens after age 86 and the expected returns are met or exceeded, and the LTC event was as expected or less than expected.

What our analysis seems to indicate is that there is far greater downside risk for not much lost in upside potential. With the re-position for MoneyGuard protection, your values at age 100 for the older spouse show $8,700,000 Net Worth with or without our hypothetical LTC event. While NOT putting in place protection shows only about 6% more in upside potential to an expected $9,200,000 Net Worth at age 100. The RISK however, is a 32% potential loss to $6,300,000 if our hypothetical LTC event happened. So again, the question is; do you give up a potential gain of about $600,000 to eliminate a potential loss of about $3,000,000?

Here is another way of looking at this. You are betting $3,600,000 (today’s portfolio value) and are expecting a $8,700,000 pay off if we re-position the $140,000 today. Or do we bet $3,600,000 and might get $9,200,000 if we win (no ltc event) or $6,300,000 if we lose (having hypothetical ltc event). By the way… it is about a 70% chance that you lose and 30% chance that you win.

What will most clients be more appreciative of? If you help them prevent taking a big hit or squeezing out a little more yield?

I sincerely understand though that this couple should be just fine no matter the decision.

Sorry to carry on…

Tim
NOTE: The financial planning team highly recommended re-positioning the $140,000 into MoneyGuard. We are in the process of implementation.

If you do not have the time to commit for doing insurance work, then assign insurance work to an associate or allow Westland to assist.  What would you pay an associate? 50%?  Westland will be your associate for 25% or less depending on your role.  Best of all you are keeping it all in your control and not allowing any competition to creep into your practice.  We just become part of your practice just like an associate.

Please do not hesitate to contact Nancy or I at any time.  We are here to help.

 

 
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