Your next LTCI sales idea: Which made more, "Gone with the Wind" or "Avatar?"

By Stephen D. Forman (LTCA)

Long Term Care Associates, Inc.


Why do you suppose I'd ask a bunch of LTCI producers about movie grosses? Because the answer hinges on inflation, or in other words, the eroding purchasing power of the dollar over time.

I’ve been thinking about inflation a lot ever since I discovered a great online tool for comparing what things cost today versus some year in the past. The results can be illuminating. For instance, when agents ask about the feasibility of running a direct-mail campaign, one is always warned against the high cost of postage. In truth, what you paid 29-cents for in 1991 (the cost of a first-class stamp) would today cost 47-cents.

The cost of just about everything in the U.S. economy has risen by 61.7 percent in the last 20 years. Well, I can think of one thing which didn't inflate that much — an actual first-class stamp! It's still just 44-cents, meaning postage has not kept pace with inflation, and is in actuality a "good buy".

Inflation calculator
    If in (enter year) I purchased an item for $,
    Then in (enter year) that same item would cost:
    Rate of inflation change:
Why does this matter? Because "one of these things is not like the other.” Each year — either step-like or gradually — the price of hamburgers, gasoline, clothing and movie tickets all go up. That "Gone With the Wind" movie ticket which cost 23 cents in 1939 now costs $8.10 on average. And to pay for all these goods and services, our incomes keep pace as well, hopefully (and investment returns must outperform inflation, or else lose ground).

But one thing famously doesn’t budge: LTCI premiums. Even while health, homeowners and auto insurance premiums go up to reflect the inflation of the collateral risks indemnified against, property taxes rise, and Medicare Supplement and Part B premiums each pass through their annual upward adjustment, LTCI stays level.

Granted, levelized premiums are an actuary's choice. The conventional wisdom has always been that if you allowed premiums to rise of their own accord, the cost would far outstrip a policyholder's ability to pay during the latter years when they can least afford to lapse.
But now let's philosophize for a moment from the perspective of our online inflation tool. What happens after a rate increase letter goes out to your policyholders? One of the most reliable techniques for easing their concerns is to demonstrate the great and irreplaceable deal they've already got in place.

You do this by illustrating what it would cost to purchase a brand new long term care policy at attained age, using today’s policy forms and inflated daily benefits. But a valid alternative is the reverse: demonstrating the eroding power of inflation on their antiquated premium. The analogy is that they are paying "Gone with the Wind" movie ticket prices (23 cents), while you and I and everyone else has to plunk down $8.10 to get in. When an insurer proposes a rate increase, there is some consideration towards bringing the old rates in line with today's prices (be it an $8.10 movie ticket, or a 44-cent stamp). This concept is called parity.

"But Mr. Forman, LTC premiums are level because seniors and retirees are on fixed incomes."

Really? Allow me to challenge this conventional wisdom in three ways. First, 15 years ago when the average buyer was age 72, you could conceivably make this argument. Now that the average applicant is age 58 and dropping, it gets thornier to argue that a client's primary (or sole) source of income is fixed or that limited-pay modes haven't evolved to meet the needs of those who fear a decline in income after their earning years.

Second, in what meaningful and practical way is a retiree's income fixed in which a younger factory worker’s wage is not? As we are seeing played out all across the country, the latter only receives a raise if his boss grants him one, while the SSI benefits we commonly refer to as fixed receive a cost of living adjustment pegged to the consumer price index (notwithstanding this has held steady since third quarter 2008).

Third, according to the most recent US Census statistics, it would be naive to characterize Americans 65+ as reliant on any particular income source: there are over 30 kinds of income tracked. Perhaps this was why the most recent survey of Americans also revealed that this demographic was the only one whose incomes have risen and poverty rates have fallen during the recession.
By the way, an exploration of your clients' passive income sources can evolve into an ancillary sale: "Really, you’re not earning 5 percent? That’s odd, all of my clients are earning at least that much. We should talk about how to use an annuity to fund your long term care policy and start earning you a better interest rate."

Finally, the inflation conversation allows us to re-think the wisdom of guaranteed purchase options. I think GPOs have received an unfair shake in the past — and this only reinforces my opinion. To wit, one of the biggest objections is that someone who purchases an $1,182 per year plan today (at age 50, to use the example from Prudential's "Spotlight on GPO" flier) would be completely priced-out by a $9,787 per year premium when she turns 76. But consider what everything else will cost 26 years from now. There's probably an $1,182 gas barbecue grill over at Home Depot that will cost a pretty penny in 2037: by then, the premium for the LTC-3 plan will look relatively tame by comparison. Likewise, our $8.10 theater tickets could very well cost $100.

Oh yes, I almost forgot ... the movies. It's "Gone With the Wind" by a mile! It's the all-time leader in inflation-adjusted gross, coming in at $1.61 billion. "Avatar" is respectably in fourteenth place, raking in just under half that amount.

Editor's Note: Read the first in the series, Your next LTCI sales idea: Access