Explaining insurance products to a client can be confusing and challenging. This is particularly true of long term care products. Just when the agent who occasionally writes a long term care policy thinks they have a basic understanding of their product, other solutions to the client's issues hit the radar screen.
Helping a client fund potential long term care costs is a complicated process. It is not a one-product solution, and those who only have a one-product solution for their clients could be selling them short. That's why you should explore all options, including two recent products that have risen in popularity lately: annuity-based LTCI and life insurance-based LTCI. While not all products are appropriate for all clients, knowing which options best suit which clients can help you develop the perfect plan.
Long term care insurance: A brief history
The first products that made an appearance in the long term care arena were reimbursement policies. These products were underwritten using morbidity considerations. They functioned by reimbursing the policyholder for expenses incurred for long term care up to the policy limits.
Next on the scene were indemnity products. These were also underwritten from a morbidity point of view but differed in how the policyholder received funds. With an indemnity policy, the insurance company pays the policyholder the daily or monthly amount specified in the policy without regard to incurred expenses. No receipts are required. Once the conditions are met for payment, the policyholder receives the money. Generally speaking, if all other features are the same, an indemnity policy will have higher premiums than a reimbursement one.
Modern products
Today's combination products combine both reimbursement and indemnity features. The most common design is a policy that reimburses for nursing home and assisted living expenses but has an indemnity approach for home and community-based care. The logic behind this approach is that the daily cost of community and home-based care fluctuates from day to day, and the facility care costs are in most cases a flat daily rate.
But more recently, annuity and life insurance-based products -- annuities or life policies with LTCI riders -- have gained footing in the industry due to underwriting considerations and clients' desires to have something for themselves or their family should they never need to use the policy for long term care costs.
The life insurance approach allows early access to the death benefit in order to meet the costs of long term care. There are generally limits to the amount the policyholder may access per month, with 2 to 4 percent being the most common. The death benefit is reduced by the amount of the advances. There are riders available that would extend the number of months that a benefit could be available. This benefit would make the payout greater than the death benefit and is purchased at the time of issue. The underwriting is generally a combination of mortality and morbidity standards. This approach will cost more in premiums than the previously mentioned approaches. The premiums are generally single-pay, but some companies allow monthly or annual payments.
The final model is the annuity approach. With this type of policy, the annuitant purchases an annuity that allows access to the funds under certain circumstances. One of those situations is for the payment of long term care expenses. Generally, there are no penalties associated with such withdrawals. Perhaps the most attractive feature is that there is no medical underwriting for an annuity.
Finding the perfect fit
So which approach is the best for your client? It depends. The business of providing advice in this market can be complicated. One size does not fit everyone; there are many factors that influence your client's solution.
One of these factors is the client's financial condition. If they have funds that have been earmarked for an emergency such as long term care, those funds could very well be sitting in a CD. By transferring the funds to a single premium life insurance policy with an LTCI benefit, the client could very easily triple the amount of the death benefit as well as add the LTCI feature. By taking this action, both the death benefit and the LTCI benefit would be non-taxable. There are similar advantages when it comes to utilizing an annuity that has an LTCI feature versus one that does not.
The key, however, to finding the best solution when it comes to long term care funding is to get all the facts about the client that could influence a decision. Factors that influence the planning direction include the local cost of long term care, the financial profile of the client, the health profile of their spouse, their risk tolerance, and finally, their personal preferences when it comes to a solution.
So what should you do? Above all, if you are not a specialist in the area of long term care funding, you should align yourself with someone who is. Knowing your options and teaming up with an expert can take much of the guesswork out of selling a combination product with LTCI features.
Mickey Batsell, CLU, CSA, CASL, individual commercial brokerage and sales vice president, has been recognized as one of the country's top LTCI producers. He may be reached at 800-264-3931 or mickeybatsell@mickeybatsell.com.
