With the first of the baby boomers reaching retirement age in 2006, the generation is facing many issues, including protection of their standard of living. Though the boomers will enjoy more years in retirement than previous generations, the financial burden of a potential need for long-term care (LTC) is one of the biggest risks they face.
People who are concerned about the need for long-term care and look at a traditional stand-alone LTC insurance solution often deem it too expensive, especially since there is a possibility they may never need it. Many elect to self-insure instead; however, in today's world, it is unlikely they will be able to self-insure for the full cost of care if needed.
As a result, boomers are seeking more sophisticated solutions than traditional long-term care insurance (LTCI) to protect against the risk of expensive long-term care, while also protecting the value of their estate. LIMRA sales data reflects this trend, showing that through the second quarter of 2006, traditional long-term care insurance sales trailed sales from 2005, which in turn, trailed 2004 sales. Recognizing the need for long-term care coverage and the challenges traditional solutions provide, life insurers have been looking creatively at product development to address this issue.
The growing attraction of combination life/long-term care insurance products is simple. Unlike traditional long-term care insurance (LTCI), the client always realizes a benefit. These products are appealing because they have greater flexibility to address multiple needs for a potentially lower cost than single-solution products stacked separately.
Even more, a policy with a lifetime return of premium (ROP) feature allows clients to retain control of the asset by having the ability to reclaim their full premium at any point in time (potential tax implications may apply). This creates a combination of features that allows the client to simply reallocate cash and provide a LTC insurance reserve, not a straight expense such as with a traditional long-term care policy.
Hybrid products such as a universal life/long-term care insurance (UL/LTCI) combination product offer self-insuring clients greater leverage of personal assets for multiple needs, including long-term care costs.
The recently enacted Pension Protection Act of 2006 is helping to make this type of combination product even more attractive. This new legislation helps pave the way for more favorable tax treatment. As of Jan. 1, 2010, the premiums used to fund a LTC insurance rider taken from the cash value of a life insurance policy would no longer be considered a taxable distribution. Linking the benefits of life insurance and long-term care insurance is emerging as the choice for thousands of clients who are seeking a more efficient and effective solution for their financial protection needs.
How It Works
By using a UL/LTCI linked benefit combination product, we can reposition an appropriate percentage of personal assets (saved in a certificate of deposit, money-market, or savings account, etc.) into a tool that will help mitigate the risk of LTC while giving clients control and tax benefits they want with the protection and asset leverage they need.
For example, using $100,000 to purchase a universal life policy combined with a long-term care insurance rider (UL/LTCI) with a $166,407 death benefit would significantly increase the client's leverage of that asset for legacy planning purposes. With the addition of the long-term care rider, which could be extended to another four years of coverage, the overall amount of LTC protection (accelerated death benefit + LTCI rider) is equivalent to approximately five times the original asset: $166,407 + (4-yr. Rider at $83,204/yr = $332,814) = $499,221, or six years of $83,204.00.
In this scenario, the life insurance creates a $166,407 tax-free legacy plan for clients to transfer to their beneficiaries if it is unused for LTCI purposes. That's approximately 1.5 times the amount the client would have left if the cash had remained in the certificate of deposit, money-market account, or savings account.
To appreciate the full impact this leveraging effect of a UL/LTCI has on a client's ability to cover LTC expenses, however, one must understand the real risks and real costs involved. Nearly half (45%) of all boomers turning 65 by the year 2010 have a probability of spending some time in a nursing home. Almost a quarter of those boomers (24%) will spend a year or longer in a nursing facility. As the use of nursing homes increases, so does the cost of services.
The costs for long-term care services are rising at a rate that consistently outpaces general inflation in the economy. In 2004, an average annual cost of nursing home care was $70,000.1 In some areas, the costs are much higher. By 2025, when today's 67-year-old turns 86, these costs will average $140,000 a year.2 A two-year stay is the average, resulting in an approximate cost of $280,000. Demand for combination products is being driven by these escalating costs.
The greatest risk to boomers' retirement income may not be the impact of sweeping changes to Social Security or a prolonged market downturn. Rising longevity statistics mean the chances of experiencing a health care event have increased. One of the biggest risks to retirement income is the possibility of a long-term care need. This risk directly impacts the security of an entire portfolio. If not prepared for it, a catastrophic health care event could significantly affect even the best-laid plans for retirement income security. A UL/LTCI combination product helps round out a financial plan to ensure that retirement income security is not jeopardized by one's own health concerns.
1 Congressional Budget Office, 2004.
2 U.S. Senate Special Committee on Aging: http://aging.senate.gov/index.
Mark Doherty is second vice president, product manufacturing for The Lincoln National Life Insurance Co., a member company of Lincoln Financial Group. He is the MoneyGuard(R) business leader for Lincoln's universal life/long-term care hybrid business. He has been with Lincoln since 2003. Prior to joining Lincoln, Mr. Doherty served as senior vice president, and head of adviser practice development for ING's U.S. Financial Services. Prior to that role, he was senior vice president of marketing for ING Life Group, after serving in a number of marketing and product management roles for ReliaStar and Security Connecticut Life.
Disclaimer: Neither The Lincoln National Life Insurance Company, its distributors, nor their respective employees and representatives provide tax, accounting, or legal advice. Any tax statements used herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S. federal, state, or local tax penalties. Please consult your own independent advisor as to any tax, accounting, or legal statements made herein.
