Filed Under:Health Insurance, Ltci

Linked Benefit Products Breathe New Life into LTC Market

If you have not been talking about long-term care insurance with clients because you find the products too complicated or difficult to sell, then it is high time to bring you up to speed. For the LTC market is, by all accounts, enjoying a renaissance.

Gone are the days when clients only had a choice of high-priced, stand-alone long-term care products that either paid an LTC benefit or paid nothing at all. Today, life and annuity "linked benefit" or "combination" products that cover long-term expenses, such as through an acceleration of benefits feature and/or extended benefits via an optional rider, have broke open a market once largely confined to LTC specialists.

Industry statistics confirm the trend. According to market research firm LIMRA, Windsor, Conn., new premium for the products (UL-LTCI, VUL-LTCI and whole life-LTCI) reached $1.2 billion with more than 26,000 policies sold. From 2006 to 2009, the market for linked benefit products grew at a compounded annual growth rate of 27%. In 2010 alone, sales rocketed 60%.

"Agents are very excited about the new products," says Thomas Jurek, a sales director for Art Jetter & Company, an Omaha, Neb.-based brokerage general agency. "Many have told me the hybrids are too good to be true."

Adds Mike Hamilton, head of product development for insurance solutions at Philadelphia, Pa.-based Lincoln Financial Group: "We've seen significant sales growth in recent years of our linked benefit products. The reception among producers and clients has been fantastic."

Fueling the surge in demand is a burgeoning supply of new products. Carriers joining the linked-benefit bandwagon in recent years include Aviva, Genworth, John Hancock, Liberty Mutual, Lincoln Financial, Mutual of Omaha, Nationwide Financial, State Life, Sun Life and others.

Experts credit the market's growth in part to the Pension Protection Act of 2006. Among the law's provisions: changes that took effect on January 1, 2010 favorably impacting the taxation LTC benefits offered on life insurance and annuities.

Long-term care insurance offered as a rider in a linked benefit annuity can now be tax-qualified (a tax treatment that life-LTC combo products enjoyed before the law's passage). Internal charges to pay the qualified long-term care insurance rider in a life insurance policy or annuity are no longer treated as taxable distributions. Moreover, life insurance policies and non-qualified annuities can be exchanged tax-free for traditional LTC insurance policies.

A chief benefit of the PPA, say experts, is the ability to escape taxation on account gains. If, after exchanging an appreciated single premium immediate annuity for a combo product, the client submits a claim, the LTC benefit (including the gain accrued in the old annuity) is distributed tax-free.

"I'm seeing a lot of clients transferring money from highly appreciated annuities into linked benefits product to secure a tax-free distribution," says Irving. "And the tax savings are often massive."

What is the target market for the hybrid products? Experts say the ideal client is someone between ages 55 and 75 with $300,000 to $500,000 in investable assets--a portion being idle money that won't be needed to fund retirement expenses--and who wants to insure against scenarios that might require temporary or permanent long-term care.

"Advisors should look for the client who is self-insuring the LTC event ask them which asset they would liquidate first to pay for LTC expenses," says Doug Burkle, the linked benefits product development leader at Genworth Financial, Richmond, Va. "They can then suggest repositioning this asset with a linked benefit solution that will provide more protection than self-insuring dollars, as well as free up assets for other uses."

The LTC benefit, sources say, is frequently purchased as a hedge against long-term care expenses that might otherwise drain assets intended for heirs. But not all clients fit this profile. Shawn Britt, an advanced sales consultant for Nationwide Financial, Columbus, Ohio, says that many annuity-LTC prospects purchase a combo product to fund twin needs: supplementing existing savings to meet retirement needs and insure against a long-term care event.

As with traditional, LTC-only products, healthy prospects also make better candidates for the linked benefit solutions because underwriting factors in not only mortality costs, but also morbidity: The incidence of an illness or disease resulting in cognitive impairment, or one that impacts activities of daily living. The best policies, observers say, pay benefits if the client cannot perform two or more ADLs without assistance.

"The ideal client for me is healthy, wealthy and wise," says Paul Irving, an annuity marketing manager at Annuity Department, a Los Osos, Calif.-based independent marketing organization. "I say wise because clients often seek to buy a combo product when it's too already late. Many are declined due to health conditions."

Typical of the new offerings on the life-LTC side is Genworth's Total Living Coverage solution: a universal life product with qualified long-term care riders and a 15-year return of premium rider. An acceleration of death benefit rider pays out for covered LTC expenses. The death benefit exhausted, an Extension of Benefits Rider kicks in to continue payments. The product boasts, too, a residual death benefit that pays the beneficiary the greater of the remaining death benefit or 10% of the initial death benefit.

"Total Living Coverage will always pay its promised benefits, whether it is a death benefit upon the [insured's] death, an LTC benefit upon a qualified LTC event, or a return of premium if the client changes his or her mind during the first 15 policy years," says Genworth's Burkle. He adds the product provides on average "six times the premium" for covered long-term care benefits.

Genworth is not alone in claiming unusual or unique features. Nationwide, say Britt, offers an unmatched flexibility in product selection and payment schedules.

State Life touts second-to-die life- and annuity-LTC combo products that cover two lives. Aviva offers a rider on a straight life indexed annuity that requires no underwriting: In the event the insured is confined to a nursing home facility, says Jerek, the carrier will double the monthly income payment for the duration of the insured's life.

Dan Herr, head of product research for retirement solutions at Lincoln Financial, says the carrier's annuity-LTC combo solutions pay monthly benefits automatically for qualified long term expenses, rather than requiring insured to first submit claims for reimbursement. Among the products is a variable-LTC annuity that guarantees a payout of the deposit for an LTC acceleration benefit if the account value should decline.

For some, says Jetter & Company's Jurek the various guarantees seem suspiciously generous. How, advisors and clients have asked, can a product pay out a multiple of the initial deposit for long-term care; or, alternatively, a return of premium to the insured or a death benefit to heirs?

The answer is that such guarantees entail trade-offs. Jurek notes that, in respect to life-LTC products, the main benefit is the LTC component: For a given premium, policyholder beneficiaries receive a lower death benefit than they would otherwise be entitled to with a stand-alone life contract. The cash value in the linked benefit products may also have a lower interest rate, and thus accumulate more slowly, than would a conventional life policy.

Benefits aside, sources say that if producers are to be successful in this market, they need to become properly versed in product mechanics, suitability issues and state laws governing linked benefit products.

Many states, observers note, require agents to first meet certain continuation education requirements before they can begin offering the solutions. Conversely, the products are not uniformly sold nationwide. Jurek says that California, Connecticut, New Jersey, Massachusetts, Illinois, Oregon, Utah and Vermont are among states that have not approved certain products for distribution.

The carriers themselves, observes Britt, impose restrictions on payouts that producers need to watch out for. Not all life-LTC linked products, for example, pay both temporary and permanent claims. Likewise, some carriers will decline an LTC claim if the policy owner and the insured are two different individuals.

Also, the greater is the indemnity, the greater is the exclusion period. Britt points to one product that pays an amount equal to triple the client's investment, but only seven years after purchase.

Producers also need to take care to do a competent fact-finding to ensure they meet product suitability requirements; and to guard against negative underwriting outcomes.

"What I tell producers is to do the field underwriting first," says Irving. "Because when a life or LTC carrier declines an application for medical reasons, that rejection gets coded into the client's MIB [Medical Information Bureau] record. And this could adversely affect the client's ability to qualify for another product."

Burkle, too, cautions that producers need to factor in the prospect's age and financial condition when deciding whether to recommending optional riders. A prospect over age 60 will do better without a 5% compound inflation rider because he notes, one can generally purchase twice as much death benefit (which doesn't inflate) and LTC benefits without the rider as with the rider.

Producers also have to properly set expectations in respect to underwriting: Because of required health assessments for many of the products, processing can (depending on the carrier) take up to several weeks. Says Herr: "We've endeavored to streamline underwriting as much as possible. But the advisor can't simply submit a ticket for a linked benefit product. Medical issues have to be addressed."

Not least, producers to be prepared for objections to product recommendations. Prospects might question why, for example, a combo product is not as customizable as a traditional LTC offering. Britt observes that, whereas a conventional LTC policy's elimination period (the duration of time following an LTC event that must pass before a claim can be entered) might range from 0 to 360 days, almost all linked-benefit products carry a 90-day elimination period. Similarly, the products generally don't allow prospects to choose between simple and compound interest when choosing an inflation rider.

The carriers keep the product options simple so as to minimize administration costs," says Britt. "Though there is less customization, linked benefit buyers can take comfort knowing the products will distribute a benefit. That might come as an LTC benefit guaranteeing double or triple the initial amount invested, a death benefit or a return of premium."

That's a key selling point. But Britt observes that agents often fail to close by marketing a one-size-fits-all solution to clients whose financial means and objectives vary widely; and by inappropriately framing a conversation about long-term care. Example: discussing how an LTC benefit can pay for care in a nursing home (a topic prospects generally don't like to discuss) rather than how the benefit can help keep them in their home (which they're more receptive to).

Those advisors who manage to win over client prospects, adds Britt, can expect long-term relationships. "Of all insurance solutions, long-term care is the toughest one to pitch," she says. "But, ironically, once the sale is closed, the product is the last one to go. It's the hardest sell, but enjoys the highest retention rate."

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