I was recently challenged by a financial professional who asked me why anyone would sell linked long-term care solutions, such as life insurance or annuities with a long-term care (LTC) rider. He was of the opinion that life insurance sales should address life insurance needs only, annuities were for income, and long-term care needs should only be handled with dedicated LTC products. I had to surmise he had the ideal set of clients — older, healthy and relatively affluent. However, I routinely speak to financial professionals who have clients with objections and obstacles pertaining to long-term care coverage, and they’re looking for solutions their clients will accept or qualify for.
According to LIMRA, sales of traditional LTC policies have dropped in recent years, showing a -5% compound growth in sales between years 2005-2010. While they do offer the most comprehensive coverage, there are common obstacles to these sales:
• The “Use it or Lose It” structure of the products is a common cause of objections
• Falling interest rates, unexpected high retention rates and increased claims have forced LTC companies to continue to file for rate increases.
• Many people find it difficult to purchase a product they hope never to use.
• Clients under age 40 are rarely open to making such a purchase.
• Some clients do not qualify due to health issues.
• Some clients have assets but lack disposable income.
There are now alternatives that can help address some of these issues, including asset-based solutions that allow assets to be retained and offer a return of premium feature. These products may counter some client objections; however, underwriting, as well as a large single lump sum of money, is required. In addition, these products are usually reimbursement plans, which require monthly submission of bills and receipts. That leaves a lot of clients still looking for a viable solution to LTC coverage — and that’s where LTC linked solutions come into play.
Annuity/LTC linked solutions
Clients who lack the necessary LTC health qualifications now have options through annuity products with LTC riders. These products can pay a tax-free benefit for qualifying LTC conditions (per provisions in the Pension Protection Act of 2006, which went into effect on Jan. 1, 2010). While these products generally offer less LTC coverage compared to underwritten solutions, it is better than having nothing to help offset LTC costs. These products vary greatly, but generally, the contract value or the guaranteed income is doubled (sometimes tripled) when the annuitant qualifies for the LTC claim. And there are companies offering annuity/LTC linked products that don’t require underwriting. Instead, there is an exclusion period in which the client will not be eligible to file a claim. Depending on how rich the LTC benefits are, these exclusion periods tend to run between two and seven years.
The annuity/LTC linked solution may also appeal to clients who lack liquid assets for annual premiums. The annuity will provide either income for retirement or LTC benefits. For example, some contracts will allow the client to start taking a guaranteed income, then if qualifying LTC needs arise, the income is doubled. Be sure to inquire how the LTC benefits will interact with the income benefits, as provisions vary greatly among companies and some LTC riders drop once income commences.
Life insurance/LTC linked solutions
Prospects for a life/LTC linked product can take several forms. Typical prospects include clients with LTC concerns who have excess assets they wish to use to create a tax-efficient legacy. This solution also appeals to people who voice the typical objections to stand-alone LTC policies and need flexibility in funding premiums. Other potential prospects include younger clients not ready to discuss purchasing full-fledged LTC coverage. The LTC rider is added to a life insurance policy they already intend to purchase. The cost of the rider is generally quite inexpensive for younger individuals and gets some initial LTC planning started. Should the client not qualify for additional long-term care coverage in the future, they at least have the benefits from the life insurance policy in place.
The death benefit from the life/LTC linked product creates a pool of money that can be used, while alive, to help pay for qualifying LTC expenses. If LTC is never needed or only partially used, any remaining death benefit is paid to the beneficiary. Exclusion periods generally do not exist with the life products, so the insured could file a claim on these contracts immediately after issue should an unexpected LTC need arise. However, most products do have an elimination period at the beginning of the claim. The benefit is normally paid monthly and is a percentage of the LTC rider specified amount, such as 2% of the death benefit per month.
Long-term care riders are generally available on permanent life insurance contracts, which generally offer the following:
• Clients choose a base life insurance product that fits their risk tolerance and strategy.
• Some products offer premium guarantees and death benefit guarantees.
• Premiums are leveraged into a life insurance death benefit.
• A wide array of premium payment arrangements exist from single pay options, life pay options and anything in between.
• There is no “use it or lose it” risk.
• Indemnity plans are available, eliminating the administrative hassle of submitting bills and receipts each month
• Some products include an extra residual death benefit if all funds are used up for LTC benefits.
For those who believe product sales should remain dedicated to the product category: yes, that would be wonderful in an ideal world where all is black and white. But the world I work in sees a lot of gray, and I am grateful linked solutions exist so we can still accommodate client objections and obstacles with a LTC solution.
Shawn Britt, CLU, is director of advanced sales with Nationwide Financial Services in Columbus, Ohio. She may be reached at firstname.lastname@example.org.
The opinions expressed are being provided for informational purposes only and are not intended to provide specific advice or recommendations for any individual. For specific guidance on how to apply this information to your particular circumstances, you should contact your insurance, legal, tax or financial professional.