It’s November, and Long-Term Care Awareness Month is well underway. Thanks to the efforts of organizations such as the American Association of Long-Term Care Insurance (AALTCI) and the LIFE Foundation, not to mention long-term care (LTC) carriers, more advisors and consumers are aware of the need for LTC planning.
In fact, the U.S. Senate even convened an LTC Commission this summer to make recommendations on how to deal with long-term care (or the more awkwardly named “long-term services and supports”) in the country. One critical part of that commission discussed how to finance long-term care. Not surprisingly, the answers split along ideological lines, with some of the commissioners supporting a new entitlement program and others promoting private financing.
The truth is, both are necessary in a country with a widening wealth gap. Although I would love everyone age 40-plus to own a private LTC policy, almost half the country does not have the means to afford premiums. Some type of government solution (currently Medicaid) is necessary.
We’ve seen needed changes to the Medicaid LTC program in recent years, including a growing ability for people to receive care at home in many states. Medicare, which pays for some short-term care, could also play a larger role, as the so-called “dual-eligibles” — those who qualify for both Medicare and Medicaid — have better care coordination.
However, for many Americans, and especially affluent retirees, simply relying on the government programs will be unacceptable. Even in countries with social LTC programs, such as Germany, there is a desire to pay privately to increase choice and quality of care.
Luckily, in the United States, we have many private LTC insurance solutions. Despite media perceptions, Americans have more opportunities than ever to plan for LTC through insurance. Will baby boomers heed the message and actually engage in planning? Financial professionals are the most likely group to influence them.
See also: 5 ways to sell LTCI to boomers
There are four key types of coverage: traditional health-based LTC insurance, linked life/LTC plans, life insurance with LTC or chronic care riders, and finally annuity LTC plans. Let’s look at the future of these product categories.
1) Traditional health-based LTC: Traditional LTC plans continue to be the dominant LTC program sold. In 2012, according to LIMRA, there were more than 200,000 traditional LTC policies sold compared to well under 100,000 life/LTC policies. However, traditional policies have faced struggles in recent years because of lower than expected lapse rates and a low interest rate environment. Due to these challenges, there have been many unplanned in-force rate increases that have caused consumer and advisor consternation.
Fortunately, once those advisors and policyholders find out what a new policy costs today (which is much higher), they normally are willing to pay the increased premium.
From a plan design perspective, LTC policies no longer offer the popular “lifetime” benefit that was loved by consumers and feared by carriers. The most up-to-date products today allow a purchaser to select a total pool of money, say from $100,000 to $1 million. That pool can be used in the future for care, up to monthly withdrawal limits either expressed on a percentage of the pool basis or a monthly maximum.
Fewer advisors today are spreadsheeting policies and recommending simple solutions based on the lowest premium product. Instead, advisors are looking at how claims will be paid.
One key difference between these carrier policies is the benefits for home care. Some plans allow for a “cash alternative” that can be used in lieu of the reimbursement benefit. Other plans offer expanded definitions of what qualifies as a home health care agency in order to support the newer private-pay home health care franchises that are rapidly growing throughout the country.
Another difference in LTC plans is how they handle future inflation requirements. The past standard, 5 percent automatic inflation, is simply not affordable in today’s economic environment. In addition, historical LTC inflation rates for home health care from 2000 to 2012 have averaged 1.01 percent, according to AALTCI. I personally have found that the 5 percent inflation I bought has greatly outpaced the cost of care increase in my area, and I decided to scale back my monthly benefit maximum to save premium dollars. If carriers weren’t required by regulation to offer 5 percent compound interest, chances are they wouldn’t.
Today, inflation options abound on products. Options include:
- Policies that increase automatically with the CPI
- “Dial-your-own inflation,” from 1 percent to 5 percent in 0.25 percent increments
- Inflation that increases by 5 percent to age 61 and 3 percent from ages 61 to 75
- Step-rated increases that increase premiums and benefits each year
- A plan that increases benefits if the carrier’s underlying investment portfolio performs well
With so many options, how does someone decide what is best? One growing way to design a plan is focus on a premium budget first and then back into an appropriate plan design. You could call it the name-your-price option.
Who is most receptive to traditional LTC products? There are four likely buyers. First, business owners or those who have a health savings account are receptive because of premium deductibility. Anyone who has had experience with a family member needing care or even using an LTC policy will be very interested. Those who like “pure protection” products like term life and those wanting automatic inflation adjustments also would be interested in traditional LTC products.
2) Linked life/LTC plans: Linked life/LTC plans have been growing in popularity and market share. One big reason: plans often offer guaranteed premiums. Because linked plans have the life insurance component, there is no use-it-or-lose-it mentality like there is with traditional LTC plans. If a policyholder dies before using any of the LTC premiums, the full life benefit goes to the beneficiary.
In addition, linked policies work as a form of leveraged self-insurance. The policyholder is accessing the premium deposit first, through the acceleration of a benefit rider, before accessing the extension of benefit riders.
What are upcoming trends with these products? Although the current plans are mostly single-premium policies, there are more policies that are multi-pay plans, such as a 10-pay plan, that are becoming available.
3) Life insurance with LTC or chronic care riders: There is an explosion of carriers offering living benefit riders on life insurance. The concept is simple: those who need to access policy benefits to cover costs of care for a condition such as Alzheimer’s can use the accelerated benefit feature to do so.
To cover LTC costs, they typically take the form of either LTC or chronic care riders. The LTC riders have benefit triggers familiar to those who sell LTC insurance (tax code 7702B), and the advisors also must have LTC CE training. On the other hand, chronic care riders use tax code 101(g) and the condition for LTC must be permanent.
Those looking at these plans as a long-term care solution need to answer several questions:
- What’s the impact on the life insurance benefit if LTC is needed?
- What does the home health care benefit for LTC look like?
- What is the total LTC benefit at issue? Can it even be determined? What will the LTC benefit look like in 10, 20 or 30 years?
4) Annuity LTC plans: Annuity/LTC plans with tax-qualified benefits allow a holder of a non-qualified annuity to get benefits out of the policy, tax free, to pay for LTC. These benefits became possible with the passage of the 2006 Pension Protection Act. Companies, such as Genworth, offered them for a few years but then stopped. Why? Because the low interest rate environment made it difficult for the carrier to charge appropriate rider premiums for substantial LTC coverage and still offer annuity value build-up. As long-term interest rates increase, expect to see these plans, where health underwrites the rider, become more available and popular. Already, some variable annuity companies are offering the LTC riders. These annuities will be popular 1035 exchange opportunities for existing non-qualified annuity holders.
The future of healthcare planning in retirement is bright for advisors, and as you can see, several insurance solutions are available. The appropriate solution will vary by client and life stage. Advisors might also need to partner with specialist organizations that can guide them through the maze of choices.
Finally, LTC planning is not a one-and-done endeavor. Regular client in-force policy or plan reviews are critical and need to occur on a periodic basis.
For more on LTC planning, see: