Combo policies have arrived as repeatedly predicted in this column. Living benefits are stationed on every marketing street corner, and almost everyone who’s anyone has one. Selling against those without these products in their portfolios is just too easy!
However, the problem this plethora of new chronic illness opportunities has created is that rarely are they similar in structure, design or intent. In other words they were not born equal—they can be very different and everyone needs to stop and carefully examine what is being sold.
Let’s back up first and review. I am often asked which approach is best: stand-alone LTCI, combo life or combo annuity? Or, a step further, which combo life plan is best? These are simply the wrong questions, and if you are off base at the beginning, the sales decisions will also be flawed. Remember why all this is happening. HIPAA gave us two ways to offer tax-free LTCI benefits: tax-qualified stand-alone LTCI “health” benefits under IRC 7702B and an expansion of terminal illness definitions which included “life” chronic illness accelerated death benefit riders under IRC Section 101g.
Where you need to begin your due diligence is by understanding whether what you are selling is a health or life rider. Health riders pay LTCI benefits, and life riders pay terminal illness benefits, not LTCI benefits.
Begin by examining the language of the marketing materials and the specimen rider. If the words long term care are not used, guess what—it is not covered. In other words, you would have to be “terminal” to collect any benefits.
To complicate this grand canyon of difference, I need to add that there are chronic illness accelerated death benefit riders that use “health” definitions. I know it’s a mess. More on this later.
Let’s return to asking the wrong questions. Combo policies are not just a separate and distinct alternative to stand-alone LTCI. It is not a matter of either/or—it should not be something you sell instead of LTCI. Applying premium directly to the risk is always the best approach.
Unfortunately, there are consumer objections to traditional LTCI, but the infamous “use it or lose it” consumer paranoia must be met head on. Transferring a large and fairly certain claim to the insurance company is expensive. Why would anyone expect anything else? If this concern cannot be overcome by explaining how insurance works, then alternatives must be provided.
Life combo products provide absolute certainty. Someone will get the money—the policyowner, in the event of a critical illness claim, or the beneficiary, upon death of the policyowner. The problem, of course, is that if the death benefit is used for long term care expenses, it will not be there for life insurance needs. This means that the life insurance sale was superfluous.
What about the fact that you may be selling unneeded life insurance to an older client at a time in his life when his insurance needs are likely receding. Or, in order to get sufficient payout from life insurance, you may have to exaggerate the face amount needed, which compounds the problem. This same reverse reasoning is true of combo annuities to some extent. If the deferred annuity was sold for retirement income purposes and it is used for LTCI expenses, you may have just shot someone in the foot.
Now on to an even more obtuse question: Which combo life policy is best? The answer of course is which one best fits your client’s needs. There are three basic designs:
• There are life products which simply come with a life chronic illness accelerated death benefit rider at no current charge—if your client does not use it, there is no cost. Of course, the problem is that the insurance is not free. If you do need care for a terminal illness, the cost will be deducted from the payout of benefits. Based on age, such costs can be 25 to 50 percent of the benefit.
• There is also level premium universal life that charges for the care benefit as a scheduled rider deduction from the account benefit. Since regular deductions from the account value for the cost of the rider have already taken place, the full death benefit is available. Only a small corridor of the death benefit is reserved to prevent an inadvertent lapse. These riders need to be evaluated carefully because some use a life definition requiring a “terminal” event and some use a health definition which does not. Proceed with caution or at least make sure your clients understand exactly what they bought.
• The largest and most successful sale is the asset-based life combo. With this product there are three separate and distinct buckets of money: the client’s single premium, the net amount at risk from the life insurance, and an “extension of benefits” for long term care. With claims dollars coming from all three in that order, there are long term care benefit definitions throughout. These products come with return of premium riders and guarantee all principal dollars. This is a pretty cool sale for customers with discretionary assets to relocate. Dollars that were probably already set aside for future expense adversity can be leveraged up four to six times, plus principal is safe and net cost is dramatically reduced.
You can tell by my description that I like combo annuities even more. Dollars are leveraged, LTCI risk is abrogated, principal is secure, heirs are protected, payments are always health benefits, and the net cost for LTCI protection is even lower.
I encourage you to read carefully any contract that purports to pay for caregiving in any form. These new arrivals to our growing arsenal of options are very diverse in structure. Some pay only nursing home benefits, some will not pay on cognitive claims, some do not pay for assisted living, some will not pay if a policyholder could recover, and many are limited in the actual dollars available at the time of claim.
Of course I am delighted that we have so many choices, although the saying “careful what you wish for” keeps ringing in my ears.
Other than that I have no opinion on the subject.
