One of the goals that I have as I work for my agents across the country is to guide them on which is the best product for their client’s situation. Impartial and unbiased product knowledge and strategies is what agents want. Needless to say, I analyze a lot of annuity, life, and long term care products. The point is, of a large universe of these products, there are two areas that really excite me today when it comes to product innovation. What are those two areas that excite me the most? It would be a tie between annuities and the topic of this article—linked benefit long term care products.
Too good to be true?
Linked benefit products have gotten so good that many times I get the responses of “Are the benefits really guaranteed?” or “It seems too good to be true.” Skepticism is warranted, because when people think of long term care insurance, they think of traditional LTCI. And with traditional LTCI, many folks have experienced significant premium hikes as the years have gone by. Plus, with traditional LTCI, if you don’t use the benefit, you lose the benefit and the premium you paid. Therefore, the fact that many linked benefit products have 100 percent guaranteed benefits and also have a death benefit and cash value, this creates skepticism among the clients. In this article I wanted to spend a couple minutes discussing why and how the benefits are not “too good to be true” and are indeed sustainable for the insurance carriers to offer. By the way, Traditional LTCI, I believe, is more sustainably priced than previous generations for reasons I will discuss.
First, what is a linked benefit?
A linked benefit long term care product is a subcategory of the broader “Hybrid/Combination Long Term Care” category. What differentiates a linked benefit product from just the products with accelerated benefits (AOB) is that the linked benefits also have a “Continuation of Benefits Rider” or “Extension of Benefits Rider,” depending on the vernacular the carrier uses. Example: Many life insurance policies have AOBs on them where the death benefit—and only the death benefit—can be accelerated for chronic illness or long term care purposes. Conversely, a linked benefit product has the death benefit that can be accelerated (via the AOB) but then, once the death benefit is fully depleted, there is a COB or EOB that kicks in to provide additional long term care benefits. So, with linked benefits you can get multiples of the death benefit in long term care benefits if we are talking a life insurance linked benefit product. With linked benefit annuities you can get multiples of the accumulation value in long term care benefits. The presence of the COB/EOB is what makes a linked benefit product a linked benefit product.
Back to the Question:
Are these products too good to be true? No, they are awesome products but the actuarial logic that goes into these products make them very sustainable to create and price. The semi-actuarial reasons are:
1) Interest rates: This not only goes for linked benefits, but also for traditional long term care insurance. We all know that when an insurance company takes the premium, they put it into their general account, which hopefully grows in value so that the carrier can dip into their general account to pay claims. The higher interest rates are for the carrier, the easier it is to pay claims over time all else equal. Today, interest rates are much higher than they were just one or two years ago. This helps the carriers pay claims! However, this rate environment may not last forever so it also comes down to what are the long term interest rate projections that the carrier is assuming as they price today’s products? Today, carriers have much more reasonable long term projections of interest rates than they did a couple of decades ago. A couple of decades ago carriers assumed fairly high interest rates which allowed for low premiums, at least until interest rates substantially decreased. At that point, the clients got love letters from the carrier saying that their premiums on their long term care policies were going to increase! Today, carriers are much more rational with their long term interest rate projection. So, whether it’s traditional long term care or linked benefits, I believe that premiums are much more sustainable going forward. Besides, with most linked benefit products, the premiums are rock solid 100 percent guaranteed.
2) Lapse assumptions: The best thing that can happen for the carrier with traditional LTCI or linked benefits is that the client pays premium for quite a while (long enough for the carrier to offset the acquisitions costs plus profit) then stops paying the premium and the policy lapses without the carrier ever paying a claim. Once upon a time carriers had lapse assumptions of over five percent. Oversimplified Example: At a five percent lapse assumption, the policies that are written this year will be completely off the carrier’s books over a 20-year period of time. This means that the carrier would be free of any claims on the policies written this year because “all” the policies would be lapsed by year 20!
These overzealous lapse assumptions did not happen! Folks that had LTCI generally held onto their insurance until they went on claim. Even after carriers increased the premiums, clients generally did not lapse their policies. In actuarial terms, the “shock lapse” did not meet the carriers’ expectations. Policy owners were extremely resilient in continuing to pay the premiums, which is a testament to how the consumers valued their policies! So, because very few clients lapsed their policies relative to what was projected to lapse, unfortunately some carriers imploded from their inability to pay claims. Today, carriers are generally assuming that consumers continue their policies until there is eventually a claim and are pricing policies accordingly. This helps with the sustainability of premiums for traditional LTCI and helps the insurance carriers remain financially strong.
3) High deductible: Linked benefit products are very sustainable because they are very similar to high deductible health plans. What do I mean by that? Whether that linked benefit product is an annuity that has an accumulation value or a life insurance policy that has a death benefit, the long term care benefits paid are reducing the client’s accumulation value or death benefit first. The first dollars come from the client’s pocket! For example: Assume a client has a $100,000 death benefit on their linked benefit life policy. They also have a long term care pool of $200,000. If the client goes on claim, the first $100,000 in long term care benefits will reduce the death benefit to essentially zero (residual DBs are usually a part of these policies). That means that if the client were to pass away, then the life insurance policy will not pay out a death benefit at that point (or a very small one). But overall, the client wins because they get up to $200,000 in long term care benefits. Another example: If a consumer has a linked benefit annuity with $100,000 in accumulation value but a long term care benefit of $300,000, the first $100,000 in long term care benefits comes from the client’s accumulation value. Although not technically a “high deductible health plan,” it has a similar trait that allows the carrier to better price this product type.
4) Consumer behavior: With traditional long term care, it is a use it or lose it proposition. Therefore, if the client so much as stubs their toe, they may try to go on claim. A bit of an exaggeration I know. But the clients are very inclined to try to use their policy when they can so they get something out of it. Conversely, with linked benefit products, the client is using their own money at first. This leads to lower claims experience at the insurance carrier for linked benefit products.
Opportunity exists when there is a gap in the need that a consumer has and how much of that need has been addressed. I won’t bore you with statistics around long term care that we all know. What I will say is, when you compare the number of people that will need long term care insurance to those that currently have it, the opportunity for you, the financial professional, is huge.
I hope this article provides you with some confidence and knowledge on traditional LTCI, AOB riders, and linked benefit products. It is now up to you to broach this conversation with your clients.