Charlie Gipple, CFP, CLU, ChFC

I remember when my oldest kid was a toddler, and my youngest kid was old enough to just barely sit up by himself. I was in my office which overlooked the living room. They were both in the living room sitting on opposite sides of the room as I was observing from afar. My wife was downstairs in the kitchen. My oldest son (Seth) thought it would be a good idea to grab a plastic cube that was a piece to some sort of puzzle and launch it across the room at his little brother. Nolan Ryan couldn’t have done it any better. His form was perfect, and his fastball was delivered right to the side of Matthew’s head. It made a loud “pop” when it made contact. Matthew burst out crying. Before I could say anything or do anything, my wife yelled from the kitchen down below, “Seth, did you hit your brother?” At this point Seth is nervous and he knows he’s in trouble. My wife yelled out again, “Did you hit your brother?” He nervously and hesitantly yelled back “I didn’t hit Matthew!” Although Seth was 100 percent telling the truth, I then got involved and clarified what really happened.

This is what I call “literal language.” Literally Seth was 100 percent correct. However, my wife wasn’t seeking a literal answer, she was seeking the practical answer. Seth was operating under the letter of the law. My wife was interested in the spirit of the law. Did Seth hurt Matthew? Absolutely he did. That is what my wife wanted to know. If Seth wasn’t six years old at the time, he might’ve argued that she did not ask the right question and he was being truthful.

I see this literal language used a lot in financial services, whether it is intentional or just the way people were taught. One example is, “With XYZ product you cannot lose money.”

One area that I want to focus on today has to do with cash value life insurance. I recently read about a lawsuit that was filed against an agent, and the insurance company, that had to do with IUL. The client stopped funding the policy and “lost” tens of thousands of dollars when they cashed out. It did not appear that the agent had done anything egregious in the design of the product! Afterall, the client stopped funding it! Of course it didn’t perform well! As I read the lawsuit I just wondered how much literal language versus practical language was used in the sales pitch. Literal language being language that is indeed 100 percent truthful, but yet not adequate. To be clear, I am a fan of cash value life insurance as I distribute a lot of IUL and whole life insurance. So please don’t take this column as a bash on the product, but rather guidance on setting the right expectations and also a demonstration of how sensitive these products can be in relation to projections.

Let’s use as an example a male client that is 35 years of age, healthy, and wants to “max fund” an IUL for the next 30 years at $10,000 per year. Then, at age 65, he wants the maximum amount of tax-free income for the rest of his life (which we will say is age 100).

Example of “Literal Language” with Indexed Universal Life Insurance
After running an illustration on one of the top IULs in the country (and one of my favorites), our illustration shows a projected (note the emphasis) retirement income of about $85,000 per year from age 66 to age 100. In other words, for 30 years he would have paid a total premium of $300,000 into the policy, then for the next 35 years he is projected to get back out almost $3 million. This was illustrated at 6.71 percent and is the “maximum illustrated rate.”

So, you discuss the illustration and the product with the client. However, as you reach the end of the discussion, you wrap the conversation up with a nice bow by saying, “And remember, with this product you can never lose any of your money as a result of the market crashing.” You told the truth 100 percent!

When Reality is Different Than “Projections”
Fast forward a few decades. Our client has put money into the product, as promised, for 30 years. The market even performed halfway decently! The client retires and begins to take loans against the policy that you showed them of $85,000 per year. The problem is, the client gets a “Lapse” notice when he is only 72 years old—seven-years into retirement. Hopefully the product you chose had an “overloan lapse-protection rider,” which is a topic for another day.

What happened? Did the market crash? Did the carrier jack up the interest rate on the loan? Did the carrier increase COI charges? None of that happened. Everything actually went fairly smoothly. The only difference in my two scenarios is that the actual performance was five percent rather than the 6.71 percent that was projected. (By the way, this scenario can happen with whole life as well. Dividend rates can be different from projections and so can loan rates.)

Did the client “lose money?” No, he actually got out almost $600,000 (seven years of payments), which is double what he put in. However, for this client that crammed money away into this policy to the tune of $10k per year for 30-years to have it “die” only seven years into his retirement, try telling him again that he “did not lose money.” His perception is your reality. Him getting back twice what he put in will be no consolation to him if his mind was anchored on $85,000 forever. The 1.71 percent underperformance created an income deficit of about $2.4 million ($600,000 versus the $3 million projection).

What Went Wrong?

When you step back to the original conversation and the sequence in which everything was explained, what did the client hear when you wrapped it up with the comment, ”And remember, with this product, you can never lose any of your money as a result of the market crashing?” In many cases what the client heard was, “Even if the market doesn’t perform well, what you see on this sheet will happen.”

Some folks may think my example above is egregious. Many financial professionals might think that this is common sense and basic math, and most clients would not be so assuming, especially considering that on the ledger are the guaranteed columns as well. I get it, but I have seen many examples of consumers not being really savvy with financial products “assuming” certain things in the absence of full “practical language” and full disclosure.

Now, where I admit to exaggeration is, I would hope that it would not take three or four decades for a financial professional to break the news to the client that they will not be getting their $85,000 per year.

A less “abstract” example that I see and hear occasionally is “that you cannot lose money with IUL.” This one is less abstract because they are not even qualifying it with “losing money as a result of a market decline.” I told an agent a while back that the client can lose money if the market does lousy and the insurance charges eat up the policy. I also stated that if the client puts in X dollars and ultimately gets a lapse notice, the client’s perception is that they lost money. He said, “Technically they were paying for life insurance though and were not losing money.” I understood what he was saying 100 percent, but in the client’s eyes, if they thought their IUL policy was going to last until death and they got a lapse notice, they lost money. Sometimes a client losing money is more about expectations rather than actually losing money. So, we need to set the right expectations, and that starts with the marketing messages we put out.

Back in the early 2000s I worked for one of the large career life insurance companies that we all have heard of. This was and still is a great company that I was proud to represent. However, eventually I decided to leave to work with one of the carriers here in Des Moines that were first to the indexed annuity game and distributed all of their products through independent distributors like IMOs and independent financial professionals, like you. That was over 20 years ago, and I have been in independent distribution ever since.

The experience of being “captive” then later being exposed to independence was a very eye-opening experience for me in many ways. Thus, I would like to highlight three areas that I feel were the most significant differences at the time and still are.

The Product Spectrum is Wide and Optionality is Important
When I was a career agent—naïve in my early 20s—I believed that if I was with a fortune 500 company that had been around forever, then almost any product that we offered should be “decent” relative to almost any competitor out there. Afterall, how do you get much better than a mega A+ Fortune 500 company! Boy, was I brainwashed!

Thus, my first observation when I entered independent distribution, and still one of my strongest observations, is this: There is a huge spread between the “worst product” and the “best product” in the world of financial services, even among top rated carriers. Let’s use a simplified example.

Although there is much more to product than numbers/price, let’s take an example of term products and how wide the spectrum is when it comes to term prices. If I punch into my term quote engine that I am a 45-year-old male with a preferred health rating and looking for 10-year term prices on a $1 million death benefit, the worst price is 64 percent higher than what the best price is! That is significant. The ledger that I ran includes about 50 or so life insurance companies that my company offers to our agents. To put numbers to it, the company at the top of my term ledger costs $669 per year and the one at the bottom comes in at $1095 per year. Again, 64 percent difference between the lowest and highest. Am I glad that my agents and I are not stuck representing solely the product at the bottom? Absolutely.

Now the cheapest is not always the best, but in the previous scenario I believe that it is very close to the best. The lowest cost term product is fully convertible—for many years into the future—to a plethora of fabulous permanent products that are also top of their category (GUL for example). Plus, the cheapest term in my scenario is offered by an A+ company and that company will likely provide a great underwriting offer.

To be clear, a product being bad or good oftentimes has nothing to do with the quality of carrier that offers the products. Occasionally, product attractiveness with XYZ company has to do with whether the company even wants to be a player in that product line or not. Great companies may decide they don’t want the lowest term rates, or the highest paying MYGA rates for example. To that point, the company that has the worst pricing in my example above is a fabulous A+ rated carrier that has been around for over a century and is a household name. So again, a carrier having a good or lousy product is not necessarily a function of how good the carrier is. This goes against the belief I had in my 20s that “if I represent one company that is rock-solid then their annuities, life, long term care, mutual funds, etc. must also be of solid value to my clients.”

My point here is, whether it’s the price of term coverage, underwriting situations, guaranteed payouts on annuities, cash accumulation potential on IUL, etc., the spread between the worst and the best is huge. Make sure you have a wide peripheral view of the products that exist. I am very thankful that in independent distribution we have almost the entire world at our disposal.

Technology is Key
Speaking of term quote engines, my second observation is: Technology is key in independent distribution. When you have the entire world of products at your disposal, narrowing down the products based on quantitative items like price or GLWB payout levels on annuities is important. Conversely, if you had access to just one product, very little technology is required. You have what you have!

There are great term quote engines that your IMO can likely provide you with to help you narrow down the prices. There are also great annuity engines out there that let you filter down to the highest paying GLWB annuities, highest caps, highest participation rates, etc.

With optionality of products also comes complexity, at least unless you have good technology to sift through which carriers want to truly be a player in that product line and which carriers offer that product basically as a concession to their distributors.

Again, a good marketing organization/BGA can oftentimes provide these technological tools for you, or at least run the numbers for you.

Product Training and Knowledge
In the previous two sections I spoke largely about numbers, price, payout levels, etc. Naturally, there is much more to these products than just the numbers. Well, “qualitative” is just as valuable as “quantitative” when it comes to most financial products. There is more to it than just numbers. As I’ve said a million times, “Cost is an issue only in the absence of value.” Many times that value is in the various bells and whistles on a product.

In essence, the previous considerations can be utilized as a starting point to identify the pricing dynamics of the products, but then it is important to understand the other items that go beyond the ledgers and quote engines.

Examples of these items might be:

• Is the term convertible?
• Will the company give a good underwriting offer? Yes, carriers can differ significantly on various health conditions and the health rating offered.
• Does the IUL have relatively minimal moving parts? (Loan rates, caps, spreads, bonuses, etc.)
• Is the whole life policy direct recognition or non-direct recognition?
• Is the long term care policy indemnification or reimbursement?
• Does the annuity have any liquidity?
• Does the GLWB have a nursing home benefit?
• Although the GLWB payout is great, what is the accumulation potential/death benefit?
• What is the company’s history with renewal rates/caps/etc.?

These are just a handful of “qualitative” topics for various products that you and/or your IMO should be aware of. Because sometimes the best all-around product may be the cheapest, but sometimes the second or third product from a numbers standpoint is the best.

Awareness around each product’s qualitative components emphasizes how important your training and knowledge is—my third observation. The importance of associating with entities (carriers, IMOs, partners) that will offer you this training and knowledge is just as important as the products and the technology themselves.

Don’t have the time to study all of these features? Then partner with an IMO that is already an expert in these areas and can save you time by pointing you in the right product direction.

If you have the optionality of product, the technology, and the knowledge, you will never be “outproducted” in independent distribution. Although product is just one part of the equation in working with your clients, it is an important part of the equation.

If this article resonates with you, join us at our upcoming Lunch and Learns in Chicago (Nov. 15), Des Moines (Nov. 16), and Minneapolis (November 17). Even if it doesn’t resonate with you, join us anyway! Visit http://www.cgfinancialgroupllc.com/events for details!

Much of what I write about is derived from what I hear from the hundreds of agents that work with my company as their IMO. With that, something that has come up a lot in recent months from many of my agents is the topic of RILAs, or Registered Indexed Linked Annuities. The two questions I get on these products are:

• What are these products?
• What are the additional fees?

What are RILAs?
This article is not intended to be a comprehensive training on RILAs as there are product variations beyond the scope of this article—different indexes, inverse strategies, various crediting segments, etc. Rather, this article is designed to give those that come across these products enough knowledge to at least know what they are looking at.

RILAs can also be called “Structured Annuities.” For the last decade or so, RILAs have been the top area of growth in the variable annuity business as RILAs have gone from basically non-existent to approximately $40 billion in sales in the year 2022. RILAs now take up around 40 percent of the entire variable annuity business. Although $40 billion is still relatively small compared to the $310 billion (2022) overall annuity business, the growth of this product line has been outstanding and will continue to be.

These annuities very much resemble indexed annuities where they are linked to some sort of an index, they have some level of downside protection, and most of the time have no explicit fees. This is very different than traditional VAs that invest the clients’ money in various subaccounts/mutual funds that can come along with significant fees (subaccount, M&E, rider). There are certainly more similarities between RILAs and fixed indexed annuities than there are between RILAs and traditional variable annuities.

What about the differences? A few of the differences between RILAs and fixed indexed annuities are:

1. It is possible to lose money with most of these products, versus an indexed annuity—where you cannot get a negative return. For example, one such product has a floor of -10 percent, which means you can lose up to 10 percent of your money. (Note: there are products that have zero percent as a floor. Many times, you can choose your floor.)
2. As a trade-off to being able to lose some money, the caps and/or participation rates are generally higher than what you see in the indexed annuity world.
3. These products are registered as securities because of the fact that you can lose money on them. This means that only reps that have a securities license can sell these products.

Although there are various flavors of RILAs as well as many different options within each RILA, to simplify it I would break RILAs down into two main categories—those RILAs that have “floors,” and those RILAs that have “buffers.”

For those that have a floor, the floor is the maximum amount a consumer can lose. Some RILAs give you various options on the level of floor that you would like. Generally, the more money the client can lose, the higher the cap/par rate is. For example, one option may be where you have a floor of -10 percent and have a cap of 15 percent. This means that if the market drops 15 percent, you only lose 10 percent. However, if the market goes up, you can get up to 15 percent. There may be another option in the product that has a floor of -20 percent. So, you have the possibility of losing more money if the market should tank but this generally means that you would have a higher cap, 20 percent as an example.

Instead of a floor, there are RILA options that provide buffers. A buffer means that if the market drops, then the insurance company absorbs the first X percent of that drop. Then, anything beyond that buffer, the client will participate in. For example, if a client has a 10 percent buffer but the market drops 15 percent, the client will only experience a five percent loss. The higher the buffer is, the less the cap/participation rate is to the upside.

What are the additional fees?
When I explain to my agents how the products work and also that they are a subcomponent of variable annuities, they always respond with, “There have to be fees attached to these…” Also, when an agent sees a cap of 15 or 20 percent, they are taken aback because fixed indexed annuities have caps of 10 to 12 percent today on the high end. So, again, “There have to be fees attached to these…”

My answer to the fee questions is: There generally are no explicit fees associated with these annuities, just like how fixed indexed annuities have no fees. (Note: Exceptions are when a certain strategy might have a “strategy fee.”)

The next response is, “Then how are the insurance companies able to do this?” This is where I will refer you to my other article in this month’s edition entitled, RILAs: How Do Insurance Companies Do It?

Something that I don’t think advisers talk enough about is the “death penalty” that the IRS assesses to the surviving spouse. What do I mean by this? Many times when one spouse dies, the surviving spouse generally gets a tax increase. This is because, once one spouse dies, it is not like the “taxable income” to the surviving spouse immediately reduces by 50 percent. And without a 50 percent reduction in taxable income, that generally means a tax increase to the surviving spouse. The bestselling author of The Power of Zero—David McKnight—discusses this a lot, but in the following paragraphs, I want to put numbers to it to demonstrate the various flow that makes up this “tax increase.”

In the chart below are the 2023 federal tax brackets. As you can see, married individuals filing jointly can have twice the taxable income for a respective tax bracket than what a single filer is allowed for that same tax bracket. What this means is, again, unless the surviving spouse is recognizing taxable income that is half or less than what the couple was getting prior to the death, it will generally be a tax increase. (One exception to this is how Social Security taxation works, but that is for a later conversation.)

Let’s give a quick example. (Note: This is fairly simplified and is assuming that Bob and Jill are using the standard deduction as a large majority of Americans do.)

Bob and Jill
Bob and Jill are both aged 75 and have a total retirement income of $100,000 per year. Their income is comprised of the following sources:

• $30,000 (Social Security for Bill).
• $20,000 (Social Security for Jill).
• $30,000 (IRA Annuity Payments from a GLWB (Joint Payout).
• $20,000 (Required Minimum Distributions).

Bob tragically passes away in late December of 2023. What does their joint tax return look like for 2023? We will then compare that to Jill’s tax return for 2024, in order to demonstrate this “Death Penalty.” We will also be assuming the exact same tax brackets and standard deductions in both tax years for simplicity.

2023 Tax Return
(Note: In the year of death, Jill is allowed to file as “Married Filing Jointly” as we do below.)

Income Subject to Tax:

• $42,500 (85 percent of their Social Security Income that is subject to taxation because they made over $44,000 in Provisional Income).
• $30,000 IRA Annuity Payments from a GLWB (Joint Payout).
• $20,000 in Required Minimum Distributions from securities.
  $92,500 (Total Income Before Standard Deduction).

Standard Deduction:

• $27,700 (Regular “Married” Standard Deduction).
• $3,000 (Additional $1,500 per person for being over age 65).
  $30,700 (Total Standard Deduction).

Taxable Income:

• $92,500 (Total Income Before Standard Deduction).
• -$30,700 (Total Standard Deduction).
  $61,800 (Taxable Income Subject to “Married Filing Joint” Tax Brackets).

Total Tax in 2023:
(Note: Tax brackets are “marginal,” meaning that although Bob and Jill are in the 12 percent tax bracket, not every dollar is taxed at 12 percent.)

• $2,200 (The first $22,000 of Taxable Income multiplied by 10 percent).
• +$4,776 (The remaining $39,800 ($61,800 — $22,000) taxed at 12 percent).
  $6,976 Total Federal Tax Due.

Now let’s move on to the 2024 tax return and assume the same income to Jill (except for the Social Security on one life that she will lose). Again, this is simplified because we are assuming the income levels per tax bracket remain the same in 2024, although this is unlikely due to the “inflation adjustments” that occur in most years to the brackets.

2024 Tax Return
Note: This is the year after death and therefore Jill is filing as “Single.” She is not a “Qualifying Widow.”

Income:

• $25,500 (85 percent Social Security Income Subject to Taxation. Jill inherited Bob’s $30,000 Social Security payment. Jill’s Provisional Income is over $34,000.)
• +$30,000 IRA Annuity Payments from a GLWB (Joint Payout).
• +$20,000 in Required Minimum Distributions from securities.
  $75,500 (Total Income Before Standard
  Deduction).

Standard Deduction:

• $13,850 (Regular “Single” Standard Deduction).
• +$1,850 (Additional “Single” Standard Deduction for being over age 65).
  $15,700 (Total Standard Deduction).

Taxable Income:

• $75,500 (Total Income Before Standard Deduction).
• -$15,700 (Total Standard Deduction).
  $59,800 (Taxable Income Subject to “Single” Tax Brackets!).

Total Tax in 2023:
(Note: Jill is now filing off the “Single” tax brackets. She is now in the 22 percent tax bracket, versus the 12 percent that Jill and Bob were in when they filed “Joint”.)

• $1,100 (The first $11,000 of Taxable Income multiplied by 10 percent).
• +$4,047 ($33,725 taxed at 12 percent. This is the entire length of the 12 percent bracket).
• +$3,316 (The remaining $15,075 ($59,800 minus $44,725) taxed at 22 percent).
  $8,463 Total Federal Tax Due!

Summary:
This scenario is actually more ominous than it looks. You may be looking at the difference in “Tax Due” between the two years as being very minimal. After all, Jill is only paying an additional $1,487 ($8,463—$6,976) in taxes. However, there is more to this story than just that number.

Bob and Jill were previously living off of $100,000 in income coming from Social Security, their annuity with a GLWB, and the RMDs coming from the securities. As far as true “after tax” purchasing power, they were “netting” $93,024 that they could spend on travel, food, etc.

Conversely, after Bob died, Jill was only getting $80,000 in income. This is because she lost her Social Security in order to take the higher of the two—which was $30,000 from Bob. That is how survivor benefits generally work. How much was Jill taxed on the income she was getting of $80,000? More than when she and Bob were raking in $100,000! The above tax increase to Jill after she experienced a $20,000 pay cut is certainly a rude awakening to many widows/widowers. The tax situation can be mitigated by looking at items like Roth conversions and cash value life insurance, as David McKnight discusses.

In the end, between losing one of their Social Security payment streams and the tax increase, this meant that Jill was getting a “net” of $71,537 ($80,000 – $8,463). Relative to what Jill and Bob had to spend prior to Bob’s death, this is a decrease of $21,487 or 23 percent!

There are studies that say that when the spouse dies, the survivor will naturally spend less. I often wonder if that is because the surviving spouse truly has a desire to spend less, or because it becomes a necessity to do so in order to not run out of money. My opinion is, it should be up to the surviving spouse if he/she wants to stop spending. At least giving him/her the option would be nice. How do you provide these options? In addition to a “Tax Free Retirement,” I think a life insurance policy to fund that $21,487 annual gap would be a good starting point… But it has to be earlier than age 75.

Free Stock photos by Vecteezy

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.