Friday, March 29, 2024

Deeper Dive Into The Latest Technologies Impacting Life Insurance Digital Sales

I attend many webinars and now finally travel to industry conferences. Speakers love to use analogies when attempting to make comparisons to hammer home a point. Sometimes it connects and sometimes it is just too way out there for the audience to understand. Either way, in 2022 we have turned the corner in life insurtech from AI in underwriting and expansive use of electronic health records, to innovating the sales digital experience and renovating the life insurance value chain. Since we have turned the page, a metaphor would be more appropriate when describing the exciting innovations in life insurance technology. Here is my metaphor, “Life Insurtech in 2022 is a whole new highway.”

Five Ways to Renovate the Life Insurance Value Chain
The first week of March my company, InsurTech Express, exhibited at the iPipeline Connections conference in Las Vegas. At the conference, I met Hari Srinivasan, CEO, and Nicole Mwesigwa, co-founder and COO, of iCover. As I have said in previous Tech-Tock articles, data is the fuel driving innovation in the life insurtech space. iCover is an AI/algorithmic underwriting platform that assesses, prices and delivers life insurance in five minutes. With a built-in eApp, QUITM behavior-based questions and a proprietary decision engine, iCover can transform your new business process in 12 weeks.

By most measures life insurance is essential to household economic stability, but ownership fell in the last decade from 63 percent to 52 percent (these stats are from LIMRA Fast Stats Sept. 2021). So, what is preventing us from “connecting” with and “covering” more consumers? Lack of product innovation and the buying experience, which is too long and too complicated! The good news is we have the tools, the data, and the talent to change the trajectory of our industry. Here are five ideas that can be implemented in 2022!

  • Offer a multi-channel distribution platform to reach consumers wherever and whenever they are primed to think about insurance and seamlessly connect them to a digital buying process. Include digital messages to keep the consumer engaged and informed about the application status and next steps.
  • Revamp the eApp to use behavior-based vs. reflexive questions. This will make the purchase journey intuitive and fast. Fast means less than 10 minutes from app to offer for most consumers.
  • Use data differently. Data functions to knock out apps or supplement the traditional underwriting process. Using data to detect non-disclosures and rate applications behind the scenes eliminates the uncomfortable task of fact-checking the consumer over the phone and increases opportunities to price applications on the spot.
  • Install AI/Algorithmic underwriting to simultaneously assess applications and make decisions at the point-of-sale. A data-driven system maximizes auto-acceptance without compromising risk and is the flywheel for the entire buying process!
  • Create a feedback loop for the AI decision platform. Whether online or offline, this loop will expedite learning, improve accuracy and increase straight-through processing rates. Data can come from multiple sources; consumer buying analytics, claims, post-issue DHR requests, manual underwriting decisions, application and admin surveillance activities.

Renovating the value chain does not have to be overwhelming, particularly when using an agile approach to manage incremental change. Choosing the right partner and solution, like iCover, also helps!

Effective Life Insurance Illustration System Implementations
Over the years working on various single carrier and multicarrier illustration systems, the implementation process includes critical pieces like the functionality and the user experience. When adding life insurance products to a platform there are three areas that are key to the implementation (Calc Engine, Reporting, and User Functionality). Some features in the illustration platform are already baked in, but other features such as how to select age, riders, and strategies, just to name a few, can be sensitive in ease of use and practicality in running the illustration. What most agents and BGAs may not realize is that it is not necessarily the vendor who may be the cause of a challenging user experience, but how the carrier did their implementation. The key to a successful implementation is to have advisor and BGA beta testers in the field before the launch.

“Modern and capable Illustration systems are absolutely critical for carriers, of any size and complexity, to both drive the sales process and enable the exponential benefits of a digital ecosystem,” says Lyndon Edwards, president of illustrate inc, a leader in providing illustrations, eApp, and other digital cloud-based solutions to the North American life insurance industry.

Edwards continues, “Illustration systems are much more today than they used to be, and they continue to evolve. In addition to providing accurate, instant, compliant, and secure information, today’s systems also need to be feature rich, integration capable, and future ready to deliver customer, user, and operational experience, all critical for carriers to attract agents, succeed, and grow in today’s market. Choosing a proven illustration partner with the actuarial, industry, and technology expertise required, to understand and deliver on specific carrier needs and requirements, will ensure and provide the continued innovation, evolution, and commitment in a constantly changing environment.”

More Innovation Using Electronic Health Records (EHR)
If you read my Broker World article in February, Electronic Health Records (EHR) For Life Underwriting Surging In 2022,” then you will see the rapid expansion of how EHR is being used in the life insurance industry. AdamsBridge understands the healthcare data and pharmaceutical industry which defines their expertise to retrieve and translate medical records from an industry that uses them for maximizing healthcare reimbursement, not for the interpretation needed for the life insurance Industry.

“We are the only organization in the industry to show and document the risks of using EHR records for risk assessment in life insurance, showing variances it has in ‘missing’ data compared to legacy APS records—variances that could range several tables. It is not about your ‘hit’ rate, but the ‘useability’ rate of the data,” said Peter Iras, executive director of AdamsBridge.

Iris continued, “We further redefined the logic used by other summary/data providers with the industry’s first LOMA certified summary team. Another first for the life industry—a customer driven tier builder platform where the clients can build their own summary. Imagine getting the medical data of your choice digitized, extracted, and sorted the way you want and not by some off the shelf or plagiarized version. Data that is searchable, sortable, chronological by body part, body system, key words, diagnosis, scripts, labs, or whatever method you want to use to gain that edge. Useful reports designed by you that focus on impairments with their underlying factors, morbidity, diagnosis, prescriptions, labs, body limbs and specific body systems, delivered in any format, from any data aggregator, with even a customizable analysis focused on directional recommendations (decline or approve) for your underwriters or an underwriter snapshot so you can make easy directional decisions.”

Up until now, many InsurTech disruptors were start-ups steered by ambitious young people with impeccable technology credentials but limited knowledge and understanding of the life insurance industry. They typically arrive with a solution looking for a problem to fix and often stumble when confronted with regulatory and compliance obstacles as well as with the complexity of insurance distribution. The situation is now being reversed.

Random Expectations

As a profession we can hold our own when it comes to the ability to ask, “What if?” Perhaps the word malaise works best to describe our chosen market. There seems to be some speculation that we are on a great new venture. That indeed things have changed forever. However a consensus as to the trajectory of this alteration in goals or approach seems much more illusory. Let’s try on a few of the open conundrums out for consideration:

  • Looking back at the death to birth ratio as far back as the U.S. Census has records, COVID has provided us with a new and possibly permanent reversal of our fate and fortune. For the first time, deaths outnumber births. It is not only the dramatic increase in mortality but a commensurate decrease in birth rates during the Pandemic. Isn’t it, after all, the capricious nature of our mortality and the responsibilities that accrue with new life that creates and sustains our fiduciary marching orders?
  • In a recent informal conversation with a Senior Actuarial State Regulator, a conversation about the level of activity concerning new long term care or chronic illness filings, the question of product or benefit relief rose to the surface. It appears that, with the exception of chronic illness ADBRs on life policies, the cupboard is bare. Nothing new or pending portends and defines an acquiescence in our market condition that should not be conducive to a good night’s sleep.
  • I recently got my own annual long term care policy review. As frequently reported in this column, at the dawn of TQ Comprehensive Options I was sufficiently brilliant to buy a 10 pay, lifetime benefit, five percent compound COLA with indemnity payments. It will currently pay $417.89 per day or $152,524.85 annually. Does this strike anyone as, at the very least, the faint whisper of an incentive to claim?
  • “Careful what you wish for” could never be more significant than with the simmering pot of idealistic reform brewing in Washington State. As expected, Governor Inslee has signed two new bills into law amending the existing establishment of a new social insurance program. House Bill 1732 and House Bill 1733. Under Bill 1732, the implementation of the new mandatory payroll tax will now go into effect July 1, 2023. The adjustments meaning benefits will not be available until July 1, 2026. Vesting however can now be graded for those born before 1968. Under Bill 1732 those disabled Veterans, those with non-immigrant visas, and those with a permanent out of state residence may be exempted. My prayers are that there may yet be additional revisions before the legislative session comes to an end in March.
  • Establishing a mandatory revenue funding mechanism constructed with required employee or employer payroll taxes, founded on no pre-x, with an initial premium rich social insurance trust fund placed into the hands of even hopefully well-meaning politicians struggling with Medicaid costs in any state is precarious at best.
  • Be alarmed, actually be very alarmed. There is a large white flag waving in the Pacific breeze. Acknowledged defeat in the face of overwhelming odds is acceptable even to my hard head. However, holding in my right hand my paid up potentially multi-million dollar policy demonstrates that our capitulation may be premature.

That empty flag is not the birth of answers, it is a graveyard of solutions.

Other than that I have no opinion on the subject

Discover How Data Transforms The Digital Life Sales Process

You can control your own destiny with web-enabled Lead Gen and Data-Driven Decisioning.

Raise your hand if you want more leads.

Hands up if you think your website could be better utilized to capture interested prospects.
Okay, last one. Hands in the air if you have felt an intuition about a strategy that could make a substantial impact on your business, but had no facts or metrics to back it up.

If you have any hands above your head right now, read on. First, let’s talk lead generation. Lead gen has two primary impacts on your business: 1) the potential for new revenue and, 2) attraction and retention of agents. I have yet to encounter an agency that doesn’t want more leads. And with the right tools at their disposal, agencies can efficiently attract, capture, and distribute ample leads.

One of the biggest areas of lead capture opportunity? Your website. Think of your website as a storefront. When you don’t provide a virtual shop window for prospective clients to browse, you forfeit the chance to draw them inside. A consumer-based quote engine on your website can be a game-changer for your agency in 2022. You can increase lead volume, leverage existing CRM technology as you transfer leads to agents, and even jump-start an application. Sound interesting? Check out this clip: https://www.ipipeline.com/bgas-jump-start-your-lead-gen-in-the-new-year/.

Next up, data-driven insights and decisioning. Most agencies are short on resources—people, time, and money to examine strategies, test and analyze, execute, and improve. In the absence of humans, more hours in the day, and an influx of unexpected funding, the differentiator is data. What if you could look across your carrier partners and know where your cycle times are shortest and longest? What training would you prioritize for employees if you could pinpoint where execution breakdowns were occurring in case management? What if you could measure agent productivity by premium and cycle time? What if you were able to see that by reducing cycle time by five days, your placement ratio would go up by 13 percent?

If you were able to use metrics to drive decisioning, you would gain invaluable insights into your business, enabling you to confidently take courses of action using the resources of teams three times your size. Data is that powerful. And the best part? You don’t have to be a data scientist to utilize it. Check out this video of three BGAs discussing the results of their data-driven decisioning: https://www.ipipeline.com/bga-panel-how-data-is-driving-better-performance-more-business/.

Small adjustments can make big impacts. Ask yourself the questions above in a few months…and let’s get those hands down! These video links and metrics were provided by Roy Goodart who is head of product management at iPipeline, offering an end-to-end ecosystem for fully digitizing the life insurance industry. iPipeline provides distributors with the technology needed to differentiate themselves from their competitors by offering a comprehensive end-to-end platform. They provide you with the agent tool sets that a modern workforce needs in order to process business quickly in this ever-innovating market.

Agent Tools Using AI Predictive Data for Product Recommendations
Sproutt is a new kind of life insurance provider who is transforming how life insurance is purchased and distributed. I met the Sproutt team at the LIDMA conference last October in Denver. I found their sales model coupled with their Insurtech platform very innovative. I asked Sproutt about their technology: Using proprietary AI technology, Sproutt’s Quality of Life Index (QLI) identifies consumers’ “hidden” healthy behaviors to provide a personalized life insurance buying experience, in 10-minutes or less. Sproutt has established itself as a key player within the direct-to-consumer space, and following its rapid growth and technology evolution in the last two years, it is now pioneering agent distribution within the insurtech sector.

Sproutt is bridging the gap between traditional distribution and modern technology, providing agents a competitive advantage. They do things differently at Sproutt. “We put agents first and we provide them the tools and latest technology to be successful,” said Assaf Henkin, co-founder and president. Sproutt covers the full spectrum of omni-channel distribution including independent agents, brokerage, P&C, banks and wire-houses, along with partnerships and affinity groups.

Sproutt’s agent platform includes proprietary Smart Routing technology, which can accurately match clients to a personalized product that best meets their needs and buying preferences. The agent platform includes instant issue term and permanent life insurance covering protection and accumulation sale scenarios while enabling agents to reach clients in a much more effective manner. “We have fully integrated the needs of a life insurance agent into our platform and leveraged our proprietary technology to provide a best in class agent experience,” said Henkin.

As a data-first company, Sproutt is leveraging historical and real time data to provide a predictive experience for both agents and consumers. The ability to accurately predict customer needs, confirm that with agents’ input, and recommend the right product is extremely valuable in a digital buying scenario where speed, transparency, and responsiveness go a long way. Sproutt is preparing to launch a new, fully-redesigned agent portal that will feature a “next generation” series of products all hosted on the company’s predictive data platform later this year.

More Life Digital Sales Platforms and Using Behavioral Science
New from Covr Financial Technologies is Covr Pro, which brings Covr’s digital life insurance technology to independent distribution across multiple channels and agency business models. Originally built for Covr’s 30,000 financial advisor partners, Covr Pro gives independent agents, agencies and producer groups a new digital toolset to rapidly grow their business while future-proofing their practice.

In addition to term and permanent life insurance solutions, Covr Pro offers asset-based long term care, disability, and will introduce an annuities path from more than 30 top-rated carriers including Prudential, Protective and AIG. The fully digital experience also includes needs analysis tools, multi-carrier quoting, case status tracking, and policy delivery and review. The platform is the only one in the industry to offer drop ticket for 100 percent of the available products.

Covr Pro also gives agents access to Covr’s team of industry experts with omni-channel support and assistance. Signing up is easy and fast—agents can create an account and submit business immediately, and get paid some of the most highly competitive commissions in the industry today.

InsurAware™ is an end-to-end digital distribution platform built on state-of-the-art data analytics, behavioral science, and artificial intelligence which aims at matching clients with cost-effective insurance policies provided by leading policy providers. InsurAware™ is equally beneficial for financial institutions, as it leverages the power of precise digital marketing coupled with the accuracy of industry data processed with state-of-the-art AI to become a one-stop solution for the customer acquisition journey.

I asked the InsurAware team, “What are the market trends?” They replied, “We are seeing traditional and digital carriers coming to market with truly end-to-end digital products complete with APIs. Helping to identify the consumers that have the ability and intent to purchase while also providing agents with digital tools to better match these prospects with the right solutions for their specific needs will be table stakes in the future. The ability to take customers and agents through the fulfillment journey, achieved through using data services, data analytics, and state-of-the-art flexible rules engines and fulfillment systems, is becoming table stakes as well. Low code configuration tools are increasing speed to market and accelerating the pace of digital transformation within carriers and distributors. Real time interface techniques through APIs and SDKs are making automated underwriting and the intelligent quoting process much easier.”

Combo Your Life Sales With Disability Insurance

Your clients are both 30 years old, just had their first child, and now need some life insurance. You show the couple $1 million of 20, 25 and 30-year term. You discuss the value of permanent insurance and you show some very compelling facts and figures. At the end of the day, your client chooses a 25-year term for about $560 per year and you start the application and underwriting process. Awesome! Your client was approved without a medical via an accelerated underwriting process and you e-deliver the policy a couple of weeks later, make your client system notes, add some follow up dates for future reviews and move on to the next client.

A few months later, the same client runs into an old school buddy and within a few weeks they find themselves playing golf and catching up on old times. The old friend happens to be in the financial service business as well and the conversation turns to planning and protecting the family. Your client tells his friend how easy it was to buy some life insurance and what a great job you did with the process. The old friend starts to ask about how much disability
insurance was recommended, and your client says, “Disability insurance, how does that work?” Within a month, your attorney client has a $5,000 per month DI policy with comprehensive riders for about $1,500 in annual premium.

Fortunately for your client, in this hypothetical scenario, the other producer was able to secure a critical part of basic planning for young professionals and business owners. Unfortunately for you, the only product you sold was the low-cost term insurance and you missed the larger sale of the disability insurance. In addition, traditionally, a disability insurance sale will pay renewals for the next 10+ years, while, with the majority of companies, term insurance will just pay a first-year commission and no renewals. While the income generated is a fantastic reward, more importantly the disability insurance is based on morbidity rates versus mortality rates—which means that most of your younger clients have a statistically greater chance of being disabled than passing on during most of their working years. The disability insurance is a triple win product! It’s a win for the consumer, a win for the consumer’s family, and a win for the producer.

Everyone who works needs disability insurance while they are building their nest egg. While the need for this important product is great, not everyone can add it to their portfolio based on their combination of income and expenses. As a client’s income increases over their fixed expenses, then that client has more flexibility to spend, save, and invest. So, depending on a client’s fixed expenses, the crossover point will vary. The greater the fixed expenses, the higher the amount. For example, a client with three children and a large house will have more fixed expenses than a client who has one child and needs a much smaller house.

In general, we have found from personal experience that professionals, such as doctors, dentists, certain other healthcare workers, attorneys, engineers, accountants, and salespeople and business owners, making about $80,000 or more, are more likely to proceed with purchasing robust individual disability insurance policies.

For those with lower incomes or more manual duties there are less robust individual disability policies still available to provide protection—but perhaps without as long a benefit period. Also, the definitions may not be as comprehensive or the monthly benefits as high.

So, when presenting the life insurance, combo the presentation with disability insurance. If the timing isn’t right for the dual presentation then take a look at the life application after the life insurance is placed. As part of any life insurance policy, the application is part of the policy. This gives you the ability to review the life application to see if you feel the client is a possible candidate for individual disability insurance.

In addition, the medical part of the life underwriting can assist in some of the field underwriting needed for disability insurance. This includes, but is not limited to, providing information about medicine being taken and historical medical care that may have been needed.

So, the next time you are working with your clients, be sure to order the combo meal! 

Roth IRAs: The Basics And Not-So-Basics

With the tax increases that will almost inevitably happen, the entire world is talking about Roth IRA‘s. So, I thought it would be good to give some basic and not-so-basic information on Roth IRA‘s, Roth conversions, order of withdrawals, etc.

First off, I say all the time that we in financial services “normalize our excellence.“ Now this may sound arrogant, but it is not meant to be. Basically, all that I mean by this is that what we know by the back of our hand many consumers do not know. For example, many consumers do not know what the difference is between a traditional IRA and a Roth IRA. This is hard for many agents to comprehend but it is the truth.

So, let’s start out basic and discuss how I explain the differences. I usually draw out Diagram 1 for clients as I explain the traditional IRA versus Roth IRA concept.

Explaining Roths Versus Traditional IRAs
What I say is, on the right-hand side you are paying taxes on the “seed,” and on the left-hand side you are paying taxes on the “harvest.” In other words, with one you are putting in after-tax dollars in order to be tax-free at retirement. With the other, you get the deduction, but those chickens come home to roost in retirement. I also usually tell the client, “Now, the seed versus the harvest is a nice catchy line I know, but without getting into the math on which one is better, the decision really comes down to your expectations of tax rates at retirement versus today. As much debate as there is around which one to go with, it is really as simple as this: If you believe tax rates will be higher in retirement than today, go with the Roth. And vice versa.” I usually also let the client know that there are some additional benefits to the Roth IRA in that withdrawals do not add to your “provisional income“ which determines if your Social Security is taxable.

Now, there is more to the story when it comes to Roth IRAs. What happens if you don’t wait five years? Or, what happens if you are not 59 1/2 when you take out the withdrawals? Or, what if you are 59 1/2 when you take out withdrawals but have not had the Roth IRA for at least five years? Etc. etc. This is where I will discuss the intricacies of how money withdrawn from Roth IRAs is treated in various situations.

First and foremost, in general, if you have had any Roth IRA established—not just the one you are withdrawing from—for at least five years and are age 59 1/2 or older, you can take out what you put in plus the growth without paying any taxes at all. And without having that dollar amount added to your “provisional income” for social security purposes.

But life isn’t always that easy. So, let’s get into the nitty gritty.

Order of Withdrawals
Diagram 2 represents the order of withdrawals from a Roth IRA. It is a lot like drinking with a straw. Depending on the density of the fluids, many times what you pour into the cup first stays on the bottom, then the next mixture is layered on top of it and then the next mixture is on the very top. Ever pour a stiff drink where you put the alcohol in first and you forget to stir it? The first thing up the straw is 100% alcohol! That is my analogy for a “first in first out“ treatment. This is the treatment that Roth IRAs enjoy. When you take withdrawals out of the Roth IRA, your contributions come out first, then any amounts you had previously converted to the Roth from a Traditional IRA, then the gain.

Withdrawing Contributions
The tax treatment of contributions is what makes “FIFO” so appealing. If “Joe” is 35 years old today and put in $6,000 and had something come up next year where he needed $4,000, could he take it without any penalty? Absolutely. As the years go by and his “contributions” pile up in the Roth, he has that dollar amount that he can access at any time without a 10 percent penalty or tax. The lack of tax should be common sense because what he put in was after-tax.

Withdrawing Converted Amounts
Now let’s take our 35-year-old “Joe” again and make this a little more complicated. Let’s say that Joe put in his $6,000 contribution today, and one year from now he moved in $10,000 that he converted from a Traditional IRA. Now let’s say that a year later he wanted to access $8,000. How is that treated? (Note: Keep in mind he already paid taxes through the conversion. Therefore, this process is to determine whether he gets a 10 percent penalty or not. He cannot be taxed twice!)

His first $6,000 that was his contribution is free and clear of any taxes or penalties (again, even though he is now only 37 years old!). However, the other $2,000 that he accesses is from the conversion he did the year prior. What is the tax/penalty treatment on that money? He is not taxed on the $2,000 withdrawal because—again—he just paid taxes on the conversion the year prior. However, he is penalized 10 percent because he did not satisfy the Roth IRA five-year holding period requirement. (Note: Some folks believe that if he set up a separate Roth IRA many years ago that the clock started ticking on this conversion back then and therefore he would not get a 10 percent penalty on the conversion, at least if the first Roth was set up more than five years ago. That is false when it comes to conversions. Otherwise, you would be able to convert pre-tax money to a Roth then immediately withdraw that conversion amount and thus avoid the 10 percent penalty. The IRS is ahead of us on this one. There are separate five-year holding period requirements for conversions.)

With the converted amount, can you fail the five-year holding period requirement and not have to pay the 10 percent penalty? Yes, there are nine “Special Purposes” the IRS allows you to have to avoid the 10 percent penalty:

  1. You are older than 59 ½.
  2. Death.
  3. Disability.
  4. First home purchase (Max $10,000).
  5. Medical expenses.
  6. Medical insurance premiums while unemployed.
  7. 72Ts or annuitization.
  8. College expenses.
  9. Birth/adoption.

For example, if Joe was fifty-nine when he converted to the Roth, he can take his conversion amount out six months later (59 ½) without receiving a 10 percent penalty. To keep it simple, in any of these scenarios in this article, if the client takes money (even gain) for any of the nine reasons, there will not be a 10 percent penalty. It is just a matter of if you are taxed or not.

Naturally, if Joe satisfied the five-year holding period rule and also experienced one of the nine special purposes, there is no tax and no penalty.

Withdrawing Gain Amounts
Now let’s talk about the treatment of the gains. Whether it is gain from the contributions or gain from the conversion amount, it is at the top of our glass and the last thing to be sucked out by our straw. So now let’s assume that Joe did this.

  • At age 35: Contributed $6,000.
  • At age 36: Put in $10,000 that was converted from a traditional IRA.
  • At age 39: He wanted to access $20,000 to buy a car (Note: The Roth grew to $25,000 at this point).

In this example, Joe is taking out all three areas of our fluid in our glass. The treatment of the first two areas (contributions, conversion amount), you should know by now. No taxes on either of the two amounts but a 10 percent penalty on the conversion amount—because he failed the five-year rule. Plus, he did not meet any of the nine special purposes.

For the withdrawal of gain, he receives a 10 percent penalty and is taxed on the gain. This is because he failed the five-year test and he did not satisfy any of the nine special purposes.

Withdrawing Gain Amounts: Alternative Scenario
Now let’s alter the scenario a little bit and assume that he had taken the withdrawal for any of the reasons you see in our list of nine special purposes instead of just to buy a car. In this case, the gain would be taxed (because he did not satisfy the five-year requirement) but there would not be a 10 percent penalty. Remember, no 10 percent penalty applies if he takes the money for any of the nine reasons.

Withdrawing Gain Amounts: Another Alternative Scenario
Now let’s say that Joe, many years down the road, does indeed meet the five-year holding requirement. He has held the Roth for at least five years after his original contribution and also five years after his conversion. Does he avoid the 10 percent penalty and taxation on the gain? It depends!

If the reason is for any of the first four (59 ½, death, disability, first home) of our special purposes, he pays no tax and no penalty. For example, he is over age 59 ½. This is how most Roth IRAs are intended.

If the withdrawal of gain is because of the last five (medical expenses, medical premiums, 72Ts/annuitization, college, birth/adoption)—and thus he is not 59 ½—then he pays taxes on the gain but no 10 percent penalty is due.

If the withdrawal had nothing to do with any of the nine special purposes, he pays taxes on the gain and a 10 percent penalty even though he satisfied the five-year holding period.

Guesses, Precision, And Importance

“I’m writing a book. I’ve got the page numbers done.”—Steven Wright

At a few points in my career, I was responsible for product development for the life insurance carriers that I served as either a consultant or an employee.

With each product developed we had one great fear: that we would only sell a handful of policies. These, in turn, would require the companies to maintain them on the administrative systems, adjust the plan description files with each system modification, and require the company to report and track the profitability of even the small number of policies on the books until they lapsed or became claims.

The first thing I did in that role was ask our distributors what they thought was missing in our product portfolio. Then I asked my sales teams what they believed they could enthusiastically get behind in regard to a new product. Lastly, I met with our administrative teams and sought their advice, concerns, and ideas.

Then the fun began. I made an appointment at the State Departments of Insurance in my home state and in the neighboring states. I would show up with a box of donuts for the civil servants and begin reviewing the filed product forms of our leading competitors. The donuts were intended to grease the skids for all the photocopies I needed.

Armed with the suggestions of our home office staff, the dreams of my sales teams, the unrealistic expectations of our distributors, and a decent understanding of the competitive landscape, I produced an Executive Summary of a proposed new product. The next step—approval by senior management.

At that point our actuarial team took over. I provided them with competitors’ rates, product performance comparisons, and product feature summaries.

In a short while, I could hear the numbers crunching.

Life insurance is many things but, at the bottom, it is about numbers. Math.

Guesses
The number of ants alive on the earth right now is estimated at 1016 (ten thousand trillion). This educated guess means that there are roughly one million times more ants than the number of people alive today (approximately 7.5 billion). In a happy coincidence, individual ants vary in weight between one and ten milligrams, which means “the remarkable result of these several guestimates together is that all the living ants weigh about the same as all the living humans.”1

There exists, therefore, a rough biomass equivalence between ants and people.

(Lest we get too impressed, the total mass of either all ants or all people would fit within a cubic mile of space, an area that could nearly be hidden in remote portions of the Grand Canyon.)

Question of Importance: Do educated guesses really matter? (Think COVID-related cases, hospitalizations, and deaths.)

Precision
“Crucial to the making of almost anything is the matter of its measurement. In English, this usually involves the use of the near-invisible adverb how, with its interrogative determination of to what extent and to what degree something might be. How long is it, how massive, how straight an edge, how curved a surface, how hard, how close the fit?”2

Today, most of the world utilizes the International System of Units (SI). This system, adopted by all countries except the United States, Burma, and Liberia, “defines the seven fundamental units of length, mass, time, electric current, temperature, amount of substance, and light intensity—otherwise known as the meter, the kilogram, the second, the ampere, the kelvin, the mole, and the candela.”3

In addition to these physical measurements, manufactured things possess geometrical characteristics, such as straightness, flatness, circularity, cylindricity, perpendicularity, symmetry, and parallelism. In the world of engineering, these physical and geometrical characteristics are measured to the finest tolerance, that is, the least permissible variation in dimensions or geometry.

According to a definition from The American Society of Mechanical Engineers, the industry standard, ASME Y14.5M, tolerance is “the total amount a specific dimension is permitted to vary. The tolerance is the difference between the maximum and the minimum limits.”4

Example: If an ideal part is to be 0.5 mm +/- 0.1mm, any resulting product between the range of 0.4 to 0.6 mm will be acceptable; the rest will be rejected.

Tolerances may also be expressed with any number of decimal places. The more decimal places are included, the stricter the tolerance is.

Example: Four decimal places, expressed as (.000x), (e.g., ±0.0005″).

Question of Importance: Aren’t you glad that there are rigorous requirements for precision manufacturing, especially for something as important as aerospace parts (think, jet engines) where a variation of just a few thousandths of an inch can lead to equipment failure or worse?

Guesses, Precision, and Importance in Financial Services
Products in financial services require adequate pricing in order to be both marketable and sustainable. In the life insurance industry, the elements of product pricing include mortality, interest rates, expenses, sales compensation, and lapse assumptions. Annuities, disability income and long term care products require similar pricing assumptions with the addition of morbidity.

Getting these assumptions (guesses) wrong can have devastating results.

Example: Long term care.

Paying for long term care is one of the greatest financial risks Americans face in retirement. Studies show that one-in-five individuals can expect to spend more than two years in need of long term care. This exposure represents a significant financial risk.

Back in the 1980s and 1990s an increasing number of insurance carriers began offering LTCI to fund out-of-pocket payments by the elderly and their families. By the mid-to-late 1990s more than 100 companies were selling policies to individuals and employer groups. “In 1990, 380,000 individual policies were sold; by 2002, 755,000 policies were sold in that year.”5

“In 2003, the pattern of annual increases in sales came to an abrupt end. In fact, LTCI policy sales began to decline rapidly. Between 2003 and 2009 individual policy sales declined by nine percent per year. Thus, in 2009, fewer policies were sold than had been sold in 1990. Moreover, while in 2002 there were 102 companies selling policies, by 2009 most of these companies had exited the market; that is, they had stopped selling new policies.”6

Question: It is worth asking, if the need is important, and the marketplace is growing, why would sales plummet and companies exit the product space?

Certainly, the companies entered the market because they believed it represented a profitable opportunity. “Many companies entered this market to take advantage of an opportunity that they knew existed, even if they were not completely certain about how to exploit it profitably. For 40 percent of the companies that left the market, their initial business strategy was to grow modestly in order to learn the business and improve their management of the product over time. Only 16 percent had aspirations of becoming market leaders.”7

It all comes down to math. (And wrong guesses.)

“Regarding the pricing of early policies, there was little basis on which to develop an estimate for future morbidity (i.e., the chance that someone would develop a condition that required use of long term care services) in the context of private insurance. In order to price these early policies actuaries relied on national data sources like the 1977 and 1985 National Nursing Home Surveys.

For other pricing parameters, like voluntary lapse rates and mortality, there was a reliance on the experience of Medicare Supplement policies and standard mortality tables. For this reason, voluntary lapse rates priced into initial policies were much higher than what they ultimately turned out to be. (In fact, there is no other voluntary insurance product in the market that has experienced lower voluntary lapse rates than what is found in LTCI policies.)”8

The math is important: “Even small errors on multiple assumptions can lead to major changes in the product’s underlying profitability. All of the major determinants of premium and product profitability have been going in the wrong direction: Interest rates are significantly lower than what was priced for, voluntary lapse rates are lower than for any other insurance product, morbidity is somewhat worse than expected and mortality is actually improving.”9

Distribution Influences Math
I had a hand in developing many different types of life insurance products, including whole life, current assumption whole life, universal life, level term, and indexed universal life. We made many educated guesses and relied on less-than-precise models. We did, however, focus on the important. Here are what we deemed important:

  • The product would be sustainable. It could remain on the shelf indefinitely and not impact the bottom line negatively.
  • The product met a definable need in the market. There was a real person with a real need that the product was designed to meet.
  • The company had the administrative systems to service the policyholders who bought the products. The policyholder could expect, and receive, satisfactory service in terms of time standards, accuracy, and dependability.

Over the last several decades, insurance carriers, brokerage general agencies, and independent financial professionals have all alike pushed the knife edge of competitive advantages deep into the heart of long-term profitability for life insurance, annuities, disability income, and long term care products.

LIMRA and NAILBA collaborated on a tremendous survey published early in 2022 entitled, Inside the Intermediary: BGA and IMO Survey Results. They surveyed 60 BGAs and IMOs, over 400 independent life insurance and health producers, and eight senior executives from BGAs and IMOs. I was interested in what the independent producers said was their number one reason for placing business with top carriers: Product pricing.10

Insurance carriers know that every product they introduce is ubiquitously quotable in comparison with all other like products. The competitive pressure requires actuarial precision.

Question: Does the distribution system’s expectation of ever-improving product performance, lower rates, and new features obscure the importance of reaching more people with the necessary coverage and protection? In other words, rather than always seeking the so-called best product, do distributors lose sight of the pressing need to find new unprotected customers?

Underwriting Influences Math
In February 2021, Deloitte published an article entitled, The Rise of the Exponential Underwriter. Underwriting is partially about guesses, but mostly about math. Underwriting manuals have always been compendiums of experience-driven classifications. “Traditionally, underwriters have utilized decades of static, historical information to develop rules and guidelines to assess risks.”11

There has never been the opportunity like now for underwriting to apply an innovative application of technology, AI, and data analytics. The article defines “exponential underwriters” as those utilizing “new data sources and advanced technologies to augment human underwriters to a degree never seen before.”12

“In life insurance, while historical health records would continue to be essential, insurers may get a more comprehensive and current assessment by tracking predictive data variables via fitness wearables and social media.”13 This, in turn, will create pricing relief through greater efficiencies.

All the guessing is getting more sophisticated!

Summary
In the insurance business, and particularly in independent distribution, success is a function of right guesses, precision when needed, and focus on the important. These responsibilities are shared between the home offices and the distribution partners.

We can overemphasize precision—the numbers—to the exclusion of the important—the people. Steven Wright’s quip implies that what goes on the page is far more important than the page numbers.

Similarly, the number of people owning our industry’s products far exceeds the value of making sure only a small number of people have the very best rate.

Faces, not facts, are what we need to always keep in focus! 

Footnotes:

  1. “Tales from the Ant World,” Edward O. Wilson, Liveright Publishing Corporation, 10/05/2021, ISBN-13: 9781324091097.
  2. “The Perfectionists: How Precision Engineers Created the Modern World,” Simon Winchester, Harper; 1st edition (May 8, 2018), New York, NY, ISBN-13: 978-0062652553.
  3. Ibid.
  4. https://www.asme.org/codes-standards/find-codes-standards/y14-5-dimensioning-tolerancing.
  5. LifePlans, Inc. (2012). 2011 Long-Term Care Top Writers Survey Individual and Group Association Final Report, Waltham, MA. March.
  6. https://aspe.hhs.gov/reports/exiting-market-understanding-factors-behind-carriers-decision-leave-long-term-care-insurance-market-1.
  7. Ibid.
  8. Ibid.
  9. Ibid.
  10. https://www.nailba.org/assets/LIMRA%20NAILBA%20Inside%20Intermediary%20Final.pdf.
  11. https://www2.deloitte.com/us/en/insights/industry/financial-services/future-of-insurance-underwriting.html.
  12. Ibid.
  13. Ibid.

A Recommendation

This column has tried for 18 years to simply comment from the grandstands about the pomp and circumstance of the passing parade. It was always an attempt to admire the vivid color and theme execution of the individual parade float offerings and not to pass judgement on the motivations behind the need to be in or out of the parade. This was to be the home of a contemplative analysis of normative values of truth, fairness, equity of access, economic justice and freedom of choice. In other words, go to your favorite flavor news wire service and drink your fill of current events. Here we would at least try to simply explore what it all means and where it might drag or push us.

Recent columns have unfortunately been forced to drift into a growing concern that a particularly flamboyant, politically extreme and disruptive market alternative is on final approach. This unique aberration is now developing with certainty and significant disregard of how its revolutionary presence may alter forever the long term care risk mitigation universe as we know it.

The implementation of the Washington State Cares Act has been postponed. A memo from the Washington State Democrats dated December 17,2021, confirms the temporary delay until the next legislative session is complete before April 2022 with premium collection in limbo potentially for calendar year 2022. Please allow the stated goals time to sink in: “Pausing the program so that it can better serve disabled veterans, military spouses, non-residents, and near retirees will improve the program.” And, “A pause will give the Long Term Care Commission the ability to study and make recommendations about residents who move out of Washington to retire and assure that those who opt out of the program maintain their private insurance solutions.”

The quote “It’s a poor general that does not have an adequate plan of retreat” has been so often used it’s source is uncertain. Its sentiments are not. Suffice it to say we cannot go back. There is no plan to retreat and frankly no possibility to fall back to a market that is comfortable and familiar. Going forward will necessitate what have been historically irreversible structural choices. What we here choose to accept or resist will dominate our market/product destiny for a generation. Will we live in a world abundant with recommended choices and free market decisions or one of mandated political control only allowing humble supplemental options from the sidelines?

  • There is no possibility of the resurrection of past success as we knew it. Robust, comprehensive stand-alone individual accident and health policies have no foundation to build upon. To my knowledge there is no company or reinsurance appetite for a mass influx of this premium.
  • The temporary gold rush of policies in Washington State which will now soon protect against intentional lapse immediately turned off the product spigot. Any possibility of this aberration igniting additional production windfalls will collapse that market overnight.
  • COVID has altered the future permanently. According to a recent report from The Society of Actuaries, deaths have increased in particular among the disabled with 47 percent showing an increase in “active life and disabled experience.” Incidence rate for claims showed an early decrease but is returning to pre-COVID levels. The American Academy of Actuaries was quick to add they are concerned about future health and disabilities that may show up as caused by COVID. It is also worth noting that COVID deaths are predominantly occurring among those least likely to be insured.
  • Institutional warehouse care, both nursing homes and assisted living, are experiencing a serious retraction. Close quarters, inadequate training and being structurally unable to quarantine or socially distance has for now moved the care market home.

Events on the West Coast require our attention. In addition, recent Supreme Court decisions on mask mandates could not have better illuminated the precipice of choice on which we are now perched. Government controlled and funded entities must comply with mandatory behavior fiat decisions. Free and independent business does not.

Do we now wish to live in a world of behavior recommendations (strongly incentivized) or inflexible government decree? Personally, it is very difficult to understand those who might prefer OHSA to be their permanent, omnipotent, omniscient parade Marshall.

Other than that I have no opinion on the subject.

Electronic Health Records (EHR) For Life Underwriting Surging In 2022

There is a surge of services, innovative solutions, streamlined processes and automated underwriting for life insurance utilizing Electronic Health Records (EHR). I get it that the availability of electronic medical data still has a mountain to climb to completely replace Attending Physician Statements (APSs), however what you will find is that solution providers are creating intelligent processes to support both. By the end of this article, you will be convinced of the surge of EHR.

Accessing EHR
MIB is e-connected to 99.9 percent of the insurance companies in North America and for over 100 years has been a trusted industry partner, providing unique insights to aid in the underwriting process. Their Electronic Medical Data Service (formerly MIB EHR) improves the life insurance industry’s ability to access electronic medical records, streamlines the broader APS process, reduces overall costs, and accelerates the underwriting process. Offering the only solution in the life insurance market with access to the top three EHR systems in the U.S. (Epic, Cerner and Allscripts), and with access to NextGen and Practice Fusion (through Veradigm) and over 5,400 patient portals, MIB has more than doubled their release rates in the last year. Available to carriers as well as distribution, MIB provides the industry with a single point of access to secure records from multiple data sources, including the ability to systematically reflex to a traditional APS where electronic records are not available.

MIB recognizes the growing opportunity for electronic medical data platforms to provide a greater value to underwriting in 2022 through improved access to data, enhanced speed of data retrieval, and enriched usefulness of the data available to life insurance underwriters. “To meet the full needs of the life insurance industry, we recognize that data needs to be available from multiple sources through a single interface, including electronic data and traditional APSs,” said Andrea Caruso, executive vice president and chief operating officer of MIB. “It must also be provided in a way that makes it easily utilized in the underwriting process and comprehensive so that it can be decisional in nature.” In addition to making the format of the data more useful, MIB recognizes there is a critical need to provide underwriter support and educational materials to encourage use and adoption of electronic medical data. With former underwriters on staff, they are taking a leadership role in providing training and other resources, developed by underwriters for underwriters, which can help organizations get past the learning and adoption barriers.

Last year when I was browsing Human API’s website, their Vision Statement caught my attention and sent a simple yet powerful message, “We exist to radically accelerate the pace of health innovation for everyone, everywhere.” I reached out to the product team at Human API to find out more about their ever evolving EHR platform for life distribution. “Human API launched their Health Intelligence Platform for BGAs to enable better carrier collaboration, improve placement rates, and create better consumer experiences. The platform simplifies EHR and APS ordering into one unified process and turns health data into actionable intelligence that accelerates underwriting. With a single order, Human API searches for all available EHRs through their proprietary network. If no electronic records are found within a predetermined time period, an APS will automatically be ordered, reducing the operational burden on agents and case managers while decreasing the time it takes to get usable medical evidence.

Human API’s electronic health record network consistently exceeds a 50 percent conversion rate for customers by leveraging the largest combination of networks including HIPAA authorized networks, patient portals, and consumer-mediated record retrieval networks. The Health Intelligence Platform was built with distribution in mind, allowing brokerages to securely share evidence directly with carriers, keep agents and case managers informed with automated status notifications, and quickly understand the key aspects of an applicant’s health with simple health summaries. In addition, Human API’s structured health data powers improved client experience and better placement rates with personalized product matches. To learn more about how Human API’s Health Intelligence Platform can empower your business, reach out to Human API through humanapi.co/request-info.

Sharing Information and Integrating Solutions for a Better User Experience
This is the fourth consecutive article where I mention APIs. An open API (Application Programming Interface), is a software intermediary that allows two applications to talk to each other. The market of Insurtech for life insurance has made it necessary that solution providers offer APIs. This emphasizes the importance of sharing information seamlessly between disparate systems and also building your own user experience. APIs make both of these possible.

MediPro Direct offers simple API connectivity solutions for exam and APS ordering. This includes access to MediPro Direct’s zip scheduler, which identifies coverage and availability for insurance exams before an order is placed. Additionally, MediPro Direct has partnered with Clareto and AdamsBridge Global to deliver real-time access to consolidated EHR data, reducing both time and cost throughout the underwriting process.

Industry consolidation in the life insurance exam space left service gaps including a lack of concierge type services for large, fully underwritten applications. MediPro Direct is filling this gap with a team of highly rated mobile nurses and phlebotomists, as well as informal APS and lab services.

Management Research Services, Inc. (MRS) has 33 years of history with Attending Physician Statement (APS) services, leading the U.S. market. MRS takes pride in its ability to locate the records, obtain needed special authorizations and conduct all research needed to verify requested information. MRS representatives contact the applicant and/or the agent when necessary if your process allows. In essence, MRS makes every effort to find the records prior to closing an order.

Recently, MRS has evolved into a more technology focused company supported by growth capital partners to help enhance its breakthrough no-code platform. This technology focus has resulted in tremendous growth over the past two years, proving MRS’s excellence in insurance technology and automation. MRS migrated its entire APS business to its modern platform in 2021, enabling an agile solution for its clients and internal representatives to process and complete orders with minimal human touch.

MRS’s technology platform allows it to support a stand-alone APS business, or to provide APS as an add-on to an e-App or tele-underwriting service. The MRS platform also provides advanced reporting capabilities that provide standard reports for time-service, volume, and average cost per order. The entire platform is constructed utilizing Application Program Interface (API). This allows for other systems to use their own existing technologies to still harness the power of the MRS rules engine. Data is collected via the MRS call center, online application or both. The next generation of application collection and underwriting technology is here. This is how it works: The rules engine enables the user to construct the detailed scripting and logic necessary for completing and underwriting an application. The MRS self-service model allows any subject to construct the scripting and underwriting decisions without the support of a software developer. This enables a more cost effective and timely process, as well as easy maintenance moving forward.

New Services and Solutions
eNoah has developed a structured, streamlined, cost-effective, technology-driven solution which addresses not only traditional medical record collection but EHR/HIE retrieval. With this, expert team members have developed time-tested and foolproof methods of speedy and effective communication with hospitals, clinics, physicians’ offices, and their copy services. Their deep long standing relationships with these facilities and copy services also contribute to best-in-class cycle times without compromising quality. Because of new technological developments and increasingly stringent security measures, confidential data is secure and in accordance with the regulatory guidelines of PHI and HIPAA privacy rules.

Traditional medical records collection is not going anywhere any time soon. While electronic health records are making an impact for some carriers, it will be some time before we get strong adoption. eNoah has developed and is continuing to develop advanced technology to assist with getting the records in as quickly as possible without compromising quality. eNoah is partnering with some of the top EHR/HIE vendors to ensure a smooth and timely request process and transition to the traditional records request when needed. Their platform and records retrieval experts insure there is no lost cycle time in being able to immediately switch to the traditional records request.

In response to the increased complexity of the insurance sales and underwriting process, ApplicInt has automated the information collection process. Whether you are an agent, carrier, call center representative consumer or examiner, ApplicInt solutions are utilized by their partners for the life insurance application digital point of sales and fulfillment end-to-end process with the data transmitted to the carrier in-good-order, which significantly decreased cycle time and ultimately results in placing more business. ApplicInt’s EHRComplete platform Integrates the collection of electronic health records (EHR) directly into ApplicInt’s ExamComplete, CallComplete or UComplete data collection processes. It saves time by obtaining permission from the consumer to initiate the collection of EHR in real time when the proposed insured is engaged in providing medical history. This simplifies and speeds the application process and at the same time reduces the workload for the underwriters or other staff from needing to initiate the collection of EHR separately.

I know when this article gets published there will be push back from other firms and vendors whose innovative EHR solutions and services were not mentioned. This just proves my point about EHR surging in 2022.

How To Prepare To Sell Your First DI Policy

Share The Love This Valentine’s Day For Disability Insurance

It’s the month of February which means another Valentine’s Day. A month to show your love for the important things in your life. Of course, this means showing your love to your family, your clients and yourself! Making sure you and your clients have the right products is another way to show your love. Your clients who are working and yourself most likely need disability insurance.

Why disability insurance? We all have fixed expenses that need to be paid if we can’t work due to an extended sickness or recovery from an accident. At the very minimum, there are certain expenses that are a must for anyone to have covered. These would include the rent or mortgage, utilities, car payments and insurance, and the cost of food.

There are of course other important fixed expenses that can be covered as well. What are your fixed expenses? Take a few minutes to jot down the expenses you have and ask yourself how many months could you pay the expenses with your current assets? A few months perhaps or maybe you can last a few years? Now think about this for your clients as well. For most people, having a disability policy that provides a monthly income would be much preferable to the stress of seeing one’s savings be depleted.

So now you need a quote for you or your client. There are three parts of underwriting when seeking your first individual DI illustration. Part one, the Occupational Class. For an individual quote, a rate class will need to be chosen. With most companies, the higher the number the better the rate class and the lower the premium. For example, with one company, a 6A may be the best rate class with the lowest cost per unit, while a 1A may be the most expensive rate class. If the occupational class is not quoted correctly then you may be showing the client rates that are too low or too high. Also, certain riders or policy limitations may be tied into the rate class as well. So making sure, as much as possible, that the correct occupational class is being shown is important.

You need to know the occupation and job duties. For some occupations it’s pretty obvious, but for others it may not be so clear. Understanding someone’s job duties, such as the percentage of administrative, supervisory, sales, and manual duties would be important to someone assisting with the illustration.

Part two of the quote process is to understand the income and how much maximum coverage can be quoted. Companies that focus on individual disability insurance will have an issue and participation limit. The issue limit is based on a percentage of earned income that is made during the year. It’s important to use the net income, which would be the income after business expenses but before taxes.

If someone actively works as a business owner of a pass-through entity, such as an LLC or S-corp, then most companies allow the amount of income (or loss) being passed through to be added to the W-2 income as well.

We mentioned issue limits, but what about participation limits? Companies will limit the total amount of monthly benefit that a client can buy of disability insurance with all companies. This is to prevent someone from having more income on claim than if they were working. Therefore, it’s important to know how much individual and group disability coverage someone has in force so that the monthly benefit amount of the new quote can be adjusted accordingly.

Lastly, if your client has unearned income, say from a trust, pension, or investment income from having a very high net worth, some of that income may be reviewed by the underwriter as well.

Part three of the quote request is to know the health history of your client. There are some conditions that may not be insurable with traditional individual DI companies and a specialty company may be recommended, assuming the client can obtain coverage at all.

Asking the traditional pre-screening questions, such as if someone’s been diagnosed with any diseases or conditions that have ever required treatment, including any psychotherapy, would be important.

Also, an individual disability insurance underwriter has the ability to exclude singular or multiple pre-existing conditions, such as a portion of the back or a knee. Therefore, it’s important to ask your client about any muscular or skeletal issues someone currently has or has had in the past. In addition, knowing their medications can be helpful to determine if a client has a condition that may be an issue in underwriting.

You are almost there! Once you get the illustration, be sure to review the disability policy before you discuss the insurance with the client. It’s always helpful to review the illustration and how the policy works with the resource that provided you the quote.

Also, never just forward an illustration to a client via email and expect your client to call you to review. Always make an appointment to review the illustration together. It’s important to review the need for disability insurance and why this product is so important to the planning process.

Share the love of disability insurance this February with the ones you love.

Medicaid In Plain English

Last year I had just finished a seminar to thirty pre-retirees on retirement strategies as I was approached by one of the attendees and her husband. For purposes of this article, I will call her Sarah and him John. Sarah and John were both 63 years of age and she started the conversation with “I really need your advice on something.“ It was clear she was profoundly serious about what was on her mind. Sarah immediately proceeded in the conversation with telling me that they had 250 acres of farmland that had been in her family for generations. They also had a couple of small IRAs. The total assets amounted to around $1.5 million in total assets. As you know, this is not a real common conversation to have at the front of the seminar room immediately after the seminar, but she laid it all out for me. She almost had a sense of urgency. Sarah then transitioned into how her mother had just passed away after being in the nursing home for three years. I thought I knew exactly where this conversation was going whereas she was going to ask about the various types of long term care insurance that exist. Although that was a part of our later conversations, that was not where she took the conversation next. She said, “So here is what I need guidance on. How do we protect our retirement assets and most importantly the farmland that has been in our family for generations should either of us go into the nursing home?” What she was getting at was not just long term care insurance but also Medicaid. Naturally, we took this conversation off-line to a series of appointments the following weeks.

My previous point demonstrates a couple of points:

  • Number one is that there is nothing as emotionally charged in the financial lives of our consumers as long term care. Every time somebody explains the financial and emotional experience they had with a family member’s long term care process it is heartbreaking. And, as we know, it is a 70 percent probability for anyone over age 65. Thus, the need for LTCI.
  • The second issue is Medicaid! How Medicaid works is something that every financial professional should be somewhat familiar with. The preconceived notion with Medicaid Planning may be that it only applies to “poor people“ on their way to the nursing homes. That is not the case, as we saw with the example of Sarah and John.

Now of course my conversation with Sarah and John included LTCI, as Medicaid is not a great alternative to having had a full-blown plan that includes LTCI. However, this couple was in crisis mode as they both were uninsurable—she had already been treated for cognitive decline and he had serious heart issues. I bring this up because some folks will view Medicaid strategies as the antithesis to a true long term care plan. It is not. It is a last resort strategy.

With that said, allow me to explain some basic concepts when it comes to Medicaid so, at the very minimum, it allows you to be “dangerous“ with the concept or at the most, pique your interest so that you research enough to become very adept at it as I have over the years. Please note that my commentary is merely meant to be a “plain English” description that gives you a basic understanding of the concepts. This is not all encompassing. Qualifying for Medicaid is one of the most complicated strategies that a financial professional can employ and therefore this column seeks to distill it down. Let’s crawl before we run.

What is Medicaid?
My unofficial definition of Medicaid for purposes of this article is: A federal/state joint health insurance program for individuals that have assets (countable assets) and income below certain levels. This is different from Medicare in that Medicare does not have maximum asset and income thresholds to qualify. Furthermore, Medicare does not cover long term care beyond one hundred days. Medicaid does. Although there are many requirements and parameters that the federal government creates for Medicaid, there is some flexibility—and thus differences—among the individual states. The states create rules within the framework of the federal government.

What is the Process?
Once you enter the realm of Medicaid strategies, you are in “crisis planning mode.” Once a consumer is in a situation where Medicaid is the last resort, the process might look like the below.

This is the process of preserving assets in situations where those hard-earned assets would otherwise need to be liquidated in order to fund long term care expenses. For example, Sarah having to sell the farmland in order to pay for her husband’s long term care would be a catastrophe! Medicaid strategies revolve around helping Sarah and John become eligible for Medicaid without having to spend a significant amount of those assets before they are eligible.

Sticking with the theme of extreme simplicity, the strategy is largely about moving the assets in the left column below to the right column, or completely off the grid (Irrevocable Trusts).

Clearly, we need to back up for a second and explain the relevance of the chart below and what this means.

Let’s take Sarah as the example here. Let’s say that in 20 years her husband John goes to the nursing home. Naturally, we do not want them to liquidate the IRAs and/or the farmland in order to pay $100,000 per year (approximate national median cost of private room in today’s dollars) for the nursing home. So, what will she do? She might seek the assistance of Medicaid and fill out the Medicaid application. On that Medicaid application they would ask for all of their assets as well as income sources, including social security.

Medicaid breaks the assets into two different sections. One section is “countable assets“ and the other section is “non-countable assets.“ When I am explaining this to clients, I draw the exact T-Chart that you see. In one column are the countable assets and the other column are the non-countable. The non-countable assets column is the good column. These are the assets where Medicaid has deemed them to be an asset that you should not have to liquidate to pay for your care. Unfortunately, this list is usually small relative to the other column. It is usually items like clothing, household furnishings, the residence, etc. These are assets that you should not have to “spend down” in order to be eligible for Medicaid. I should not have to sell the shirt off my back for Medicaid to kick in. Bad visual I know! Medicaid does not punish you for these assets when it comes to Medicaid eligibility.

Now, the Countable Assets—left column—are the ones they focus on. Countable assets would be checking accounts, IRAs, stocks, bonds, real estate that one is not living in, farmland (in most cases), etc. If John has “countable assets” in today’s dollars over $2,000 (Iowa), he is not eligible for Medicaid. They have to “spend down” their assets in order to become eligible. Keep in mind that the spouse that is not in the nursing home is allowed $137,400 in assets. This is to prevent “spousal impoverishment.” So, what does that mean? It means without proper planning they would have to spend down a large chunk of their $1.5 million in “non-countable assets.” To be exact, they would have to spend down $1,360,600 in assets. That would leave John with his $2,000 and her with her $137,400. This is without discussing Medicaid’s income limitations on John ($2,523 per month), which we will discuss in detail another time. In Sarah and John’s example, it would mean selling farmland and liquidating the IRA.

What strategies can be explored to avoid “Spend Down”?
There are several steps they can take (or should have already taken), but here are a few that one should look at:

  • They could have gifted some of their assets to others as the years have gone by. Now, what if Sarah and John gift all of their otherwise “countable assets” to somebody else the day before they apply for Medicaid? Would this make them eligible for Medicaid? Nope. The government has recognized this strategy and therefore has a five-year “lookback” in most states. For veterans, the lookback can be three years. Therefore, in this example, there would be a period of time where Sarah and John would have to pay their own way. This is called a “penalty period.”
  • Irrevocable Trusts: This is a great tool for Medicaid planning as it removes the assets from Sarah and John’s ownership. However, the lookback applies here as well. The farmland can be moved to an Irrevocable trust: Note: There are tradeoffs to moving property to an irrevocable trust, which is considered a separate entity from them. Make sure you work with an attorney to understand them. IRA money cannot be moved to an irrevocable trust. You must liquidate the IRA first.
  • A Medicaid Compliant Immediate Annuity: This annuity would be for the retirement assets they have put aside. The notion here is, when you take an otherwise “countable asset” and turn it into an income stream (usually to the spouse outside of the nursing home), it becomes exempt from being a “countable asset.” Therefore, the five-year lookback does not apply here. Of the three options I lay out here, this is the “last minute” option as it is not subject to the lookback. Note: Not all immediate annuities are “Medicaid Compliant.” Very few of them are. To be a “Medicaid Compliant Annuity,” there are a handful of requirements that must be met with the annuity. Therefore, the list of these annuities is very small but very effective.

In closing, it is important to note a couple of things:

Medicaid does seek to “recover” what John and Sarah will take from the Medicaid system once they both pass away! Many consumers are not aware of this. Although there are strategies (Irrevocable Trusts) that work as a shield against recovery, it is almost always best that consumers never get on Medicaid in the first place and instead have LTCI to cover the cost. Without tapping into Medicaid, the estate does not have the government coming after them for “recovery.” The long term care products available today are fabulous and have innovated significantly. Plus, when you have the means to pay for long term care yourself, you have choices… One such choice would be to be cared for in your own home versus a nursing home!

Lastly, in this article we merely talked about the assets and the general idea around Medicaid Planning in a greatly simplified way. We did not even get into the maximum income for John to not have to pay the nursing home himself. We also did not speak about single retirees, Miller Trusts, Minimum Monthly Needs Allowance, Funeral Trusts, homes contiguous with farmland, Medicaid Divorces, Veterans, etc. So, if you have any questions or would like my feedback and guidance feel free to reach out.

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