Reprinted from the CLTC Digest in cooperation with Certification for Long-Term Care, LLC, www.ltc-cltc.com. Email Amber Pate at [email protected] for a more than 20% discount on CLTC training for Broker World subscribers—just mention code BWMAG.
Which is the best type of business line for long term care planning—health, life, or annuity-based LTCI? How can I compare different LTCI plans to determine which is right for my clients?
—Overwhelmed in Oregon
Dear Overwhelmed,
Listening to insurance professionals quoted in the news might lead us to believe a civil war is being waged in the insurance industry. Entire business lines are portrayed as good or evil based on anecdotal evidence from policies sold decades ago. In reality, we are on the same side with the objective to protect our families and society from the devastating consequences of not planning for long term care. Touting one business line as always superior to another may leave you with egg on your face. Innovative product actuaries at insurance companies are frequently designing new LTCI solutions. Pricing, guarantees, and underwriting criteria can change. Each client has unique needs and preferences.
LTCI has traditionally been delivered in health insurance products as stand-alone LTCI. The challenges of stand-alone LTCI motivated regulators and companies to adopt a rate stability model in the early 2000’s that now requires more conservative pricing and reserving. At the same time, insurance companies seeking new markets offer LTCI or chronic illness benefits linked to life insurance benefits. Linked benefit riders often provide LTCI protection as an acceleration or reduction of the life insurance death benefit. This allows companies to offer LTCI protection in a limited way, but provides the client flexibility on their life insurance plans.
Companies have added another dimension by providing an extension of LTCI coverage beyond the life insurance death benefit or annuity payout. The Pension Protection Act implemented in 2010 aided Extension LTCI products that commonly required single pay pre-funding. The cash value from existing life or annuity products could be exchanged tax-free for a policy with LTCI benefits—either stand-alone or linked benefit plans.
Stand-alone products can have life insurance features too. This is not a new concept, although it has been revived by the popularity of linked benefit plans. As an example, 30 years ago, our company designed a health-based LTCI product for a major company with a guaranteed single premium, lifetime LTCI benefits, return of premium at death, built in inflation protection tied to the CPI, and a lifetime income annuity which start paying benefits at age 85! At that time, there was less demand for single premium products. Now guaranteed single premium is highly sought after. It is interesting how times change.
Product choice provides new tools for the LTCI expert, but each alternative has its own tradeoffs. It can be overwhelming to cover multiple business lines and products. Here are tips you can use as a step-by-step process to summarize the tradeoffs. Once you understand the needs that are most important to your clients, you will be equipped to guide them on their LTCI journey.
Inside the Numbers
Budget-Based LTCI Planning for When It Matters Most
Step #1—Connect Emotionally with Your Client When it Matters Most: Never forget that insurance is about peace of mind. It is important to have the planning conversation at the right time. Engage not just with the client, but also the client’s family and trusted advisors. Do not get lost in the numbers at the expense of the bigger picture. Sometimes perfection can be the enemy of good.
Step #2—Fund the LTCI Plan When It Matters Most. Proactive planning is critical to success. Just like saving for retirement, the best plans typically start while the client has many years to earn income and is still healthy enough to qualify for all of their LTCI options. Address cost early in the process to help reduce anxiety and ensure a result that meets the client’s expectations. The top reason prospects do not choose LTCI is that they think it will be too expensive.
Use financial fact finding questions to build trust with the client. Let your prospective client know that you are determining the amount of funding that is most appropriate for their needs and desires. Make sure you are treating their money as if it were your own.
LTCI premiums are largely based on the amount of coverage purchased. The financial objective is to fund an LTCI plan using a much smaller percentage of income today, to protect a much larger amount of income that may be at risk in the event of an extended long term care need. This can be called “income-based” funding. You can use this approach with any client, regardless of wealth. Income-based LTCI plans often use funds from earned and/or retirement income sources to pay the insurance premium. Income-based funding will often line up with multi-pay or lifetime pay LTCI products.
You can similarly translate this to “asset-based” funding and asset protection. Asset-based LTCI plans use funding from client’s existing assets to pay the insurance premium. Asset-based LTCI will often line up with single pay or limited pay products whether linked benefit or stand-alone. You might incorporate linked benefit or return of premiums if the client wishes to use an idle asset now, but replace it for beneficiaries later.
With either income-based or asset-based funding approaches, never assume that the income or assets are available for LTCI until you ask. This way your client doesn’t double count funds dedicated to another purpose. The client might not wish to use an asset if it will be needed to generate retirement income.
Step #3—Design the LTCI Plan When It Matters Most: Determine a realistic age when your client is most likely to need LTCI protection. A good rule of thumb is age 85, as this is the age at which the risk increases dramatically. By focusing on one target age, you can simplify the planning process and avoid decision paralysis. On the insurance illustration this simplification makes decisions easier because you can focus on one row of benefits. You can also compare different products and benefit structures with the same planning target.
Most LTCI products have popular “sweet spots.” The sweet spot is typically a selection of benefit period and inflation protection that is perceived as having the most value at the target age. The daily or monthly benefit at age of claim is the most valuable because those will be the first dollars paid by the insurance plan when it matters most.
Here is where you can use the funding source that was determined previously to solve for the daily or monthly benefit that fits the budget at the desired product’s sweet spot. This means that just using financial and health fact finders can provide you with most of the information needed to shop the market and fully customize plan design!
Summary—Assess at the target claim age based on the predetermined budget:
- What daily or monthly benefits are available?
- What is the total amount of protection available? Total protection is often paid as a pool of dollars even if stated as a benefit period.
- How much does the client pre-fund coverage either as an elimination period deductible or as a reduction to the death benefit?
- If multi-pay, how much in total premiums will be required?
- For linked benefits, how much are the total residual death benefit or annuity values?
- Are there any other features that are important to the client?
The example in Chart 1 is an asset-based plan for a sample client funding with a $100,000 cash asset. The left side compares the tradeoffs of a sample stand-alone LTCI plan to a sample linked benefits plan on the right side. You can use this dashboard presentation by plugging in the age 85 numbers from the sales illustration software of your preferred product and sweet spot. Income-based plans can be compared by simply summing the total projected premiums on the left side of the pie chart.
Step #4—What Does Care Cost When It Matters Most? The last step is to take the plan design and compare it to the cost of care at the target age at claim. Many LTCI professionals prefer using cost of care initially to determine the daily or monthly benefits. This makes a lot of sense for clients that desire full protection. However, for most people the plan will often be a shared cost between the client and the insurance company designed to cover as wide a range as possible of outcomes and care settings. Plans far into the future are estimates. As the old saying goes, “It is better to be vaguely right, than precisely wrong.” The client doesn’t want or need to picture exactly what care will look like. Circumstances change. People move. Inflation is not totally predictable. Different health conditions require different levels of care.
Using the cost of care with an inflation estimate is a good barometer of how well the budgeted plan might fit a future scenario. At this point the client may decide to increase the budget if there is a significant shortfall to the cost of care. This will be an easier conversation once the client has seen the LTCI value proposition in the dashboard.
In Conclusion
For an individual client, long term care needs either will happen or they won’t. We all hope it doesn’t happen to us. However, purchasing LTCI provides the peace of mind that our families are protected. According to the Alzheimer’s Association, there are currently 44 million unexpected, unpaid caregivers out there who find themselves doing what is necessary to care for their loved ones. Plans that combine LTCI and life insurance or annuity features have appeal for clients that do not believe LTCI will happen to them. Don’t be the insurance professional that only offers one particular type of solution. You are limiting your audience. Instead help your client decide which plan is the best fit for them.
According to the 2017 LIMRA survey as summarized in Chart 2, there were approximately 103,000 policies sold either stand-alone LTCI or with an LTCI extension rider to provide LTCI benefits beyond the client’s death benefit. There were another 224,000 life insurance policies sold with LTCI or chronic illness riders limited to the client’s death benefit. All of these products are providing some type of LTCI plan for the client, but the total amount of new LTCI risk transfer being offered today is still low, despite increasing long term care planning needs. The good news is most prospects that needed a long term care plan last year can still create a plan this year. Equipped with all of these LTCI options, you can be the trusted expert to help get them there.
Every situation is unique, so always have your client consult their long term care, legal, or tax advisor. The views discussed in this article are opinions of the author, and not National Guardian Life (NGL), LifeCare Assurance, or CLTC.
