Asset based protection planning is a broad term used to describe the process of legally setting up barriers between your clients hard earned personal or business assets and potential threats from litigation, creditors, and high taxes. It is a key component of financial and estate planning. Perhaps an underexplored area of this planning revolves around living benefit riders and specifically long term care riders. The last decade has seen the stand-alone long term care marketplace change dramatically, from large increases in costs to primary insurers leaving the marketplace entirely. This volatility has left a certain level of uncertainty to this component of financial planning. Uncertainty that creates questions:
- What would happen to clients who had done the right thing by planning for their potential long term care needs?
- Would the policies they purchased become unaffordable or would they have to reduce benefits to maintain affordability?
- Would the insurance companies serving the marketplace when they bought their policies be the same companies that they would be working with if they were to go on claim?
- What is the solution?
Enter living benefits riders and linked benefits to provide much needed help. Life insurance is perhaps the single most stable insurance instrument sold in the marketplace. When properly designed, you rarely see massive increases in costs or primary carriers leaving the marketplace due to adverse experience. When insurance companies do leave the marketplace, they typically are acquired by larger companies with excellent track records and name brand recognition. Consumers are not in the dark or left to question the direction of the company or viability of the policies they purchased. The advent of living benefit riders added to life insurance policies and linked benefit life insurance policies is a marriage between the most stable of insurance products and one that had been the most volatile. The net effect is increased stability.
For the purposes of this article, I wanted to do a general overview of the niche living benefit riders can play in financial planning and leave linked benefits for another day. After all, they deserve their own day in the sun. Living benefit riders come in a variety of flavors; critical illness riders, chronic illness riders, and long term care to name a few. All of these are a form of the traditional accelerated death benefit riders tailored to meet specific needs and serve specific purposes.
Long term care occupies a large place in the collective psyche of consumers and, increasingly, government regulators. One only needs to look at the WA Cares Act passed in Washington State, and the rush to get coverage in place at the end of 2021, to understand this reality. As other states look to Washington as a model to enact their own versions of this law, this issue will take on added importance in the financial planning process.
According to the latest LIMRA findings, the market share for these products was $4.3 billion for 2021, which is a 22 percent increase over 2020. These products represented 20 percent of total life premium for the year. Life policies with long term care riders stood out in a year of significant policy growth, increasing 75 percent from 2020. In addition, LIMRA’s 2022 Insurance Barometer Study shows that four in 10 consumers are very concerned about how they will pay for long term care services.
Now, the question remains of how best to serve the needs of your client base? This is a question that every advisor faces. While your clients’ situations are always unique, often the most cost effective and predictable solution is a life policy with a long term care rider. According to LIMRA consumer research, life combination products that provide life insurance coverage with long term care or chronic illness is an attractive value proposition to consumers. These products can provide the solution to multiple issues including the risk of early death and supplemental retirement income as well as providing a pool of money to cover long term care expenses. There are many benefits to using this approach, a few of which are the premiums typically will not have large fluctuations provided they are paid on time. The long term care pool is well defined upfront and can be customized to meet specific objectives. And in the case of states like Washington, these riders can provide the coverage needed to opt out of the additional payroll tax.
It is worth noting here that the stand alone long term care insurance market is on much firmer ground today than it once was. Although the number of insurers in the market has shrunk, today the products sold all benefit from experience based pricing. This is also true for linked benefits products as well as long term care riders. In many respects, the volatile nature of the long term care market in the past has paved the way for the innovation that produced the products we are discussing here.
In summary, there is no shortage of insurance companies that offer a version of these riders, and each have their unique take on them. I encourage you to explore them as you strive to secure the financial wellbeing of your clients. All of them though, no matter the configuration, use a life insurance contract as the underlying product and, by doing so, they provide the predictability that will assure your clients’ needs are met in the event they require long term care. The added bonus here is that if they never need long term care, the life insurance benefit component means that these policies retain their value in the overall financial plan.
LIMRA (2022, August 9th) Sales of Life Combination Products Rebound in 2021. https://www.limra.com/en/newsroom/news-releases/2022/sales-of-life-combination-products-rebound-in-2021/.