Long Term Care Annuities: A “Low Friction” LTC Product

As I discuss this particular product type as being a “low friction” long term care sale, I do not want the reader to gather that the main reason to sell it is because it’s a “layup” sale whereas the client will give up value versus a better/higher friction product. After all, I will always work to educate my clients on the right product, whether that sale is “high friction” or not. And although I think that many clients’ best product choice should be a fully loaded, long term care Partnership approved, $8,000 a month benefit with a five percent inflation rider, that does not always fly for consumers because of price, misconceptions about the various long term care insurance options, etc. Let’s face it, getting the client to pay $2k to $10k a year ongoing premium—depending on the client—can be met with a good amount of negativity from the consumer.

Outside of the ongoing premium, standalone long term care policies have two primary areas where consumers criticize them:

  • Premiums have historically increased substantially.
  • If the client doesn’t use it, they lose it. If they die without ever needing care, they “wasted” their premium.

Although these perceptions are not unfounded, I do like traditional long term care insurance because, per dollar of premium, you generally get the highest long term care leverage of any of the products. Plus, I believe premiums are much more sustainable on the new generation of products because of updated lapse and interest assumptions priced into the products. But again, sometimes convincing clients to go that direction is a lost cause.

Before discussing the product, a great sales strategy is to address the concerns that you know consumers will bring up before they even bring it up. That tells the consumer that you understand what their concerns are without them having to prompt you. I previously mentioned the two main concerns that consumers have with traditional long term care insurance. And most consumers don’t realize that there are other long term care options beyond traditional/standalone. So, by discussing the following points, you can usually get the attention of the consumers that have preconceived notions about long term care insurance.

“Many times, consumers have two different concerns around long term care insurance—premium increases and the fact that if you never need the care, you have effectively “wasted” the premium you paid. Well, those concerns have basically been addressed with the particular solution I would like to introduce you to.”

As you articulate the above paragraph, your prospect/client would have been nodding his/her head before you finished it.

What is this product I am referring to? It is a long term care annuity, also known as a “linked benefit annuity” or a “hybrid annuity.” I prefer to call it a long term care annuity because it more explicitly tells the client what the product does. Anyway, the chassis itself is like a traditional fixed annuity whereas the interest rate is guaranteed for the first year but then can float, and likely will float. A common interest rate today is close to three percent in the first year with a minimum rate in the following years around one percent. Additionally, there is a relatively small monthly long term care fee deducted from the client’s value on a monthly basis. Now, if the client ever wanted to cash out this “accumulation value” they can do that like any other annuity. Just keep in mind that–like most annuities—there are surrender charges that go anywhere from five years to 10 years, depending on the product.

So far what I have just talked about is just like any other traditional fixed annuity. A particular type of consumer is already interested, and I haven’t even gotten to the long term care part! That “particular type of consumer” I am referring to is the one that has their money in a certificate of deposit for example—earning nothing! Just last week I got to this point in the presentation on this long term care annuity and the client said, “Why would I not do this?” I said, “Well hold on, we haven’t even gotten to the main reason to consider this solution, the long term care benefit.”

Now to the good part. What is the long term care benefit? It is triple what the accumulation value is. So, if the client puts in $100,000, and that $100,000 has grown to $110,000, the long term care pool is $330,000. Generally, the client gets access to the $330,000 once he or she cannot do two activities of daily living for a 90-day period.

One thing to note is, it’s not like the client can just cash out the entire $330,000 at the time they qualify for the long term care benefits. That type of product would not be sustainable for carriers. When you think of long term care insurance pricing, for a given long term care pool insurance carriers are on the hook for larger risks the faster they let the client tap into that long term care pool. So, naturally, there are benefit periods that these carriers have priced into these policies. The common benefit period is 72 months (or 6 years) with the products I am referring to. So, in my previous example, $330,000 divided by six years is $55,000 per year that the client can be “reimbursed” for from the policy when it comes to long term care benefits. This means that if the client is in the nursing home or received in-home care for a period of six years, and if at least $55,000 per year was spent on that care, our client would receive $330,000 in tax free benefits even though they only paid $100,000 in premium.

By the way, underwriting on these types of policies is basically non-existent. Underwriting is about ten to fifteen “knockout questions” and a 30-minute phone interview with an underwriter.

Now, a few negatives:

  1. The Benefit is Spread Out: As mentioned, for a given long term care pool, the higher the benefit period is, the less the risk is that the insurance company will pay out the entire $330,000. This is because if the consumer were to only be in the nursing home for three years and then pass away, the insurance company would have only been on the hook for $165,000 ($55,000 x three years). So again, for a given long term care pool, the shorter the benefit period is, the better for the consumer and riskier for the insurance company. The six-year guideline is a bit of a negative because statistics show that nursing home stays are less than three years on average. However, with the rise of cognitive issues like dementia, I don’t feel a whole lot of heartburn with the six-year benefit period. Long term care events have been trending longer over the last couple of decades because of cognitive illnesses.
  2. High Deductible: You can think of these policies as being “high deductible” policies. In other words, when the $330,000 is tapped into, the first two years is actually the client’s money (accumulation value) coming out first. Then, in the third year, that is when the consumer is dipping into the insurance company’s pocket.
  3. The Fee: There is a long term care fee that is deducted monthly from these policies. However, if you were to illustrate a traditional LTCI policy with the same long term care pool, you would find that many times the traditional LTCI premium would be multiples of the factor that is deducted from these long term care annuity policies. This is partially because of the “high deductible” nature of these policies. Also, with these policies, that fee is generally guaranteed to never increase!
  4. Limited Options: Options around inflation benefits and various benefit periods are basically non-existent with these types of products, whereas standalone LTCI, and also the life insurance based long term care hybrids have more robust options. However, you certainly pay for those options!

Even with the negatives that I mentioned, it is still a very low friction sale because of the fact that in the end the consumer is often able to get more interest out of the policy than what they were getting in a certificate of deposit even after the long term care fee is deducted. Therefore, our low interest rate environment makes it an ideal time to present these products to your clients.

An Analogy for Consumers:
Let’s say that your $100,000 is a very tasty but magical fruit. You can eat (spend) that fruit of $100,000 anytime you like right now. Conversely, there is a way where you can take this magical fruit and plant it. By doing so, it will immediately bear a tree that will have three of those fruits. You have tripled your fruit. Kind of cool huh? Granted, this tree will require a little watering and nurturing (long term care fees) but that is what allows you to have triple the fruit that you have right now. The only rule is when you do start eating this awesome fruit, you cannot eat any more than 1/2 of one fruit (one-sixth of the total) each year in order for you to not shock and kill the tree. We do not want the tree to die before harvesting all three fruits (the $300k long term care pool). Granted, you can rip your one fruit (surrender value) off the tree anytime if you like, but it’s wiser if you eat only half a fruit at a time to not shock the tree. That is effectively how this product works.

Charlie Gipple, CLU, ChFC, is the owner of CG Financial Group, an innovative and full-service independent marketing organization (IMO) that serves independent agents that sell life insurance, annuities and asset-based long term care. He also owns “The Retirement Academy” (www.retirement-academy.com), which is a subscription based online training platform for agents, reps, and company wholesalers.

Gipple is recognized throughout the industry as one of the foremost thought leaders and subject matter experts on annuities, life insurance, long term care, leadership, storyselling and behavioral finance. He is also an industry keynote speaker conducting 100-150 speeches per year. He has spoken at the MDRT Top of the Table as well as other large forums and has also appeared on TheStreet.com and AM Best TV.

Gipple has vast leadership experience in the insurance industry as he has been an executive of various insurance companies and large independent marketing organizations. He is unique in his broad knowledge across the life insurance, annuities and securities businesses. Additionally, within these businesses, he has a deep understanding of the distribution aspects of these products along with the actuarial and hedging aspects. He holds a bachelor’s degree in Finance from the University of Northern Iowa, is FINRA Series 7 and Series 66 licensed and also holds the CLU® and ChFC® designations.

Gipple can be reached by phone at 515-986-3065. Email: cgipple@cgfinancialgroupllc.com.