I believe that all species go through similar stages throughout their lifecycle; birth, dependency, youth, maturity, adulthood, then death. I was going through some old pictures a couple of weeks ago and saw our beloved family dog (Max) that left this Earth two years ago. He had been with us since college when he was 6 weeks old and had a life many dogs dream of; dog owners looking to provide their best friends with long and happy lives may want to protect them with something like Pets Best dog insurance. Max hung out with us in our college dorm as a puppy, he then moved into our first house with us, he moved across the country with us for my job, he was there when our first and second sons were born, then later was best buddies with my kids as they grew old enough to play with him. He had seen it all. After spending 15 great years (over 100 dog years) with us I had to make that call to the veterinarian, which was one of the hardest calls I have ever made. We loved Max like he was one of our kids and it broke our hearts when we had to end his pain.
I think of the last six months of his life, which is equivalent to a few human years. He was about 90 percent dependent on us. He was blind, he didn’t know where his food was, he couldn’t move very well, etc. Many of us have seen this decline happen with their pets; and family, which I will touch on in a bit, and many of us turn to medication such as CBD for Pets to help ease their pains during those times.
What would Maxs final days have been like if he didn’t have a loving family to take care of him? Without getting morbid, we all know how nature and predators take care of elderly animals that cannot care for themselves. However, as a domesticated animal whose family had an obligation to take care of him, he had an additional stage added into his lifecycle that I mentioned in the first sentence of this column. If he wasn’t eating, we would search for tips if your dog isn’t eating, or if he wasn’t drinking, we would try and find out why. We had a duty of care and we made sure we were the best possible owners for our beloved furry friend. That additional stage was Late Life Dependency. We as humans many times have this additional stage as well. Unlike other animals, we as humans have an obligation to take care of our fellow man/woman when they cannot take care of themselves. What I am referring to is long term care. As many of us know, there is a 70 percent chance that if you are over the age of 65 you will indeed need long term care services.
My point to the previous comparison is that every species on Earth ages and becomes frail where many times they cannot take care of themselves. If you have never seen this happen with a family member than you probably have with a pet. This is the way that nature works and cannot be denied by anybody even those that really believe themselves when they say I will not need long term care. The difference between us and other species is, we have an obligation to care for one another and we have the long term care resources to do so. Of course, this introduces a problem to us, humans, that the simpler species are not subject to how to fund this late-life dependency.
To state that long term care funding is a problem is an understatement. In 2013, total nationwide expenditures for long term care were a whopping $339 billion versus only $30 billion in 1980.* Furthermore, in 2013, 43 percent of the long term care services were paid for by Medicaid and only six percent of those expenditures were paid for by private insurance.* Today only 13 percent of individuals thought to be eligible for long term care insurance actually own it.
The size of this problem, the size of the market, the fact that the market has not been penetrated, and the vast number of innovative solutions available represent one of the biggest opportunities for agents today. I believe that when you look at the long term care risk that faces many of your clients today, it is a problem too large to ignore. Furthermore, I believe from a legal standpoint you should not ignore this risk facing your clients. To demonstrate, Harley Gordon, one of the nations foremost long term care legal experts cites an example of an agent Adams that got a call from the son of a client of hers.
Adams received a call from a good clients son, a local attorney. He proceeded to tell her that his dad was in a nursing home and paying for it with his life savings. He then told her, You have 15 minutes to produce evidence that you recommended a long term care plan in general and long term care insurance in particular. Fortunately, she had discussed the matter and had a letter recommending the sale of long term care insurance. Without it, she believes she would have been sued.
I am not an attorney but here is what I believe: I believe that lawsuits in the future will not just be about what you recommended that was wrong, but also about what you did not recommend that was right!
Again, the fact that there are 111 million Americans over the age of 50 along with the innovations in product development, there are many reasons to be excited about incorporating into your practice a solution to this problem. Below I would like to discuss just a few possible solutions as well as a concept for your consideration.
Stand Alone LTCI:
Although the stand-alone long term care insurance marketplace has gone through some significant de-risking, these policies are still superior to what they were when first offered. When first offered in the late 70s by the handful of carriers that offered it, LTCI only covered expenses associated with nursing home/skilled nursing facilities. This is in contrast to the policies today that also offer coverage for in-home, adult daycare, and assisted living facilities. Claims experience shows that the expanded list of covered expenses has indeed been taken advantage of. To demonstrate, based on the Medicare and You 2014 study by the US Department of Health and Human Services, 51 percent of those that go on claim choose in-home care, 31 percent choose the nursing home, and 18 percent choose the assisted living facility or adult daycare. These numbers are important because they demonstrate the flaw in the notion that long term care insurance is nursing home insurance. It is important to discuss with clients that LTCI is insurance that can actually allow you to stay out of the nursing home and allow you to choose between the options above! And claim statistics show that people do indeed choose to stay out of the nursing home. In other words, because of the expanded services covered, the old label of nursing home insurance is no longer appropriate. As a result, the demand for these products has increased among more broad age groups. This shift can be seen in the fact that the average issue age on LTCI has gone down steadily over the decades. In 1990 the average buyer was 68 years of age. In 2016 the average issue age was less than 59 years of age. This is a favorable development as LTCI is not just a product for the elderly40 percent of people who need care are under the age of 65.**
Combination/Hybrid Products: Because many people discuss combination products, acceleration products, and linked benefit products as if these terms are synonymous, I would like to spend some time differentiating the terminology as these terms are not synonymous. Combination/hybrid products are the broad category of products that can be on a life insurance chassis or an annuity chassis. Thus, a combination/hybrid product is an annuity or life insurance policy that has some form of long term care benefit, usually in the form of a rider. These products can be life insurance with accelerated death benefit riders, annuities with long term care riders or they can be true linked benefit products. With what has happened in the stand-alone LTCI marketplace, in 2016 there were twice the amount of combination life insurance policies sold as there were stand-alone LTCI policies sold. Clearly the flexibility of these combo products is very appealing to financial professionals and consumers, and will only continue to grow in popularity.
Even though annuities can be a combo/hybrid product, I would like to just focus on two subcategories of the combo/hybrid world. These are products with accelerated death benefit riders and linked benefit products.
Accelerated Death Benefit Type Products: This is a subcategory of the broader combination product/hybrid world. These are usually life insurance-based products where the death benefit (and no more than the death benefit) can be accelerated for the purposes of a long term care event or a chronic illness. When I present this product I like to point out that the life insurance of the old days typically had one trigger in order to access the death benefit death. However, today’s life insurance is life insurance, not death insurance. This is where the insured can actually get enjoyment out of the product during their lifetimes in the event of a chronic illness or a long term care event. Thus, the two prominent rider types offered within this category are chronic illness riders and long term care riders. Note that chronic illness riders were predominantly previously filed as requiring a permanent condition. There are now some chronic illness riders coming to the market that do not require permanence.
Linked Benefit Products: Again, linked benefit products is a subcategory of the broader combination product/hybrid world. These are usually life insurance products where there is a long term care pool that is created that can be multiples of the death benefit on the underlying life insurance product. Of course, the additional long term care pool would come at an extra cost and possibly additional underwriting relative to just an acceleration product. A linked benefit product may give two to six times the death benefit in the form of a long term care pool. The long term care benefits that go beyond the total death benefit are through the use of a continuation of benefits or extension of benefits rider. Thus, the COB/EOB is the primary difference between the linked benefit category and the accelerated death benefit category.
The Flexibility of Hybrid Life Products:
To end this column I want to add to a concept created by Moshe Milevsky (Professor of Finance at York University). Above I created a graphical representation that shows two forms of Capital that we have throughout our lives. We start life with a great amount of human capital, which is the present value of all of our future earnings. As we age and go through life we start to lose our human capital because we are getting older and therefore our future earning power diminishes. Thus, on the graph, you see the human capital line descending as one gets older. However, as we get older our financial capital (401k plan, IRAs, investments, etc.) should be growing. Thus, the financial capital line is ascending. In other words, think of life as converting your human capital into financial capital as you go. The problem with both of these forms of capital is, should a catastrophic event happen, you can lose it! This is where insurance comes into play.
How does one ensure human capital? As you can imagine, your human capital can be insured via life insurance or disability insurance. For example, should your human capital drop from $1 million to $0 in one day because of death, it would be ideal if your beneficiary would then be given $1 million in financial capital/death benefit as an offset. This is done via life insurance. Same thing should a disability happen. Above is a yellow-colored period of time where human capital insurance is needed. Of course, this is generalized for simplicity of illustration.
How does one ensure financial capital? There are many ways one can lose financial capital, one of which is via long term care costs. Of course, this risk can be insured via LTCI or combo products. Another risk to financial capital may be longevity risk, which can be insured via annuities.
I started this column discussing the various phases of our lives and the fact that our lifecycles are a little more complicated than other species on earth. For these complicated lifecycles, which will only get more complicated as life expectancies increase, we need products that are flexible enough to cater to various risks as we go. This is the very reason I believe financial professionals like the flexibility of life insurance with riders (chronic illness or long term care). In the early years, life insurance can protect human capital via a death benefit. Later in life, the financial capital can be augmented by the cash value in the life insurance policy while at the same time that same policy can provide a level of insurance for the financial capital via a chronic illness or long term care rider.
References:
*Fact Sheet: Long-Term Services and Supports (AARP)
**The State of Long Term Care Insurance 2016 (NAIC)
