Savings-based long term care insurance products (generally life insurance policies which have LTCI provisions) are experiencing rapid sales growth. Although such products have existed for more than 30 years, I believe savings-based product development is at an inflection point. As excellent as these products are, there are simple ways to make savings-based products more attractive, as well as easier for financial planners to explain and for potential buyers to understand.
In Broker World’s July 2016 issue, the annual Milliman LTCI Survey was presented, including a statement that this September issue of Broker World magazine would have survey results for savings-based life/LTCI products that offer extension of benefit features. For 18 years, Broker World authors have been able to get lots of data from stand-alone LTCI (“SALTCI”) insurers, enabling Broker World to provide detailed insight regarding a very broad array of SALTCI sales and underwriting distributions.
In the intended savings-based survey, Milliman and I expected to report limited data, asking only for sales distributions by issue age for premiums, premium-paying periods, benefit periods and compound benefit increases. Of the eight carriers we identified as offering such products, three (Nationwide, Transamerica and Trustmark) provided data. A fourth carrier committed to providing data if two of the three largest sellers of such products participated. Prior to starting the survey, I had contacted one of the “big 3”. It had tentatively agreed to participate, so we expected to be able to present valuable data without exposing any particular insurer’s distributions. Unfortunately, in the end, none of the “big 3” felt comfortable sharing the requested data. Therefore this article will discuss the market (primarily for policies with life insurance and an extension of benefits) without such data.
It is worth reviewing the attractiveness of savings-based products (“SBP”) as compared to SALTCI. The primary attraction to SBP is that it is not a “use it or lose it” policy. If the insured never needs long term care, the family gets the death benefit, or in the case of a surrender, the cash surrender value.
In past eras, a policyholder could surrender a SBP at any time, recovering at least his full premium. Even though very few insureds surrender their policies, these moneyback guarantees became increasingly expensive in a low-interest rate environment because it is difficult for insurers to invest the additional required reserves attractively. Therefore insurers have cut back on such guarantees. In addition, as noted by Carl Friedrich, a consulting actuary and principal at Milliman Inc., there is a risk that if interest rates were to meaningfully increase, policy exchange activity could increase which would dilute insurers’ profits on these plans.
Because the “100 percent moneyback guarantee” had been marketed heavily, insurers were concerned about the impact of softening the “cash back” guarantee. So they typically are now providing the 100 percent moneyback guarantee only after 5 years, sometimes as an alternative choice. It appears that, when financial advisors and consumers can quantify the additional benefits that can be obtained by sacrificing cash value, they generally favor the additional death and LTCI benefits.
For example, a 65-year-old single female who pays a single premium of $100,000 and accepts a permanent cash value floor equal to $80,000 can get a $141,775 specified amount (minimum death benefit) generating a LTCI benefit of up to $5907 per month which would last six years if the full amount was used each month. If, instead, she opts to have her cash value floor grade up from 80 percent initially to 100 percent after 5 years, her specified amount would reduce to $126,719 and her monthly maximum LTCI benefit would drop to $5280, reflecting a 10.6 percent reduction in death and LTCI benefits in order to enjoy a 25 percent increase in cash value floor after five years.
Therefore the lower-cash-value design is experiencing increased market share. Offering a moneyback guarantee has appeal and encourages purchase even if the buyer opts not to include that feature in his policy.
Some savings-based buyers would not typically consider SALTCI. People who intend to self-insure their long term care risk often recognize that SBPs are a better way to self-insure. For the first two to three years of needing long term care, SBP purchasers self-insure, as the insured’s long term care benefits are funded by a corresponding decrease in the policy’s death benefit. Such acceleration of the death benefit costs proportionately less because the insurer would have typically paid the death benefit before too long anyway.
If the long term care need is so expensive and/or long that it uses up the entire original death benefit (generally a small residual death benefit remains), the insurer continues to pay. The continuation of LTCI benefits is attractive because many people who self-insure are happy to have protection for a catastrophic long term care need that lasts more than two or three years. Savings-based policies are a catastrophic-type of insurance policy: if your need is less than two to three years, your beneficiaries pay for it; to the degree that it lasts longer, the insurer picks up (some of) the tab. This “stop-loss” coverage (perhaps more appropriately “slow the loss” coverage because the benefit may be insufficient to cover the full cost of care at that time) is not very expensive because it has the equivalent of a long elimination period as it is not tapped into until the insured has needed care for at least two to three years (plus the SBP elimination period).
Some policyholders anticipate that it will be easier to get claims paid with savings-based products than with SALTCI. They reason that the savings-based insurer has less interest in resisting payment as the money will be due in the fairly near future as a death benefit anyway. The insurer loses only the investment income which would have been earned between long term care claim payment and a not-too-distant death claim. Once the accelerated death benefit portion is being paid, the insurer is largely committed to continue to pay the subsequent extension of benefits.
Another reason why people perceive that savings-based claims may be paid more readily is that SBPs are much more likely to use an indemnity or disability (“cash”) basis than are SALTCI policies. With such designs, insureds need only prove that they satisfy the triggers (“disability”) or that they have incurred a qualified expense (“indemnity”) without having to provide bills to justify payment of the full claimed benefit.
On the other hand, as noted by Carl Friedrich, there is a higher cost for indemnity or disability-based policies than expense reimbursement policies. In addition, he observes that not all insurers will necessarily loosen their claim practices for SBP policies since they have an exposure to the long term care benefits payable after accelerations.
Large increases in premium in the SALTCI market have contributed to savings-based sales growth in two ways. First, now that SALTCI policies cost more than in the past, it costs less to add SBP’s death benefit and cash value than it previously did. Secondly, financial advisors and their clients appreciate the stability of SBPs, fearing uncertainty in SALTCI pricing.
Of course, another attraction of savings-based products has been that they are available on a single premium basis, so the client can get it “all done” immediately. Many SBP sales have been funded with money from low-yielding certificates of deposit.
The availability of single premium also has made savings-based products more capable of supporting §1035 exchanges. A §1035 exchange is a replacement of an existing non-qualified life insurance or annuity contract to a new contract. Money transfers without creating a taxable event, which is a very attractive aspect if the value in the original life insurance or annuity contract significantly exceeded the cost basis. Life insurance policies (with or without LTCI benefits) can be exchanged in such fashion to similar life insurance policies or to annuities (with or without LTCI benefits) or to SALTCI. Annuities (with or without LTCI benefits) can be exchanged to annuities (with or without LTCI benefits) or to SALTCI, but not to life insurance policies.
Another advantage is that, in 16 jurisdictions (those which opted for wording from the Deficit Reduction Act rather than wording promulgated by the NAIC), LTCI certification is not required when financial advisors sell SBPs. With the increasing attractiveness of SBPs vs. SALTCI, advisors in those jurisdictions are less likely to invest the time to secure/renew certification.
Savings-based products have attractions relative to other asset classes. SBPs are often guaranteed and, even if not guaranteed, perform well under a wide variety of economic scenarios. Although they don’t build outstanding cash value, they are secure. Their death benefit can replenish an estate that might have been ravaged by stock market losses, while the LTCI benefit protects their remaining estate from volatile long term care exposure. The safety of SBPs combined with their insurance protections make them an attractive asset, especially for risk-averse people. Thus, as noted above, SBP sales are often funded with money from low-yielding certificates of deposit.
Critical analysis of the attractions to savings-based may be helpful. Some of the attractions are more emotional than logical.
Although the “use-it-or-lose-it” appeal is strong, some buyers (particularly of savings-based annuities) may not fully internalize that the only way they may personally benefit is by using the SBP’s LTCI benefits. If the insured never needs care, it is the beneficiaries who gain if the insured purchases SBP instead of SALTCI.
More important, the stability argument favoring savings-based products largely results from “looking through the rear-view mirror”. Because past LTCI policies have incurred large price increases, a policy sold today is much less likely to incur an increase and any increase is likely to be much lower. Regulators and insurers have reacted to past under-pricing, taking steps to make LTCI premiums much more stable. A Society of Actuaries study to be published in 2016 concludes, based on predictive analysis, that policies issued in 2014 had a 10 percent chance of a rate increase. Based on a discussion I had with the author of that paper, the risk of a rate increase appears to be even lower, as the paper ignored interest yield considerations. (The paper ignored interest rate considerations because interest yields are generally not permitted to justify an inforce policy rate increase. However, favorable investment yields might enable an insurer to absorb operational SALTCI losses, hence avoid a request for an inforce policy premium increase.)
Another under-appreciated characteristic of SALTCI is that insureds are less hesitant to utilize benefits to secure desired care. When a choice not to claim benefits results in more money for beneficiaries, an insured may be reluctant to submit a claim and family members may disagree among themselves regarding the desirability of filing a claim. Not surprisingly, LTCI claims incidence rates on SBPs have been lower than on SALTCI products.
Finally, few savings-based products provide benefits such as shared care and some new SALTCI products present more attractive pricing than existed earlier in this decade. It can also be attractive to purchase SALTCI for tax advantages and State Partnership qualification.
Even though the logic behind the shift to savings-based policies is not as strong as some people may think, there are logical reasons to buy SBPs as well as strong emotional reasons. In 2015, 102,970 stand-alone LTCI policies were sold, compared to 26,000 SBP life policies, according to LIMRA, but SBPs seem likely to continue to increase their market share. SBPs produced more premium because a lot of single premium to 10-year-pay SBPs were sold.
The increasing savings-based sales have resulted in changes in the distribution of SBPs, aspects we hoped to document in the intended survey and future updates. For instance, SBPs used to be sold almost entirely as single premiums. Now most appear to be sold with premium-paying periods longer than one year.
With on-going premiums, savings-based products are more affordable to younger and less affluent markets. Thus, the SBP market is much broader (and issue age distribution is younger) than in the past.
Partly as a result of being sold at younger ages, many more savings-based policies are sold with benefit increase features than was the case in the past. Another reason that benefit increases are being sold more often is that advisors and buyers are looking at SBPs more often as an alternative to SALTCI. However, in some cases, the benefit increase features apply only to benefits paid as part of the extension of benefits provision. Obviously, it is important that advisors and clients be aware if the first few years of benefit will not increase over time.
For people who are interested in LTCI benefits, the savings-based “2+4” design (or similar designs mentioned below) is preferable. A “2+4” design means that the insurer is willing to pay the death benefit over the course of two years. (Example: a $72,000 death benefit spread over 24 months produces a $3000 monthly LTCI benefit). The “+4” indicates that, after the death benefit has been paid out for long term care needs, the insurer will continue paying benefits for up to another 4 years (or longer if the full amount is not used each month).
A “3+4” or “3+2” would spread that $72,000 death benefit over 36 months, resulting in a $2,000 per month maximum benefit instead of $3000. People interested in LTCI generally prefer a higher monthly LTCI benefit. Hence they usually prefer a “2+” design to a “3+” design.
For example, a 65-year-old single female who purchases a $144,000 death benefit with a 3+4 design would get a $4,000 maximum monthly benefit for seven years for a cost of $89,601. If she bought a 2+4 design, her monthly maximum would be much higher ($6000) but it would last only six years and would cost her $101,569, as she is likely to use more LTCI benefits.
People interested in LTCI favor “+4” to “+2” because “+4” adds little to the cost of the SBP compared to "+2", yet provides a lot more coverage by adding two years. The 2+4 design in the previous paragraph cost $101,569. Dropping it to a 2+2 forfeits one-third of the potential LTCI benefit yet reduces the premium only to $97,591, less than four percent. Carl Friedrich points out that the increase in cost from 2+2 to 2+4 is low because a large part of the premium is attributable to the unchanged death and cash value benefits.
Some savings-based policies are designed to pay two, three or four percent of the death benefit each month. Clearly, with such designs, the four percent per month benefit is preferable for those wanting to maximize the LTCI benefit. Four per cent per month can pay the death benefit out in 25 months, which is very similar to the “2+” design mentioned above.
In another change from the past, savings-based products often have longer benefit periods for LTCI than do SALTCI policies. As reported in July’s “2016 Long Term Care Insurance Survey” article, 51.5 percent of SALTCI policies had benefit periods of three years or less, with the overall average benefit period being 4.01 years, ignoring the additional coverage provided by shared care. Six years of LTCI coverage is popular with SBP plans.
Advisors often complain that it is difficult to compare savings-based and SALTCI policies. The savings-based and SALTCI products are issued by different insurers, with different financial strength, underwriting requirements, underwriting standards and couples’ discounts; different guarantees and premium-paying periods; different elimination periods and other provisions and different Partnership and tax considerations. However, it is also difficult to compare two SBPs, because the illustrations do not show what happens if someone has a one-year, two-year, three-year, etc. need for long term care then dies. Results under such circumstances can differ significantly from one SBP to another.
It is possible to make it much easier for advisors and clients to consider alternative insurance solutions for funding long term care needs. One such approach was unveiled in July, when National Guardian Life introduced a SALTCI policy with options to add a return of premium death benefit or a return of premium death benefit with a cash value. With this product, advisors and consumers can easily evaluate stand-alone vs. SBP, because there are no other “moving parts”.
As was the intent with the proposed survey, this article has dealt with life/LTCI savings-based products. It should be acknowledged that annuity/LTCI SBPs also exist, have uniquely different product designs, and sometimes are available with more lenient underwriting standards. In today’s low-interest market, such annuities seem to be most favored when life/LTCI SBPs are not available (because of §1035 restrictions or poor health) or when a client has no person or entity to name as a life insurance beneficiary. When interest rates rise, I expect the annuity/LTCI market to soar.
Also consistent with the proposed survey, so far this article has dealt with life/LTCI SBPs which include an extension of benefits, during which insurers pay pure LTCI costs, rather than simply advancing the death benefit. The article has discussed situations in which LTCI is a driving force in the purchasing decision.
However, often long term care risk is not the driving force. When life insurance is the dominant desire, extension of benefits is less likely to be sold. Instead, life insurance policies are sold with accelerated death benefits, either using a §7702 (B) long term care design or a §1.01(g) chronic illness design. In these designs, the benefits for cognitive impairment or ADL deficiencies cannot exceed the death benefit.
§7702 (B) provisions are legally considered to be LTCI, hence must include specified consumer protections and require LTCI certification in all but 16 jurisdictions.
However, §1.01(g) accelerated death benefits can be more attractive because they are “disability” based (hence can be used to pay family caregivers) and can be triggered by the same events that trigger §7702 (B) provisions (earlier, most §1.01(g) accelerated death benefits had the disadvantage that they required cognitive and ADL needs that were expected to be permanent, but that requirement no longer exists under the Interstate Compact standards). The fact that §7702 (B) designs are legally required to include consumer protections does not, of course, mean that §1.01(g) designs fail to include such protections.
Financial advisors understand that §1.01(g) provisions are often more attractive solutions for ADL deficiencies and cognitive impairment, but they are legally prohibited from referencing “long term care” when speaking about these provisions. This prohibition puts financial advisors in a difficult bind as they are forbidden from accurately describing what may be their client’s preferred approach to deal with cognitive and ADL risk. By interfering with clear communication, the law may inadvertently encourage financial advisors to favor what may be a less-attractive solution for consumers.
In 2015, 174,000 life insurance policies included accelerated death benefits according to LIMRA, which reported that 32 percent of those policies had §7702 (B) provisions and 68 percent had 1.01(g) provisions. The percentage of §1.01(g) sales may increase in the future.
There are many different insurance approaches to protect against long term care risk. As products improve and sales techniques simplify, the market will be served better which will be good from every perspective.
