Serious Flaws

Fairly certain no one will argue with the notion that limitations or restrictions that apply to specific policy benefits can be considered “flaws.” Any benefit that is not complete as presented must be inadequate by definition and therefore “flawed.” What “is” is of course crucial, but what “ain’t” is critical to our professional survival.

A vibrant combo life and annuity market has bubbled to the surface. As predicted repeatedly in this column over the last 10 years. (Sorry, I couldn’t stop myself.) You simply do not want to be the company that does not have a critical illness/long term care combo option. Not having one paints a giant target on the back of any existing coverage. Home office 1035 personnel are vibrating in anticipation. Combo policies have been around forever; truthfully the two birds with one stone story never loses its luster. The corollary truth is equally important: Two risks require two costs. Nobody rides free.

This is specifically why the adherents of supposedly free, no up-front cost, rear-end load, “discount” method chronic illness benefits Fry My Toasties! The obvious bears repeating—there is no free lunch. The entire cost of carrying the additional risk will be deducted from future benefits owed and then some. I recognize it’s fun to let the words, “If you don’t use it—it cost nothing” spill from your lips. Unfortunately the corollary truth becomes if you do need it, you have no real idea what the hell “it” is. That unknown, unidentified and currently unavailable for viewing, is also often sheltered from the light of day by built-in obstacles to claiming in the first place. The most glaring example being a requirement that benefit payment requires a permanent disability. The NAIC has allowed a more HIPAA-friendly definition for several years. The cost to the policy is infinitesimal but the benefit to the buyer is critical. Some companies have gone back and revised their definitions, which should be applauded, and new product is more likely to include the newer language as well—which makes the benefit much more copasetic. But if it’s a “discount” method payment your actual benefit, although more liberally defined as the benefit amount, is still a mystery until you really need the money. I must wonder about the efficacy of carrying sufficient E&O in retirement to be prepared when the “surprise” gets sprung on the uninformed policy holder. Bear in mind that the benefit is unknown until your client comes face to face with the reality of the imbedded shortcomings you let flow under your due diligence bridge unmolested.

I can’t believe I have to say this again: Read the specimen contract and find the flaws! If you cannot guarantee benefits, and hopefully premiums, I must ask, “What were you thinking?”

Let’s approach this calmly and rationally. Your client has agreed to buy protection against the possibility of the need for expensive extended care. It seems fairly clear that you should at least explain what that does cost. If you didn’t pay for it, it seems reasonable that there might be questions as to the validity or quantity of ultimate claim payments. I further suspect nothing should bring you in close contact with nothing, or not much, at the time of claim. Paying a known cost for a known benefit does seem to be a much safer approach. Why not take a hard look at what that net cost actually represents. Please divide the premium into the rider cost. The results might surprise you and be very illuminating to your customers. Most long term care/chronic illness claims are manageable. Doesn’t it strike you that the cost to protect a risk of that magnitude should also be manageable from a cost standpoint?

Why can’t we do this right?

You are at a fork in the road. One direction is a well-lit, newly paved toll road. You know where you are going. You know how long it will take to get there and exactly what it will cost to arrive. The other road is overgrown, dark, with unseen potholes and a dubious end to your desired journey. Again, forgive me…I just can’t see a more obvious decision. A baby pig is in a gunny sack. It can be seen moving and heard squealing. The problem, of course, is that we already know it’s probably the runt of the litter, but it is unknown just how deficient is its size and growth potential. Out here in the country we would not ever buy a “pig in a poke” or frankly have anything kind to say about those who sell them.

Other than that I have no opinion on the subject.

Ronald R. Hagelman, CLTC, CSA, LTCP, has been a teacher, cattle rancher, agent, brokerage general agent, corporate consultant and home office executive. As a consultant he has created numerous individual and group insurance products.

A nationally recognized motivational speaker, Hagelman has served on the LIMRA, Society of Actuaries, and ILTCI committees. He is past president of the American Association for Long Term Care Insurance and continues to work with LTCI company advisory boards. He remains a contributing “friend” of the SOA LTCI Section Council and the SOA Future of LTCI committee. Hagelman and his partner Barry J. Fisher are principles of Ice Floe Consulting, providing consulting services for Chronic Illness/LTC product development and brokerage distribution strategies.

Hagelman can be reached at Ice Floe Consulting, 156 N. Solms Rd., New Braunfels, TX 78132 Telephone: 830-620-4066. Email: