I saw another presentation proclaiming that asset based long term care/second-to-die life is better than traditional long term care insurance (LTCI).
My position is: Do not stake out your claim, get out your gun and defend to the death that one is better than the other.
If you do, you will not make as many sales as you would if you kept an open mind and recommend what is best for the client based on their circumstances. Do not be afraid to objectively offer both and let the client choose between “yes” and “yes”. Why be a one trick pony and lose half of your sales?
When one does a deeper dive, the combo product can fall short when compared to a traditional LTCI plus a separate second-to-die life contract. However, even though this may be factually correct, it does not change the reality that some clients are more comfortable with traditional while others prefer asset based. Sell both!
Table 1 represents what we were shown as “proving” why asset based is better than traditional LTCI. The presenter compared asset based to traditional LTCI stating:
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1. Both traditional and asset based pay a monthly benefit of $7,500 per month per spouse.
2. The traditional pays up to $450,000 per spouse vs. unlimited benefits for the asset based.
3. There is $187,500 of second-to-die life insurance which would be reduced when long term care benefits are paid until 100 percent of life benefit is gone. (NOTE: with some other companies there is a 10 percent residual death benefit).
4. The clients would have $56,884 of guaranteed cash value after 15 years.
5. They ended with, “For $1,345 more look at all you get—life insurance, cash value and unlimited benefits.”
What was not explained in detail was:
1. There are less expensive traditional policies on the market.
2. When long term care benefits are paid out, cash value and death benefit are both proportionately reduced by the amount of long term care benefit paid out. Clients are “self-funding” long term care costs from their cash value and life amount first.
3. If clients remove 100 percent of cash value from the policy they no longer have any life insurance or long term care benefits left as the policy would be terminated. One might ask, “What is the real benefit of having this cash value?”
4. Nothing prevents one from buying a separate second-to-die contract with the difference in premium.
In table 2, I show a stand-alone traditional LTCI policy plus an optional second-to-die life insurance policy:
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Here is how table 2 was modified:
1. Used a better priced traditional policy.
2. Increased the benefit pool from $450,000 to $750,000 per spouse.
3. Added a shared care rider
4. Numbers two and three increase couple’s total pool to $1,500,000 which would last a minimum of 8.3 years each or 16.6 years for one spouse. From a practical view this is virtually unlimited benefits.
5. Total cost for traditional LTCI reduced to $3,585 leaving $2,388 that client can use to buy a second-to-die policy.
If your client chooses to purchase a stand alone second-to-die policy, in this example the face amount would be $293,600. In addition, the $293,600 is not reduced by any long term care benefits paid. Your clients receive both the long term care benefits plus the full face amount of the life insurance!
A few other points:
With the traditional plan there is no requirement to buy the second-to-die policy; the client can simply save or invest the $2,388 as they wish. In addition, premiums on traditional LTCI may be deductible through businesses or on a client’s personal tax returns. Plus, this traditional policy includes: a future purchase option allowing clients to add coverage if desired and a cash alternative allowing for greater flexibility.
Do not let your preference, or should I say bias, get in the way of giving good solid complete advice to your client and letting them choose which way to go.
Now before you think I am pushing traditional over asset based, I am not. I am simply leveling the comparison. When you are helping your client determine whether combo/hybrid or traditional LTCI is a better choice for them, the answer will depend on their circumstances: Health, assets, experiences with family members, the ability to deduct premiums, Partnership Plans and other reasons. Learn the differences between the products so you can recommend what is best for your client. The fact is: Some long term care coverage is better than none at all. No matter which type is appropriate—have the long term care discussion!
Before getting into some examples of which kind of client might prefer one type over the other, let’s discuss possible rate increases on traditional policies. New research is out from the Society of Actuaries Think Tank for Long Term Care Insurance. Their report states that traditional policies issued in 2014 or after have a 90 percent chance of not having future rate increases. And for the 10 percent that might, they expect the rate increase to be only eight to 10 percent. Why? Companies have accumulated the information they need and have re-designed their policies appropriately.
Carrier product design changes that have taken place over the past several years to stabilize rates for traditional LTC include:
• No longer offering unlimited benefits.
• Assuming a zero percent lapse rate and a much lower rate of return on investments.
• Eliminating “Unisex” rates except for simplified issue multi-life.
• No longer offering a five percent compound rider or charging substantially more for this rider.
Examples of When Asset Based or Traditional Might Be a Better Fit (there are always exceptions):
1. A couple in their fifties in good health with between $250,000 and $500,000 in liquid assets.
Traditional. Partnership is very important to couples with modest assets and combo/hybrid cannot be Partnership qualified.
2. A client age 67 with $700,000 in liquid assets and has previously declined to buy traditional LTCI.
Asset Based. In fact this is probably the “perfect” client for combo/hybrid.
3. A business owner that controls a C-corp.
Traditional. Although he may have a lot of assets, premium is 100 percent deductible through the C-corp. Consider a 10-pay and do not throw away the tax savings.
4. A couple whose grandmother just got a 40 percent increase on her traditional LTCI policy.
Asset based. If the couple has assets.
5. A couple whose grandfather has collected long term care benefits from his traditional LTCI policy.
Traditional. Probably what this couple would feel most comfortable buying.
6. A business owner that has assets and also has health issues.
This could be either. A couple of asset based policies may work if they have simplified issue. Or, a better way to go may be simplified issue multi-life LTCI, which is a traditional policy with only six underwriting questions.
Conclusion:
Combo and traditional LTCI are both excellent products! By knowing the differences agents can talk to many more clients about long term care planning. Offering both, many more policies can be sold. Most important—the client wins and the agent wins!
Remember—if your clients are not allocating some assets to cover long term care costs, they are allocating ALL of their assets to cover long term care costs!
Happy selling.
