by Bruce Moon, ChFC®, CLU®, CASL
Bruce Moon, ChFC®, CLU®, CASL, is vice president of product management for OneAmerica. He has focused on product development and marketing of asset-based long-term-care solutions for more than 20 years.
The headlines have been jarring: "Long-Term Care Insurance Market Shrinking" (NJ Star-Ledger, March 25, 2012); "Long-Term Care: What Now?" (Wall Street Journal, March 9, 2012); "Long-Term Care Insurance Takes a Hit" (Chicago Sun-Times, July 4, 2012).
While most advisers agree that long-term-care protection, in the form of insurance coverage, is a component of most risk management plans, the options commonly thought to be "traditional" in this marketplace are eroding as significant insurance companies have removed products from the market in the last two years.
Decades of underpriced products, exacerbated by historically low interest rates, have put many companies on their heels. But while these issues are affecting the marketplace, a significant consumer behavior factor is contributing to a large segment of the population being underprepared for their future long-term-care expenses.
Consumers have to want to protect themselves against the unpredictable expenses associated with long-term care. Do they really want insurance? It would seem so. The 2011 John Hancock Long-Term Care Survey found that "although most respondents said they thought LTC insurance would be the best way to cover long-term care needs (61 percent), only 11 percent reported having purchased it."
The combination of significant rate-increase activity, apathy, and what some consider unattractive product design has led us to today. While some advisers have walked away from long-term-care insurance, others are finding that new options for their clients are available.
New Options for Risk Protection
These new options come in familiar packaging. Life insurance and annuity-based LTC coverage have been around for a while, and are now coming to the forefront as the pay-as-you-go, hope-you-never-need-it, health-based LTC approaches fade.
Here are some opportunities asset-based or hybrid LTC solutions can offer:
Premium guarantees. Typical life and annuity-based LTC insurance options include single premium approaches, meaning the adviser can reallocate an existing asset and eliminate future premiums (and the potential of future premium increases). Newer options include limited payment products. Instead of another premium for which consumers will pay until the end of their days, these "paid-up" approaches offer 10-pay or 20-pay periods that put a finite date-and a finite premium-on the protection being purchased. It's the guaranteed protection, not the monthly payment that stays with them for life.
True joint life contracts. Although many purchasers of LTC insurance are spouses/partners (57 percent in 2010, according to the Sourcebook for Long-Term Care Insurance Information from the American Association for Long-Term Care Insurance), the amount of premium discount continues to diminish. However, an innovation that has gained traction is the option to buy one policy for a couple to get the most of a situation where both spouses are insurable. Available on certain hybrid life and annuity/LTC policies, this provides a single pool of money from which both insureds have access, and can be available with lifetime coverage.
Coverage through annuities. Consumers in their 50s or 60s may have purchased annuities with after-tax dollars, planning to use the proceeds to supplement income. Now in their 70s or even 80s, some may not need the income, but do need LTC protection. The answer for some has come with the relatively new genre of LTC annuities that began in earnest after the Pension Protection Act became law in 2010.
These products, which have the LTC benefits and triggers of life-based and health-based contracts, offer a huge opportunity-when the insured qualifies for benefits, the money drawn out of the annuity is federal income tax free. These products typically have shorter waiting periods and less restrictive underwriting than other types of insurance. Some are available to healthy clients over age 85.
Simply the Options
Having more products in the marketplace is one thing, but how does today's adviser talk to clients about long-term care? One approach is to simplify the options.
First, describe the government programs-Medicare and Medicaid-and discuss the benefits and limitations of each, including whether the adviser and the client think the government, given the existing debt situation, is going to expand or contract the LTC benefits it makes available through these programs.
Talk about using existing assets in a "just-in-case" fund. Maybe it's money already in a fixed investment, such as a CD, short-term bond fund, or deferred annuity. Help the client realize that should care be needed, that asset will be depleted on a dollar-for-dollar basis.
That leads into hybrid solutions, which can be purchased with the assets already set aside in a "just in case" fund. These products have multiple appeals, such as:
- The money used as premium to purchase the life insurance or annuity-based long-term care protection isn't lost if the client dies in his or her sleep in their own bed after a short illness (by the way, that's the way clients see their situation, ignoring the statistics on how many will actually need long-term care).
- These products actually have a cash value the client can access. Or, if they have a specific, unplanned need or a change or heart, they can walk away from their purchase and have an asset they can use for another purpose (though lapse rates on these products tend to be very small).
- What if your clients' "just in case" fund is qualified money? Coordinated hybrid LTC approaches automatically move the money from an IRA annuity into a life/LTC policy over a period of several years. This may be an efficient way to provide LTC protection, while at the same time reducing the qualified money that passes on the heirs (and is fully taxable to them). An added bonus for clients over age 70½ is the systematic withdrawals also count toward Required Minimum Distributions.
Although it would be easy for advisers to minimize LTC insurance given the decline in health-based LTC products, alternatives exist that can make sense for some clients. As sales volumes of life-based and annuity-based LTC continue to grow, there is a sea change occurring in the industry. Now is the time to become knowledgeable about hybrid or asset-based LTCI solutions, so you can present all options to clients and allow them to select the options that makes the most sense for them.