LTC Bullet: Guest Column on Linked Products
Friday, September 13, 2013
LTC Comment: What’s better? Traditional LTCI or linked products? It depends, says guest columnist Shawn Britt after the ***news.***
*** TODAY IS FRIDAY, THE 13TH : Of course, we’re scientific, not superstitious. But, hey, it never hurts to be careful. ***
*** CONGRESSIONAL QUARTERLY Health Beat News reported today that the federal LTC Commission has completed its deliberations but deadlocked on long-term care financing recommendations. According to an anonymous leaker: “With respect to financing long-term care . . . some liberals on the commission favored an approach involving new taxes and new government programs, while conservatives pushed for incentives to encourage people to plan for their own long-term care, such as promoting products combining life annuities with long-term care insurance.” Bipartisan agreement was reached on some unspecified recommendations related to LTC workforce issues. LTC Comment: This is probably the best outcome we could have hoped for from this panel which was stacked in favor of government financing advocates. It looks like a new CLASS Act modified to make it compulsory, which we feared a majority of the Commission would favor, didn’t make the cut. ***
*** THE GOOD MEDICAID LAWYERS: Thanks to an anonymous grant from a staunch corporate supporter of the Center for Long-Term Care Reform, Steve Moses is headed to the American Association of Public Welfare Attorneys national conference in November. We made an appeal for funds to support Steve’s participation in the event a few weeks ago: “LTC Bullet: Meet the Good Medicaid Lawyers.” Steve will share what’s he’s learned about the latest techniques used by Medicaid planners to impoverish their affluent clients artificially. Animated discussion will likely ensue as the audience of lawyers who represent state Medicaid programs share their experiences fighting against fraud and abuse of the LTC safety net program. ***
*** SPOTLIGHT ON: Take our "virtual tour" of the Center for Long-Term Care Reform's website here. You'll learn how to navigate the Center’s indispensable website. Get easy access to critical information--in our public website and in our popular Members-Only Zone. Whether you are new to the Center for Long-Term Care Reform or a seasoned Center member, you'll find a wealth of valuable content on our website by taking this virtual tour. Take this tour and if you find you need your user name and password, or are not yet a member and would like to join, contact Damon at 206-283-7036 or firstname.lastname@example.org. ***
LTC BULLET: GUEST COLUMN ON LINKED PRODUCTS
LTC Comment: There’s a lot of buzz lately about linked or hybrid products for long-term care coverage. With all the challenges traditional LTCI has faced, are these equity-based products a better choice for consumers? As to any such question, the best answer is “It depends.” The better question is “What is the most suitable protection against long-term care risk and cost for each individual and family?”
Shawn Britt of Nationwide Financial opined on this topic one day in a telephone conversation. So, I asked her to write a piece expressing her views. She submitted the following. LTC Bullets will consider publishing replies of one 1000 words or less, especially if they take a different point of view.
As we’ve reported before, I’m deeply in the throes of writing four major reports on the studies we’ve been conducting all summer long in Virginia, New Jersey, and Georgia. Damon’s at the helm in Seattle doing our LTC Clippings, LTC E-Alerts, and LTC Bullets. Publishing guest columns this week and possibly next week gives him and me some breathing room. Thanks for your patience. – Steve Moses
And now, here’s Shawn Britt’s essay.
Products – How They Provide Alternative LTC Solutions”
I was recently challenged by a financial professional who asked me why anyone would sell linked long-term care solutions such as life insurance or annuities with a long-term care rider. He was of the opinion that selling a single product with combined purposes creates confusion - that life insurance and annuities should be used for the purposes they were originally designed - and long-term care needs should only be handled with dedicated LTC products.
I surmised he had the ideal set of clients – older (but not too old), healthy and relatively affluent. And in a world of perfect clientele, he might be right. However, I routinely speak to financial professionals who have clients with objections and obstacles pertaining to long-term care coverage, and they’re looking for solutions their clients qualify for and/or are willing to purchase.
While traditional LTC policies do offer the most comprehensive choices for coverage, and may be the best choice for many people, there are common obstacles to these sales.
There is now a growing marketplace of LTC solutions attached to financial products, and these alternative products may be able to address the concerns listed above.
Alternative LTC Solutions Linked to Financial Products
Solutions that combine LTC coverage with a financial product provide a way to avoid the “use it or lose it” (loss of premium) objection since the premium paid, and usually more, will be recovered either through use of the product for LTC benefits, a death benefit, or an annuity income stream. Thus, these products may counter some of the objections people have to a traditional LTC policy. While long-term care solutions linked to life insurance require some form of underwriting, there are a few solutions in the annuity space that do not, and provide a possible answer for uninsurable clients. All of these alternative products have similarities to traditional long-term care policies in the fact that they pay LTC benefits by indemnity or reimbursement, and may have an elimination period. Otherwise, the structure varies, and features are generally not as customizable. The trade off to customization is cost recovery that can be counted on.
Asset Based LTC (also known as a linked benefit) – With this product line, choice of benefit periods vary two to eight years (depending on the carrier), but one common choice of this type plan is a 6-year benefit period sold as a “two plus four” option, which we will illustrate here. The first bucket is an amount that is available for LTC benefits, but any amount not used for LTC is paid as a life insurance death benefit. This bucket lasts for two years when collecting the full benefit amount and it must be exhausted first when going on LTC claim. Once the first bucket is exhausted, the insured begins collecting from the second bucket, which is only available as LTC benefits and lasts 4 years when collecting full benefit. Any uncollected benefits from the second bucket are forfeited, however, when the insured passes away. There is a guaranteed residual death benefit that is paid to the beneficiary.
This solution avoids the “use it or lose it” objection by offering a death benefit that is higher than the investment that is collected via LTC benefits and/or death benefits. There is also a guaranteed return of premium feature. While customization is limited, there is the ability to purchase substantial LTC benefits with coverage periods and inflation protection similar to traditional LTC policies. These policies are typically paid for with a single premium (though 3, 5, 7 and 10 pays are available), so the product is a better fit for people with assets to reposition, and who want LTC coverage in an amount closer to a traditional policy, as well as some of the features such as inflation protection. Such people are also looking for cost recovery and a guaranteed return of premium should their needs change. This type of product generally uses simplified underwriting for life insurance and long-term care (including cognitive testing).
Life Insurance with LTC Rider (also known as Living Benefits)
This solution is accomplished by adding a LTC rider (for an additional charge) to a life insurance policy a person is purchasing. The death benefit from the life/LTC combo product creates a pool of money that can be used, while alive, to help pay for qualifying LTC expenses. If LTC is never needed or only partially used, any remaining death benefit is paid to the beneficiary. The benefit is normally paid monthly and is a percentage of the death benefit, typically 2% of the death benefit per month. Long-term care riders are generally offered on permanent life insurance contracts and offer the following:
People who are typically interested in this type of solution will vary. This may appeal to people with LTC concerns who have excess assets they wish to use to create a tax efficient legacy. This solution also appeals to people who voice the typical objections to stand alone long-term care policies and like the idea that the entire benefit pool will be paid to either the contract owner or beneficiary. Other potential prospects come from younger clients not ready to discuss purchasing full fledged LTC coverage.
Please keep in mind that these products are fully underwritten for life insurance and long-term care and it is possible to be offered the life insurance yet declined for the LTC rider.
Annuity/LTC Linked Solutions
Clients who lack the necessary LTC health qualifications may have options through annuity products with LTC riders. While these products generally offer less LTC coverage compared to other solutions, they offer an alternative that may be welcome to certain people. These products vary greatly, but generally, the contract value or the guaranteed income is doubled (sometimes tripled) when the annuitant qualifies for the LTC claim. And there are some companies offering annuity/LTC linked products that don’t require underwriting. Instead, there is an exclusion period in which the client will not be eligible to file a claim. Depending on how rich the LTC benefits are, these exclusion periods tend to run between two and seven years. Some of these products qualify in their design to pay a tax free benefit for qualifying LTC conditions (per provisions in the Pension Protection Act of 2006, effective January 1, 2010).
The annuity/LTC linked solution may also appeal to clients who lack liquid assets for annual premiums. The annuity will provide either income for retirement or LTC benefits. For example, some contracts will allow the client to start taking a guaranteed income, then if qualifying LTC needs arise, the income is doubled. Be sure to inquire how the LTC benefits will interact with the income benefits as provisions vary greatly among companies and some LTC riders drop once income commences. Also keep in mind that not all annuity solutions are designed to qualify for tax free benefits. But when a person is in a position of few choices for LTC coverage, the annuity can offer some assistance.
For those who believe product sales should remain dedicated to the product category – that would be great in an ideal world where all is black and white. But the world I work in sees a lot of grey, and I am grateful linked solutions exist so we can still accommodate objections and obstacles with a LTC solution that a people are willing and able to put in place.
CLU is Director, Long-term Care Initiatives, Advanced Consulting Group