Not Your Grandpa’s Long Term Care Insurance

Building a better mousetrap

by Bob Vandy, CLU, ChFC, LUTCF, CLTC

PART III in a three-part series
In part 1 of this series, we took stock of the past and current LTC planning environment, with an eye toward the role of LTC Insurance. In part 2, we took a closer look at those product solutions, including traditional and Partnership LTCI, as well as the newer “linked benefit” product solutions which, in one way or another, combine life insurance (or sometimes annuity) and LTC (or sometimes “chronic illness”) benefits to help satisfy client planning needs.

In this final part of the series, we’ll examine some specific ways to make the policy design more palatable for your client or prospect, so they don’t abandon the notion of using a product to solve their planning need because of “sticker shock” or another manifestation of being overwhelmed. Let’s face it; as worrisome as some facets of the current LTCI product environment may be, the cost – both financial and non-financial – of doing nothing because of a case of “head in the sand” paralysis could be potentially far, far worse than having at least some level of coverage in the event of a care need later.

And that brings us to the first tip we want to share when it comes to LTCI product design:

• Something IS better than nothing! Historically, we looked at LTCI policy design and automatically assumed that, in order to have a meaningful LTCI policy, one had to purchase a daily benefit at least equal to the current cost of a nursing home. But, there is an inherent fallacy to that line of thinking…can you guess what it is? Well, many of your clients already think that LTCI is “nursing home” insurance. They also are quite confident that they will NEVER go into a nursing home. So, when they see the premium for an LTCI policy (which they may have already concluded they don’t need because, after all, it’s “nursing home” insurance and they’re never going into a nursing home, right?), they conclude that, they are better off without it.This is where you can directly benefit from educating your client. Not only can you let them know that a vast majority of the extended or chronic care that is given is actually given OUTSIDE the nursing home (in fact, most of it given in a home or community based setting), but you can extend that to the policy design by gearing the benefit to a meaningful HOME CARE (HHC) benefit, perhaps covering 4-8-12 hours per day of that care. At roughly $20 per hour (the approximate average cost for HHC), you can build a policy with, say, a $160 per day benefit, providing a meaningful benefit, while keeping the premium VERY reasonable!
  Don’t get me wrong – if your client can afford a daily benefit commensurate with the NH cost of care, should they buy it? Sure. But, for those clients who would otherwise not buy LTCI at all, a more modest benefit gets them at least some meaningful coverage at a premium they can manage, as opposed to buying NOTHING because of the aforementioned sticker shock.

Next, once we’ve concluded that a more reasonable daily benefit is both advantageous and affordable to your client or prospect, we can address another design issue:

The Benefit PERIOD (BP) (or “factor” as it’s sometimes called – since, for example, a 3 year benefit factor can actually equate to a much longer timeframe because of the “pool of money” concept in LTCI).
Historically, our approach has often been to get the longest BP possible. In fact, there are some who have sold almost exclusively – and would still likely do if it were widely available – a LIFETIME benefit. What’s the problem with that approach? Well, there are really two problems: (a) You can’t get it anymore in the LTCI market (because carriers find it so difficult to price for and, even if they could, it would be terribly expensive) and (b) Even if you could get it, many would argue it is OVERINSURING the risk.

Now, we recognize that we are all quite concerned with the extended Alzheimer’s or other dementia related risk when it comes to LTC. But, the reality is that (a) claims statistics show the average claim lasts, on average, less than 3 years and (b) the pricing for many longer term benefit periods or factors puts it out of the reach for all but your wealthiest clients and prospects. Designing a policy to pay benefits for, say, 3 years is likely to handle a vast majority of claims (92+% according to some recent stats and, yes, we recognize it will be inadequate for some of the less likely, longer term claims), and a client purchasing such a policy, when they would otherwise likely purchase no coverage at all, can be a Godsend.

The next item worth discussing is inflation. Everybody should have 5% compound, right? WRONG!

• This is another example of past habit dictating future action (i.e. “that’s the way we’ve always done it”). Historically, we sold 5% compound inflation because that was the ONLY option. Now, however, most of us realize (largely because of market pricing volatility) there are multiple options to handle increasing costs of care over time, including varying percentages on a compound basis (4% and 3% have become the norm in our firm’s experience), simple basis and even future purchase options which allow policyholders to increase their coverage later by locking in their insurability today. Those policy designs have initial premiums that are MUCH more affordable than with the aforementioned 5% compound rider and still provide – once again – MEANINGFUL LTCI coverage. Yes, they are ultimately more expensive in their aggregate premiums over time if the client takes advantage of ALL of their purchase options than if they bought inflation originally, but if they don’t buy because the initial premium for 5% compound is too much for them, what is the advantage to them of doing nothing?

Finally, let’s take a brief look at the “traditional LTCI” vs. “linked benefit” discussion.

• Many advisors prefer to go straight to a linked benefit product design, which combines, for example, a life insurance death benefit with LTC benefits in some form, so the client (or their estate) will “get something back” for the premiums they’ve paid throughout their lifetimes. In the spirit of full disclosure, our firm writes BOTH traditional LTCI and the newer linked benefit policies. And, we love them BOTH!Now, on one hand, we can tell your client or prospect that [traditional] LTCI is (at least, generally) like homeowners or auto or liability or health insurance in that, if you don’t use it, you do not see a return of premiums paid later if the policy is not utilized for its stated purpose. But, for some reason (habit, again?) many people see that as a design “flaw” in LTCI, as opposed to what it actually is; that is, reality. Having said that, a return of premium option is indeed available for many carriers and products. The “problem” with those riders is that they have not been sold as much as they might otherwise because of the perception of, once again, being “too expensive.”
  Historically, we sold 5% compound inflation because that was the ONLY option. Now, however, most of us realize (largely because of market pricing volatility) there are multiple options to handle increasing costs of care over time

  Here’s a thought: the next time you are considering a single premium linked benefit product solution for your client (which, although available on some policies is not widely written with built in inflation options) because of its ability to “make sure the client gets something back no matter what), run a proposal for a traditional LTCI policy design where the amount of the benefit pool in the traditional LTCI policy comes close to or matches the pool of LTC benefit in the linked product. However, do three additional things; (a) do NOT include inflation in the traditional LTCI product (I know it’s counterintuitive), (b) DO include an ROP (Return of Premium) rider on the traditional LTCI and (c) take the annual premium for the policy and find out what lump sum would be necessary in a single premium/income annuity to fund that annual premium. You will likely be QUITE surprised at how much LESS is needed to fund the LTCI policy, and it may provide the return of premiums at death!
  p.s. as a bonus – it may even be possible to have the premium payments from the annuity be income tax free, rather than part of each payment be income taxable, which is normally the case!

So – there are just a few hints and things to keep in mind as you map out LTC, and LTCI, plans for your clients and prospects in the future.

Your main takeaways from this series of articles should be – at least – that the LTCI industry is changing, and will continue to, the news is not all bad (the rumors of the death of LTCI have been wildly exaggeratedJ) and you CAN indeed design LTC insurance policies – whether traditional or linked benefit – to suit both the needs AND the pocketbooks of a majority of your clients.

Until next time – Good selling!!