Balancing the realities of low-interest, low-lapse and high utilization
by Bryan Langdon Mr. Langdon is affiliated with Ash Brokerage Corporation, in Fort Wayne, IN. He is a national spokesman for LTCi and DI. Connect with him by e-mail: [email protected]
Part 3 in a 4-part series
Most of us in the individual long-term care market can agree that our industry has changed dramatically in the last few years. But change can be a good thing.
As I travel around the country, I often hear, “This market is coming to an end,” or “The products are priced out of range for most clients.” I strongly disagree.
But our industry is relatively new, and like all new things, it has a learning curve. I’m hopeful ours is coming to an end.
A common complaint I hear is, “So many companies have gotten out of the business.” They have – I can’t deny it. I would remind you, however, the disability income business went through an enormous upheaval and carrier consolidation several years ago. Today, that business is thriving, and ours can, too.
As they’ve paid out claims to their earliest clients, manufacturers of long-term care insurance have been forced to change their solutions in order to remain profitable. They’re dealing with low-interest rates, low-lapse rates and higher-than-expected utilization.
So we all have to face reality: We just haven’t charged enough for the products’ benefits. Unfortunately, the manufacturers can’t merely charge more for the same products. As they’ve seen how the policies are actually being used, they’ve had to go back and change how their offerings are structured. They’ve realized they can’t hold all the risk anymore – the future is too uncertain.
Keeping Up With Modern Medicine
Modern medicine has increased patient longevity, and benefits are being utilized more than anyone could have predicted. That proves our market’s demand, but it also shortens the supply.
I witnessed this firsthand. In 1999, a 5 percent compound benefit option with unlimited benefits was the norm, and I asked a carrier if they held all the risk. “Of course,” they said. “Why would you ask?”
Well, I asked because I had just experienced a situation where my great aunt spent 18 months on a feeding tube in a nursing home. Thankfully, she had a long-term care policy. But my family could not come to an agreement on how much care was to be given and for how long … in the meantime, her policy benefits were paying the bills.
That’s when I realized that having a consistent funding option DOES figure into the decision-making process. Carriers were beginning to make the same realization. So individual long-term care policies “aren’t what they used to be,” but that doesn’t mean they’re any less valuable. It’s undeniable that health care costs remain one of the biggest threats to destroying retirement plans.
Today, a 65-year-old has a good chance of living to age 85, and costs of care will only increase in those 20 years. Ask your clients, “Should you need care, where is the money coming from?” We used to hear, “My family will take care of me,” but that’s no longer the case.
The reality is, children are spread out across the country, far from parents who don’t want to be a burden to them. Again and again, advisors tell me horror stories about their clients spending hundreds of thousands of dollars on care out of their own pocket. The demand for coverage is real and it’s not going away.
A New Normal
The increasing need is our opportunity to embrace the evolution of our industry and help our clients. There is a “new normal” in our business, and we have to adjust. Introducing long-term care insurance to your client has become a planning process, not a selling process. We know one size does not fit all in product design, and each enhancement directly impacts premiums.
Now more than ever, we must use all the tools at our disposal and explain each one to the client so they can make a truly informed decision. Let’s not look at this as a hurdle, but as an opportunity – an opportunity to craft a plan that is tailor-made for each person. In order to get the best solutions, we have to take advantage of each product’s flexibility.
Let’s look at the choices we can make today. The inflation option probably won’t be 5 percent compound anymore. Pricing changes make that choice difficult. Many advisors have moved to 3 percent compound, but more choices are available.
Now, you can choose an option that lasts for a certain length of time or stops at a certain age. Carriers are also coming out with pay-as-you-go inflation options that will increase with the client’s age. This option was with us 20 years ago and has made a comeback. Except for rare occasions, unlimited benefit periods are out of the question. It just depends on the pool of money you are looking to create.
Many advisors are settling in the three-to-four-year range, in part because a number of claims never exceed that period, and in part because of the impact on premium. In the beginning, we were only able to select a daily benefit option as part of a long-term care plan.
Eventually, the introduction of a monthly benefit option was attractive for those focused on home-care benefits. Unfortunately, as with most benefits, the industry realized there was a larger cost associated with that flexibility. Now you must weigh how that benefit fits into the overall financial plan. What about the riders, you ask?
Over the years, we have had the option to add riders to enhance benefits, reduce the elimination period or even create a full return of premium. Although some riders are still available, we rarely add them in. Again, each enhancement has a direct impact on the premium charge. The bottom line is that the changes in our industry have forced us to closely examine each piece of a long-term care policy.
With higher costs for the carriers and clients, everyone must do their due diligence to ensure each plan and option is the right fit. If you go through the process and realize traditional long-term care just isn’t going to work, don’t forget hybrid products or life insurance riders can still help meet the need. Like I said, the demand isn’t going away.
The Distribution Stream
For years, our products have been distributed by agents or advisors who only sell a few cases a year. Today, that’s still the case. Even though general brokerage distribution has always held the largest segment of long-term care insurance sales, captive legacy carriers are beginning to take a larger share.
No matter how it’s been sold, the biggest problem we have is our inability to get advisors to consistently introduce the product. Every client, no matter their profile, faces the risk of longevity and rising health care costs. Why aren’t we having the conversation with each one of them?
The individual long-term care market has evolved. It had to. The business has never been easy, but we have a chance to work together – as wholesalers, advisors, clients and carriers – to embrace the opportunities and make the most of the offerings. We can’t continue to conduct business as usual. Those options don’t exist anymore. However, we can work with our clients to understand what they want, know what they have, and create a solution that meets their needs – because the need will always be there.
Yes, the market has changed… and so should we.
Next week: Part 4- Brian Vestergaard on Quality Solutions