2011 LTCi Market Study: The New Crop of Products

In recent years, financial professionals have faced many challenges. This is not new news — but it may be especially true for those of us who seek to protect our clients from the costs associated with long-term care.

The most well-known product structure, health-based LTC insurance, has fallen on difficult times due to significant rate increases, dramatic product restructuring and a number of carriers abandoning the business line altogether. Meanwhile, another LTC protection option, the combination product, has made significant inroads in the market. According to recent LIMRA data, sales of combination products increased a phenomenal 62 percent in 2010, on top of double-digit growth in 2009.

These products, which use the structure of life insurance and annuities, have become more attractive for several reasons:

  • Combination life insurance or annuities can be funded via asset reallocation instead of a reduction of monthly income, as happens with health-based LTC insurance.
  • Since most clients are self-funding for long-term care risk, combination life insurance or annuities provide a true assigned asset for that purpose.
  • Recent federal tax legislation benefits the use of annuity-based LTC.
  • Combination products provide benefits even if care is never needed.

Let’s look at each of these elements separately.

1. Funding via reallocation, not through monthly expense

From the outset, one of the biggest downsides of the health-based product has been its annual premium structure, which forces clients to reduce their fixed income in retirement. On top of that, the rate increases that many companies have initiated mean that clients are spending larger amounts of their income than they ever foresaw.

Your clients will be much more interested if you can tell them how to take an existing asset, one that doesn’t have any part in generating monthly income, and reallocate it to a single premium combination LTC product.

Perhaps this existing asset is in a low-yielding investment such as a CD, savings or money market account, or the money is in a short-term or municipal bond fund.  Regardless, clients need to understand the advantages and disadvantages of this reallocation and decide whether it makes sense for them.

2. Assigning assets for long-term care expenses

Many professionals have talked to their clients about having assets available for long-term care purposes. However, these conversations are easily forgotten when the client has something more fun on their mind — perhaps an exotic family trip or an expensive new toy. With distractions like these, the assigned asset is easily diminished.

On the other hand, using a single premium life insurance or annuity policy with protection for long-term care purposes specifically identifies an asset for funding and, year after year, the annual statement of values reminds the clients why the money exists in this place.

3. Annuity with LTC benefits — another opportunity

With tax advantages available since January 2010, clients can utilize the annuity with LTC benefits for qualifying LTC expenses without paying any federal income tax. This creates a unique opportunity for clients who have existing annuities.

Recent statistics show that only 0.5 percent of deferred annuity assets are ever annuitized (taking the income option). In most cases, you will find that the client who bought an annuity in his 50s or early 60s has now reached retirement and realizes that the annuity will not be needed for income.

These clients can sit tight with what they have, and that may be a good choice. A better choice, however, may be to do a tax-free exchange into the annuity with LTC benefits (under Internal Revenue Code Section 1035). These products work like any other annuity when it comes to non-LTC elements, with the added benefit of an enhanced value that is available for qualifying LTC expenses. Additionally, as mentioned earlier, federal tax law allows these distributions on a tax-free basis.

Of course, all factors should be weighed before the suitability of a replacement can be determined.

4. Additional benefits of LTCI

If the biggest downside to health-based long-term care is its annual premium structure, a close second is its lack of benefits if care is never needed. The average client likely believes he or she will never need long-term care. While the statistics say otherwise, it’s hard to sell a product that only provides benefits for a risk the client denies.

Combination LTC products, because of their life insurance and annuity foundations, can provide benefits for life events other than just long-term care.  Most accumulate cash value, which can be accessed in an emergency, and, at death, any cash value or death benefits not used for long-term care is passed on to the insured’s heirs. For clients seeking value for dollars spent, a benefit that will be paid no matter what is always appealing.

In conclusion

This year, a real evolution in protection products for long-term care expenses is taking place. Health-based long-term care insurance, whose shortcomings may have recently been exposed, is losing traction, and innovative life insurance or annuity-based LTC solutions are moving to the forefront.

For the financial professional and the client, these new products are a win-win opportunity: They provide protection if long-term care is needed, or death benefits to pass along to the family, charity or church if it’s not.

With these products, clients have the benefit of real choices. Equally important, current options have guaranteed premiums and fixed guaranteed interest rates, which can reduce any negative surprise elements.

If you have not yet researched these combination LTC options, this is the perfect year to get started.  «

Bruce Moon, ChFC, CLU, CASL, is vice president of The State Life Insurance Company, a OneAmerica company, and has focused on asset-based LTC solutions for more than 20 years.

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