What’s driving the asset-based long-term care surge?

Combo products continue a trend of steady growth

by Michael Begley Jr.
Mr. Begley is regional sales director at the State Life Insurance Company

 If recent sales results are any indication, an evolutionary shift is underway in the funding of long-term care. For producers wishing to offer a comprehensive array of options to serve their clients’ financial needs throughout all phases of life, the emergence of asset-based long-term care products – also known as ‘hybrid’ or ‘combo’ products – should be a welcome occurrence and one worthy of further examination.

We watched sales of single-premium deferred annuities that clients can access for long-term care expenses rise 139 percent over 2009. My company’s Asset-Care product saw a 76 percent increase in sales. These products use the structure of life insurance but, if needed, the death benefit can be accessed to pay for qualifying long-term care expenses.

And we’re not alone. Others in the asset-based long-term care market are growing as well.  New York Life and Lincoln National reported 2010 sales growth on life-based combo products of 92 and 62 percent, respectively.

There are a few key factors driving sales success with asset-based long-term care products.  Chief among them is the barrier-busting approach the company’s producers have taken on in recent years. Perhaps the biggest barrier for the long-term care market is human nature. This often leads to a defensive ‘it won’t happen to me’ reaction from potential customers, which becomes the initial barrier to the marketing of long-term care products. Some potential customers also assume that family members will provide care if ever needed. Others believe long-term care coverage is simply too expensive. 

To overcome these consumer barriers, we focus on two main advantages asset-based long-term care enjoys over its health-based counterparts: (1) a death benefit is paid to beneficiaries should the policyholder die and it has not been exhausted by long term care expenses, and (2) guaranteed premiums are available. Put simply, this is not use-it-or-lose-it coverage and it is not budget-busting coverage that could bring financial surprises in future years. This adds a great deal of value and peace of mind that customers may not see with other forms of long-term care coverage.

According to the National Clearinghouse for Long-Term Care Information, at least 70 percent of people over age 65 will require long-term care at some point in their lives. But earlier in life, funding options are often given too low a priority in the overall financial review process. If long-term care becomes an afterthought, the financial implications later in life can be devastating for a client, even one with a robust and complete retirement strategy.

As many insurance producers know full well, health-based long-term care insurance has been on uneven footing in the last several years. Some companies in this market are having to raise premiums to maintain profitability or, in some cases, are leaving the business altogether. By focusing on the natural advantages that asset-based products enjoy over health-based coverage, producers are able to use these products to offer real, lasting protection to their clients.

As the growth in sales indicates, producers of asset-based long-term care have found a willing and responsive customer base. These consumers are typically in their 60s or 70s, and are attracted primarily to the fact that the death benefit is not depleted if care is not needed. Products are commonly funded with a single premium that clients can reallocate from existing sources, like other annuities, CDs or even qualified money. And, as with health-based LTC insurance, inflation protection is available. 

Another opportunity now available is with annuity contracts that can be used to provide qualifying long-term care expenses on a federal income tax-free basis. The Pension Protection Act was especially significant for annuities with long-term care benefits. Many consumers have purchased annuities over the years and, while some will use the income they can generate after retirement, many others will simply let them grow, year after year. The law allows withdrawals from certain annuities intended to pay for qualified long-term care expenses or insurance to be tax free. This means that while the annuity they purchased 5, 10 or more years ago may not have this unique tax advantage for long-term care expenses.

These market and legal factors are combining to help companies like State Life knock down another barrier, this one among producers themselves. Many see long-term care as too difficult to sell because of the ‘use it or lose it’ proposition – you have to use the policy to see any benefit from it.  

The conversation-starting challenge can be more easily and productively met through the use of a simple question: if you needed long-term care today, where would the money come from to pay for it? If the client is able to identify an asset that is not needed for income and could be reallocated, then asset-based long term care products may be suitable. 

Now is the time for financial professionals to take a fresh look at the long-term care market and understand how current events, economic factors and changes in the law make the process of helping clients prepare for long-term care needs even more important AND achievable.  As more Baby Boomers hit retirement age, there will be more need for long-term care.  Also, increasing life expectancies and medical achievements suggest long-term care may be needed for longer periods of time.  Finally, the reality that health care cost trends are far outpacing inflation hint at the critical need to examine all options for the funding of long-term care. 

Financial professionals understand that the ‘long-term care discussion’ must take place with their clients.  Now, with life and annuity-based products, the context of that discussion can be one of reallocating existing assets instead of tapping into precious monthly income to pay for such protection.   

Please note that the replacement of an existing life insurance or annuity must not be made unless all factors are weighed and it is documented as suitable for the client.  


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