Advisors Must Act On The Tsunami Heading For Americans’ Nest Eggs
The dramatic demographic shift occurring in the United States caused by the aging of the baby boomers is reshaping Americans’ insurance needs and opening a sizable market for a burgeoning area called linked benefits.
By combining two products—life insurance and long term care—into one solution, insurers and advisors can serve a growing consumer need while demonstrating the industry’s ability to anticipate market trends.
If the industry fails to innovate in this product area, ever-rising health care expenses will threaten to jeopardize an increasing number of retirees’ standard of living.
The Linked Benefits Market
With the maturation of the boomer demographic, the portion of Americans age 65 or older will grow exponentially in the coming decades and will represent the fastest growing segment of the U.S. population. With this change will come an increasing demand for health care, which will drive up costs that are already growing at more than twice the rate of inflation.1
• From 2010 through 2030, the baby boomer segment will be growing at an average rate of approximately 14 percent per year. Compare that to the annual growth rate of the total U.S. population, which is 4 to 5 percent.2
• Sixty percent of Americans age 65 and older will need some form of long term health care during their lifetime.3
• According to a recent Sun Life Financial survey, more than half of Americans age 50 and older (nearly 60 percent) worry about long term care costs and do not feel confident that they will be able to pay for them. Only 16 percent feel financially prepared to finance their long term care.4
• Based on conservative historical inflation rates, the cost of nursing home care could rise to more than double what is expected by 2030.5
Clearly, these expenses will consume a large percentage of retirement income and may harm retirees’ assets and net worth.
How Linked Benefits Work
While this consumer demographic trend would suggest that sales of traditional long term care insurance should be strong, actual results reveal a stagnant market. Some consumers are dissatisfied with this traditional solution because it is expensive and provides benefits upon illness only. As a result, many high-net-worth consumers self-insure the risk.
Linked benefit life/long term care (or asset-based long term care) fills the gap by providing a flexible benefit whether consumers live and need care, want to leave a legacy, or need liquidity. In other words, it will pay a benefit when needed for long term care, it will pay life insurance benefits upon the death of the policyowner, or it can be cancelled and initial premiums will be returned. All of these benefits are income tax-free, though there may be some tax consequences for the return of premium, depending on the policyowner’s basis in the contract. These benefits and flexibility make a linked benefit product an attractive offering.
For example, a single premium deposit of $100,000 would drive the following benefits for a female, age 65, non-smoker, single: Whole life death benefit of one-and-a-half to two times the premium accelerated over two years (actual is $158,000). Total pool of LTC benefits of roughly five times what was contributed (actual is $475,000). The maximum monthly benefit is calculated by dividing the total pool of LTC benefits by the number of months the client has selected—i.e., a six-year plan would be 72 months.
Who Should Consider Linked Benefits?
Linked benefit products are focused at a more affluent market segment than traditional long term care insurance. The core market is consumers between the ages of 50 and 75, with a liquid net worth of $500,000 to $10 million, who are actively working with their advisors on a retirement income strategy. The product is well positioned to secure retirement income against the risk of long term care expenses.
Additionally, a growing market exists with high-net-worth clients (greater than $10 million of liquid net worth) who see linked benefits as a way to efficiently leverage their assets to protect against this risk.
More than three-quarters of the funds for linked benefit products come from cash or cash equivalents such as certificates of deposit and money market funds. This is typically money that has been set aside for a “rainy day” in liquid, secure vehicles. That is why the return of premium feature is so critical for these consumers.
The opportunity lies in the fact that only a small number of advisors have incorporated linked benefits into what they do in building and protecting retirement income security. According to Cogent Research, 8 in 10 advisors sell variable annuities, while only 4 in 10 sell life insurance.
Looking at it another way, the sales for these two distinct products vary greatly. According to Morningstar/MARC, variable annuity sales for 2010 reached roughly $137 billion; a stark contrast to the linked benefit market with total sales for 2010 of a little more than $1 billion. The upside here is tremendous.
By simplifying the product as well as the sales process, we believe more financial advisors will be willing to make linked benefit products a regular part of their planning process. Such a change will drive this product segment to the multi-billion dollar range and offer insurers the potential to increase life insurance scale and revenue. In addition, insurers with superior financial strength will have a distinct advantage, which will help set them apart from competitors and quickly build momentum.
While life/long term care products represent the immediate opportunity for linked benefits, there are additions to the portfolio that the industry may bring forth in the near future.
The Pension Protection Act, which went into effect January 2010, opens annuities to the same tax advantages that life/long term care linked benefits currently enjoy.
Now is the time for insurers and the advisors who serve Americans’ financial needs to step up and meet the challenge of providing robust linked benefits solutions as well as education about the need. Long term care should be part of all retirement planning or wealth transfer discussions. The lifetime financial security of millions of people is at stake.
1. LIMRA Combination Product Report, 2008.
2. U.S. Census Bureau.
3. Department of Health and Human Services.
4. Sun Life Financial online survey of more than 1,000 Americans, aged 50 and older, conducted in May and June 2011 by Kelton Research.
5. Sun Life Financial online survey: When asked to assume that a nursing home currently costs $80,000 per year in 2011, the median respondent projected that the cost would rise 56 percent, to $125,000 per year in 2030. But assuming the 4.3 percent average annual historical rise of the nursing home component of the Consumer Price Index, an $80,000 nursing home rate today would rise 123 percent, to $178,000 in 2030. The median respondent thus does not realize that by conservative projections, the cost of nursing home care could rise by more than double what they expect.
Christopher J. Quinn
is vice president of executive benefits, responsible for development, commercialization and profitability of Sun Life’s COLI and linked benefit solutions.