Hybrid Products: Don’t Learn About Them From A Replacement Notice
An agent with whom I had never spoken called me and incredulously explained he had just received a replacement notice for a life insurance policy on a long time client. He went on to explain that on top of a regular death benefit, the client would have four times the premium available if he needs extended care—with no premium increases—plus if he wants his money back he can have it at any time.
The replacing company offered all of this in one policy and it was guaranteed for this client (male, age 65):
• For a single premium of $100,000 a tax-free death benefit of $146,505.
• A long term care pool of $439,515 that equates to a $6,104 monthly benefit for six years.
• If all of the LTC benefits are used, there was still a $439,488 death benefit.
• No premium increases!
• A guaranteed return of the original premium if the client chooses to cancel the policy (minus any claims or withdrawals).
The agent said, “This can’t be right, can it?” I had to break it to him—it was all true!
What the replacing agent sold the client was a hybrid or linked benefit product. These products are a combination of life insurance with long term care benefits or an annuity with long term care benefits. Products such as these are an exciting option for the senior market. They offer the ability to leverage assets, guarantee safety of principal, and provide tax benefits.
Hybrids allow policyholders to leverage existing assets into a larger pool of long term benefits; generally one to six times the original premium is available for long term care. Policyholders keep control of the assets and, within certain limits, can receive the original premium back by surrendering the contract. These benefits have made hybrid products one of the fastest growing markets in our industry.
The agent on the phone learned a valuable lesson: If you aren’t offering these products to your clients, someone else probably is!
Life/Long Term Care Options
Life/long term care hybrid products are designed to provide a death benefit plus access to long term care benefits if needed. This is a possible answer for clients who are reluctant to buy a stand-alone long term care insurance policy because they may never use it. With hybrids, if the long term care rider isn’t used, a death benefit of more than the initial premium is passed to the beneficiary—tax-free.
Just like regular life policies, these products have cash values and a death benefit. However, in the event policyholders qualify for extended care, there is a pool of money available, broken down into monthly maximums. Some products even offer optional riders which guarantee monthly benefits for the life of a client and/or spouse.
Life/long term care products come in several policy types and configurations. They each fit a specific need. Universal and whole life policies are available as well as single life or second-to-die policies. I have found that the single pay option tends to be preferred, but limited pay and annual payment policies are also available.
Annuity/long term care plans combine a single premium deferred annuity (SPDA) with a long term care rider that provides from one to four times the premium for long term care expenses.
When compared to the life/long term care products, there are fewer state approvals for the annuity version—but they are available. They act like standard annuities until a client cannot perform two of six activities of daily living (ADL). Then there is a pool of money available, broken down into monthly maximum benefits, with some products offering an indemnity option.
These annuity products are a solid choice for prospects with “mattress money,” e.g., certificates of deposit, money markets, or older annuities with large amounts of taxable gains. Older annuities can be transferred to the hybrid annuities with no taxable event; and if the funds are used for a long term care claim, the gain may never be taxed.
In the event a policyholder dies without using the long term care benefits, annuity proceeds pass to a beneficiary exactly like any other annuity. This allows the funds to do what the client wanted them to do in the first place—with a bigger bang for the buck!
Some agents I talk with are under the assumption that hybrids are for clients who are uninsurable for individual long term care. This assumption is incorrect. Some carriers have the same underwriting as an individual long term care insurance policy, while others are a bit more generous. The policyholder’s premium is the first money being used for any claim, and most carriers take that into account when underwriting these risks.
Most carriers offer simplified underwriting. They also provide a pre-qualifying list of 10 to 12 questions which, if answered “no,” will be a decent indication of acceptance. If any questions are answered “yes,” there really is no reason to proceed with that carrier.
Clients will have a phone interview, and an attending physician statement may be ordered. In a small number of cases a visit from a nurse may be required.
Hybrids are not for everyone; the products fit a specific niche of prospects. While a typical prospect list for long term care insurance is a good place to start, it is necessary to whittle down that list to a more specific group.
Preferred prospects would be those who have enough assets that their lifestyle will not be affected by this transfer. While it is counter-intuitive to ask prospects with money to buy LTC insurance, they are the targets for these products, which allow them to transfer safe money, leverage it for more coverage, and use the rest of the safe money in other ways. There is no need to look for new money. Clients who have certificates of deposit, older annuities, older life policies with cash buildup, or money markets are all good prospects for these products.
There are some carriers that offer transfers of qualified money into these plans. Prospects for these would be individuals who are top heavy in IRA money—ones who will eventually have to take a required minimum distribution (RMD). If this RMD is not needed for income, a transfer to a hybrid product might be a good option.
Prospects who have rejected traditional LTC insurance policy presentations are also ripe for a conversation about these hybrids. A walk through your client files may bring a few good prospects to mind.
Hybrids can also be used to augment existing clients’ traditional long term care policies. With the recent upheavals in the traditional marketplace, clients are concerned about their current coverage; and with premium increases, they face a tough decision of paying the increase or lowering coverage. If a client has enough assets to transfer to one of these hybrids, the existing coverage can be kept with the hybrid providing the difference in required benefit.
In the end, the agent who called me decided that, while this client was a lost cause, he didn’t plan to stand by to see another client taken. He is determined that each of his clients and prospects will be aware of these wonderful products. That’s good, because as I told him, “If you are not talking to your clients about hybrids or linked benefit products, another agent is!”
Thomas Jurek, CLU, LUTCF, FSS
CLU, LUTCF, FSS, is director of linked long term care benefit sales at Art Jetter & Company.