LTCI’s Revolutionary Evolution

Consumers are increasingly snubbing health-based long-term care insurance  in favor of products tied to life insurance  or annuities.

Science has long sought to explain exactly how we came to roam this earth. The “Big Bang” theory says an explosion created the world we know today, and most of what we see around us is the product of subsequent and continuing evolution.

The world of long-term care, and the business of funding such care, may still be in its formative stage. In comparison to other financial products, long-term care insurance (LTCI) policies are very young, with the first appearing just a few decades ago. It’s not clear whether LTCI is in the midst of an explosion or evolution. But it is clear that numerous recent regulatory changes and economic and social factors are shaping a new environment for long-term care, and consumers are responding.

A shift from traditional health-based long-term care to asset-based products has been underway for the past several years. These products are sometimes called combo or hybrid products. They use the structure of life insurance or annuities, but if needed, the policy holder or annuitant can access funds for long-term care expenses.

According to LIMRA, sales of combination products were up 62% in 2010, and that was on top of a double-digit increase in 2009. In fact, life insurance-based LTC products, specifically, are riding a 30% annual growth trend that dates back to 2007. While this side of the industry trends steeply up, health-based LTCI continues to struggle. Providers are restructuring these products, imposing dramatic rate increases or even abandoning them altogether.

The attractions of asset-based LTCI
Asset-based LTC products primarily attract consumers because, with both life insurance and annuity products, the full death benefit is preserved to be passed along to beneficiaries if long-term care is never needed. It is not use-it-or-lose it protection like the health-based products. And if withdrawals are necessary for qualifying long-term care expenses, they can be taken income tax-free.

The permanent nature of the products is definitely the key value proposition and what clients appreciate most. But beyond this, three other main factors are contributing to the evolution of the long-term care market toward asset-based products: accessibility, recognition and acceptance.

•   Accessibility: Of course, I recommend to every client that they consider purchasing long-term care protection if they can fit it into their cash-flow budget. As more baby boomers reach retirement age, it only makes sense that more will need long-term care at some point. What is more common now, however, is the ability of clients to afford such coverage. A majority of my clients are retirees, so they are fortunate to have retirement savings that can be rolled over into LTC products. If you can convince a client to allow his or her entire portfolio of assets to be evaluated, chances are that some portion of the portfolio not needed for income can be used for long-term care protection.

•   Recognition: More than ever before, clients are recognizing the costs and risks associated with long-term care. It is becoming more common for a client to have had experience with long-term care through a parent, friend or loved one. He or she will understand that the costs can truly decimate the investment portfolio of a surviving spouse, for example. From a perception standpoint, clients today seem to be more aware of the financial risk of going without coverage and willing to find a way to fit LTC protection into their portfolios. While in the past, a financial professional may have been challenged to start a conversation about the potential gloom-and-doom of going without LTC coverage, today the conversation seems easier to begin. The typical “it won’t happen to me” client reaction is less likely.

More baby boomers are also recognizing that people are living longer, albeit not always with the best health, and that moving in with their children may not be a possibility. Today’s baby boomers understand that we are no longer living in the good old days, when mom stayed home and the grandparents probably lived in the same community. Back then, it was understood that the kids would take care of the aging parents. Today, children often live in different states, and even different countries, from their parents, so care provided directly by a family member happens less often.

•   Acceptance: As the growth trend may indicate, the financial crisis has actually had a positive impact on asset-based LTCI. Because these products come with a fixed rate of return, they aren’t subject to the equity markets where clients have witnessed, and likely encountered, financial turmoil. Therefore, clients seem to be much more receptive to having more conservative policies and financial products, such as asset-based LTCI, in their portfolios. More of today’s clients seem accepting of a lower risk/lower reward approach, even over the long term.

By one definition, evolution means the process of gradual, and relatively peaceful, social, political and economic advances. As you can see, there are social, political and economic factors positioning asset-based LTCI for a successful future.

These factors don’t seem to be short-term, so the opportunity for asset-based long-term care sales is likely to remain. According to the National Clearinghouse for Long-Term Care Information, at least 70% of people over the age of 65 will require some form of long-term care in their lifetime.

As more people continue to become aware of their LTC risks later in life and see a solution in asset-based products, the industry will continue to explode, or at least evolve.

Written by Paula Dorion-Gray, CFP for Life Insurance Selling Magazine.  Paula is the president of Dorion-Gray Retirement Planning in Crystal Lake, Ill.

One Response to “LTCI’s Revolutionary Evolution”
  1. I have your blog listed in my feed-burner. I enjoy your perspective very much and tend to read most of your posts, even though I do not often comment on them. However, having lived through the Universal Life law-suits of the early 1990s I am sensitive on the issue of life insurance agents giving tax advice. Whenever I see the word, “tax” I tend to slow down and reread the sentence to make certain that it communicates accurately. I have seen people suffer because of tax advice given by insurance agents. In this article, you mention that withdrawals are “tax-free.” You failed to add the caveat that withdrawals are only tax-free because you can only withdraw up to the amount you deposited into the policy for anything other than Long Term Care. After that, the only way to get money out of a policy is through a policy loan. They are tax-deferred until the policy results in a tax-free death benefit. If the policy-owner allows the policy to lapse, the entire amount of the loan, after withdrawals is taxable income.

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