How to Make Asset-Based LTC Insurance Part of Your Practice

In June, LIMRA research data showed that new premium sales for asset-based long- term care (LTC) insurance products grew by 62 percent in
2010, a strong follow-up to the double-digit growth for these products in 2009.  In fact, 2010 sales surpassed $1 billion. While products in this genre have
been available for more than 20 years, they are now showing real momentum. If you are unfamiliar with the term “asset-based LTC products,” some- times known as “combination” or “hybrid” LTC insurance products, these options combine other types of insurance, such as life insurance and annuities, with LTC
coverage. Why the increased interest and sales growth? One reason is that these products typically have substantial guarantees (fixed interest rate, benefits that don’t decrease, premiums that don’t increase), which appeal to the needs of today’s clients. Additionally, the rest of the LTC insurance (LTCI) industry
continues to struggle with well-documented pricing issues, and some long-time insurers have actually stopped issuing new policies. Those of us who have been
involved in the financial services business and taken insurance course- work through The American College understand the importance of providing clients
with protection from the expenses associated with LTC. The best retirement planning cannot be considered complete if it does not cover the area of
extended care expenses—those not covered by Medicare or other health insurance.

Starting a Better Conversation

Originally, some producers were disinclined to investigate the asset-based LTC route because the thinking was these products weren’t as good as health-based LTCI.  Asset-based LTCI is not health- based LTCI, and it is not sold like it.  Asset-based products use the chassis of life insurance and annuities. This
means that benefits are available in the form of death benefits and cash values should LTC never be needed. They are commonly funded with a single premium that clients reallocate from existing sources, like other annuities, CDs, rainy day funds, even qualified money—allowing clients to avoid ongoing, annual premiums. A conversation starter along the lines of “If you had LTC expenses tomorrow, where would the money come from to pay for it?” can be a
good way to identify these assets. Life insurance and annuity-based LTCI products differ in their approaches. Life-based products provide immediate leverage in the form of a death benefit that can be accessed for qualifying LTC expenses. These products are triple-tax advantaged: tax-deferred growth of the cash, tax-free LTC benefits (if the contract meets federal rules for tax-qualified LTCI) and, of course, at death, any unused benefits pass as income tax-free life insurance
proceeds.

Here’s an example of how the life-based LTC approach can work:

Ray and Maggie Marsh are both age 65 and have a CD that is maturing soon worth $100,000. They have been retired for three years and all of their income needs have been met. If they reallocate that $100,000 into a single premium life/LTC product, that amount could purchase $207,500 in guaranteed death benefits, all of which can be used for qualifying long- term care expenses at $4,150 per month.  Because this is a joint life contract, they both have access to the long-term care benefit balance, equal to their death benefit. They have a full return of premium provision avail- able should they walk away, but their cash value is earning 4 percent (before cost of insurance charges). Purchasing this protection did not negatively impact the Marshes’ retirement income; however,
they are in much better position to cover long-term care expenses—with any unused benefits passing income tax-free to their heirs, church and/or favorite
charity. Annuity-based LTCI products have grown as a consequence of the Pension Protection Act. Withdrawals from the annuity can be income tax-free for
qualifying LTC expenses. Annuity-based products accumulate value for future LTC expenses over time. Clients with existing annuities not needed for income may be attracted to these solutions. Annuity-based products extend LTC benefits beyond the cash value by providing an additional LTC fund, and some
companies offer this extension with lifetime benefits and guaranteed premiums.
For an example of how the annuity/LTC approach can work, let’s look at Herman (age 75) and Lucille (age 73) Birch.  They have an old annuity, now worth $150,000, that is out of surrender charges.  The Birches see friends and neighbors beginning to slow down, and contemplate why they haven’t bought protection against long-term care expenses. After agreeing that their annuity would never be used for income, they choose a new annuity/LTC combination where they can utilize their cash value to purchase a total LTC benefit of $332,000—their cash plus an additional LTC fund provided by the insurance company of more than $180,000. This creates a monthly benefit of almost $5,000 that either or both can use. You will also notice different approaches to these asset- based LTCI products. For example, life insurance options include both whole life and universal life (UL). While UL can sometimes offer slightly higher benefits, whole life-based products typically offer more guarantees. On the annuity side, fixed deferred annuities or variable deferred annuities can be used as vehicles. Again, one offers more guarantees than the other. You can discuss the pros and cons with your clients.

Understanding the market

Many sales of asset-based solutions are of the single premium variety, but not all. Over the history of asset-based LTCI solutions, which dates back to the late 1980s, purchasers are people in their 60s, 70s and even 80s, with liquid assets of $300,000 to well over $1 million. This is a market where the most interested shoppers are in retirement and have a good feel for their assets and expenses. Health does matter, as these products are medically underwritten. Because your clients have worked hard for what they’ve accumulated, they expect their dollars to provide more value and tax advantages—exactly what asset-based LTCI products are designed to do.

Present the options to your clients

With many options available, policies can be maximized for benefits at death or benefits for LTC. Benefit periods can be as short as two years to, with some companies, lifetime coverage. Some companies allow spouses to purchase a joint coverage under a single contract. While the flexibility provided by asset-based products is significant,  it is best to listen to the client, identify the asset best used for premium and then make a recommendation based on what you have heard.

Live , quit or die

When it comes time to close, remember to focus on the key aspects of asset-based LTCI. Most clients don’t envision ever needing the long-term care value of the policy, so emphasize the value that will be received if care is not needed. Several options offer a full return of premium at time of surrender (for single premium sales). That familiar “live, quit or die” close works especially well with these products.

There has never been a better time

The diversity of asset-based products available to clients has never been greater. In addition, federal tax law makes these combinations of coverage attractive. It is easy to see why asset- based LTCI is an expanding market. Evaluate the companies in the market, look at their track record and explore the options they offer—you and your clients will be glad you did.

by Bruce Moon, CLU ® , ChFC ® , CASL ® for the November 2011 issue of The Wealth Channel Magazine
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