How innovative producers are using today’s hybrid products
By Charles K. Hirsch, CLU From the December 01, 2012 issue of Life Insurance Selling. Charles K. Hirsch, CLU, is a contributing editor at Life Insurance Selling.
In this dynamic year for long-term care insurance products, a lot of agents have added the relatively new hybrid products to their sales portfolio. These products, which either combine LTCI with annuities or life insurance, were designed to provide buyers with substantive benefits for their premium dollar, even if they never need long-term care.
This flexible concept sounds terrific, but as we all know, reality often interferes with the best laid plans. To help determine how well these products are working for producers and their clients, we’re focusing this month’s roundtable on the practical realities of these conceptually innovative products.
To help provide a view of what’s working well and what changes would improve the product in the next round of development — along with a healthy dose of practical insight to assist other producers who sell these products — we’ve asked for input from these three top producers: Matthew D. Brotherton, CLTC; John J. Demboski, CFP; and Steven A. Plewes, CLU, ChFC.
Matthew D. Brotherton, CLTC, is president of 1752 Financial in Roanoke,
John J. Demboski, CFP, is a nine-year member of the Million Dollar Round Table (MDRT), with two Top of the Table qualifications, and is a Bronze Knight of the MDRT foundation. His practice, Demboski & Chapman Financial and Insurance Solutions Inc.
Steven A. Plewes, CLU, ChFC, is a 25-year member of the Million Dollar Round Table (MDRT) and has received eight Court of the Table and four Top of the Table qualifications. Active in MDRT leadership, Plewes currently serves as divisional vice president of the Best Practices Division. He is the principal of Advisors Financial Group in Gaithersburg, Md.
Who are the best hybrid prospects?
Charles K. Hirsch, CLU: Have you found there to be a certain kind of prospect who reacts more positively than others to hybrid products? Can you talk about the characteristics of that kind of prospect?
Matthew D. Brotherton, CLTC: The prospects who have been more interested in the hybrid product have been widows, widowers and single individuals. They see the value in having a long-term care policy to have access to good quality care. These prospects also want to leave a larger legacy if they do not use the death benefit for long-term care. Another great prospect for the hybrid product is someone who has an existing permanent life insurance product with some cash value. Sometimes these prospects are considering cashing in the policy or haven’t reviewed the policy in many years. I am usually able to show them a solution by exchanging the current policy to a new one with the long-term care rider, assuming they are able to be approved health-wise. Another prospect is someone who has a maturing certificate of deposit, is tired of the bank CD rates, realizes he or she needs long-term care protection, and has other assets to use for income.
The prospect typically has a higher than average annual income and net worth, wants to leave a legacy for family members, and normally falls between the ages of 40 and 70.
John J. Demboski, CFP: I have not found a particular kind of prospect who tends to gravitate toward these kinds of products. However, the issues solved with hybrid products tend to follow a common fact pattern in clients who need long-term care, who are also often in need of life or annuity solutions. Given the complexity of these products, and that prospective clients frequently only perceive “one problem” existing, they can be a challenging product to discuss with new clients.
Steven A. Plewes, CLU, ChFC: In my experience, people who react positively to hybrid products have a need and desire to buy long-term care insurance, but they fear they may never use it and, therefore, the money they spent on premiums over the years would be wasted. Those people like the idea of using their dollars to provide multiple benefits, such as a combination of life and long-term care insurance, or annuities with long-term care features. These prospects may have longevity in their family, have experience where their parents had long-term care insurance but never used it because they died prematurely, or feel they will be successful enough financially where they don’t need long-term care. They like the aspect that they can accumulate cash values or provide additional death benefits for their families in lieu of long-term care benefits, should they not use them.
Hirsch: Since these products are so unique, do you have trouble explaining to prospects how they work? What’s been your most effective approach for helping prospects understand what these products can accomplish?
Demboski: I believe the complexity of these products necessitates positioning them as part of an overall financial plan. It’s important to show the client a compare/contrast versus purchasing two products to solve both problems. You, as the advisor, have to be sure a hybrid product is the best solution.
Plewes: Because of the products’ complexities, I usually start with their basic underlying features. For instance, for life insurance, I talk about the benefits of what the life insurance contract offers: cash values, death benefits and such. Additionally, the same would be true for variable annuities with long-term care features. I focus primarily on the basics of the annuity product, any income riders the prospect may be interested in, and after establishing those foundations, I talk about the additional benefits provided for long-term care. I find that this helps the client to not become overwhelmed with so many moving parts in these products.
Brotherton: I explain that the product offers convenience — they have one underwriting process for both products; flexibility — all, some or none of the death benefit can be used for long-term care; and value — by having a hybrid, it’s less expensive than purchasing a separate permanent life insurance policy and a long-term care policy.
Hirsch: What objections do you hear about hybrid products, and can you share some ways you can overcome those objections?
Plewes: The No. 1 objection is the premium for life insurance with long-term care riders. Unlike a long-term care policy, where there may be a spousal discount involved for a husband and wife, the life insurance contracts are individual contracts, so the client is paying the full premium without discount. Additionally, there’s an added fee for the long-term care rider. Variable annuity products can sometimes have heavy fees, particularly if you add an enhanced death benefit or have an income guarantee and then add a long-term care rider. The premium and fees can start to add up. I know from personal experience — because I’ve had my mother-in-law in an extended long-term care nursing home and assisted living nursing home care as well as my own mother, who is currently on Medicaid and resides in a long-term care facility — that the costs for this type of care can be exorbitant. When you lay out the actual premium costs versus the potential benefits, you can relate that to the relatively low fees over the life of a contract, and most clients start to come around.
Brotherton: The objection I hear most often is the expense compared to a traditional long-term care policy. When I show them different options, they see the higher cost with the hybrid product. But then I remind them that the hybrid product is solving two needs they have. At that time, they remember the power of the hybrid policy.
Demboski: Making sure the client really understands that he or she has two problems is key. If the prospective client can first see that he does indeed have two issues, and then, second, see that the hybrid product will be a better fit for solving the problem, he will usually move forward.
Hirsch: Many agents who do well with hybrid products speak highly of how these products have positively impacted the long-term care insurance business. In your view, what other modifications might companies make to their products that would help the business?
Brotherton: One feature I would like to see with this product is an increasing long-term care benefit by CPI — the Consumer Price Index. One of the major negatives to most of these products is the level amount for long-term care.
Demboski: I’d like to see more hybrid solutions solve different kinds of issues. For example, a disability insurance, life insurance and wealth accumulation hybrid product would cover some of my younger clients’ problems.
I’d also like to see more carriers training on these products. Given their complexity, it’s very easy for a producer to stick with the older, more traditional products. The hybrid products haven’t picked up as much steam as they probably deserve because of their complexity and because of agents and advisors not being aware of these solutions.
Plewes: Perhaps life insurance companies can look at ways to provide some kind of joint benefit. Variable annuity contracts that offer long-term care riders typically will allow a joint contract to be written, even in the case of an individual IRA, so either spouse can take advantage of a long-term care rider benefit within the variable annuity product. Even though the life insurance may be on the life of the insured, the long-term care rider could provide access to the spouse in a sort of pooled or shared benefit, like many annuity long-term care riders offer. I think this would make it more palatable for both husband and wife, moving them toward a product where there’s a life insurance and a long-term care need.
Hirsch: Any further thoughts?
Plewes: Overall in my experience, clients in their 40s, 50s, and early 60s have either had some kind of direct experience or experience with a family member with long-term care needs. I feel this marketplace is a growing opportunity for advisors, and I recommend they work with someone who is very knowledgeable. The products are complex and vary from state to state and contract to contract. Seller and buyer beware!