The wonderful world of long term care
I have worked closely over the last several years with agents whose primary business is long term care insurance. Many of them are very successful at offering traditional long term care. Often these LTCi specialists have expanded their offerings to solve a wider range of client needs using a suite of different insurance tools.
I attended an LTCi conference last year featuring the latest product designs from a variety of insurance companies. A walk through the aisles was much like a walk-through Willy Wonka’s Chocolate Factory. It turns out there is more to a chocolate bar than just sugar and chocolate: likewise, there is more to LTCi policy designs than just a limited, cookie-cutter approach. Clients have options. Multitudes of them.
The actuaries in the insurance company home offices have continued to cook up new recipes while still updating the classics. Broadly speaking, the three main ingredients that go into plan designs are health underwriting, pricing, and benefits. The top insurance products can typically excel at offering two of these three ingredients:
Good pricing and benefits, but tighter underwriting.
Easier underwriting and good pricing, but plans with limited benefits.
Easier underwriting with richer benefits, but premiums at a higher price point.
LTC specialists often start the conversation with a detailed health assessment after understanding why the client is interested in LTC planning. This allows them to focus on the best options for the client based on their health. The primary objective is to maximize insurance leverage or protection, which is the maximum LTC benefits at point-of-claim for the premium dollar. This allows the client to spend the least, but receive the most insurance benefits. For clients with significant health issues, LTC specialists are continuing to think out-of-the-box and offer alternative solutions.
Once health is assessed, LTC specialists evaluate the clients’ financial situation. What assets are they looking to protect? How are the clients funding the plan? And last, but not least, what are they comfortable spending in the first place? This consultative approach will not only engage the clients in the buying process and answer their questions, but will often clearly point to the flavor of product that will suit them best. Along the way, funding strategies can emerge to provide additional tax savings or benefits. This adds the cherry to the top of the plan.
In Part 1, I discuss an overview of the major types of LTCi solutions on the market today in order from the most insurance leverage to the least. In Part 2, I discuss planning strategies and tax-advantaged funding sources. It is best to plan early to keep all of the options on the table, but even for someone already needing services, it is never too late to put an LTC plan together.
Part 1: LTCi Product Flavors
“We’ll begin, with a spin…”
Traditional, or Stand-Alone LTCi: This is the original option. These policies are treated like health insurance by regulators and the IRS. The strength of these products lies in their affordability, insurance leverage, funding flexibility, and tax advantages. Like term life insurance, auto, or home-owners insurance, they provide the maximum coverage if you need the benefits, while hoping never to have to activate the policy. The number of insurance companies offering new traditional LTCi products has consolidated to a few core carriers. Yet, there are still a wide range of offerings and plan designs. Older LTCi policies that were underpriced have required rate increases. Newer policies are more conservatively priced, yet still offer an outstanding value proposition from the best products. LTCi has a higher likelihood of price stability moving forward largely due to more careful health underwriting and plan designs.
Hybrid Life Insurance with Extension of LTCi Benefits: These life products are designed to minimize the cost of the life insurance component and maximize the LTCi benefits. Many of the popular plans offer LTC protection beyond the life insurance death benefit and also compound inflation increases on the benefits. The premiums are often guaranteed and the life insurance death benefit is paid even if LTC is not needed. More products have emerged with funding flexibility and creative benefit designs. There are also products that pay cash indemnity benefits and more robust international coverage. Like traditional LTCi, hybrid plans are often more careful with health underwriting.
Most LTC specialists offer both traditional LTCi and hybrid life extension products for their healthier clients. In this marketplace, about half of clients choose traditional and half choose hybrids.
Life Insurance with LTCi or Chronic Illness Benefits: These products focus mostly on the life insurance component, but offer flexibility to provide LTCi benefits up to the death benefit. The point-of-claim LTCi benefits tend to be more limited and the benefits generally do not increase with inflation. However, this allows the companies to provide richer life insurance features and in some cases the life insurance underwriting can be more favorable for the customer. While there are more policies sold in this category than the traditional or hybrids combined, most insurance plans are based on the life insurance features of the policy, and not necessarily because the primary need is the LTC benefits.
Annuities with LTCi Benefits: These products use the annuity account value to offer tax-free LTC benefits. Several products provide a multiplier on the account value when the client qualifies for the LTC benefits. These annuities may be liberally underwritten and may also be designed to maximize a guaranteed income stream in the future. These products are typically funded as a large single premium, so LTC specialists often use them with clients that have accumulated significant assets and who might have significant health issues.
Short Term Care (STC) Insurance: STC is a health insurance product where insurance companies have been offering shorter term care funding solutions. These products can provide up to one year of coverage often without an elimination period deductible for either facility care, home care, or both. The products have been approved by regulators in over 40 states, but are not approved at this time in CA, NY, CT, FL, MA, MN, NH, and VT. STC offers features, premium structures, and future rate stability that can vary by product or by state. The popularity of STC amongst LTC specialists has been as an alternative to long term care for individuals that have significant health issues, but are looking for more affordable premiums. Even limited benefits can help a family during a stressful time and allow them more flexibility to address the longer-term needs. They offer a reasonable pay-as-you-go price point, but as a product with less actuarial experience, may be subject to future rate increases depending on future claims data.
Medicaid Planning Products: Often families find themselves in situations where a parent or spouse is incurring significant out of pocket nursing home costs. The care provided might qualify under Medicaid services, but the individual is ineligible unless spending down most of the estate. LTC specialists can partner with a Medicaid planning attorney with programs designed to spend down the remaining assets in the estate with strategies such as using Medicaid compliant annuities.