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Life Health > Life Insurance

Integrating VUL With LTC Is Picking Up Steam

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Though seen as indispensable by most planning experts, long term care insurance has seen tepid sales over the past few years–a situation influenced in many cases by industrial-strength cost increases in what are guaranteed renewable but not guaranteed cost products.

Sales in life insurance and annuities that include LTC benefit provisions or riders have been rather flat, as well. However, in the last nine months, a fair amount of activity has occurred in these vehicles. This article looks at the trend, both generally and in the context of variable product offerings.

Much has been written about the need for LTC insurance, its benefits for older Americans and the “use it or lose it” aspect of stand-alone LTC policies. This has led to the use of LTC in life insurance.

In a properly structured life policy, LTC amounts paid out as “acceleration” or nonacceleration of the benefits can be received income tax-free. It’s a pretty simple construction. The client buys life insurance to satisfy death benefit needs and, if necessary, to have access to those funds earlier for care needs. Furthermore, if a client buys LTC in a variable universal life contract at an early age, the costs can be nominal. Such VULs also can have significant benefit growth in the life benefit amount, naturally leading to growth in the LTC benefit. While not a perfect match with inflation, these higher amounts will help cover inflation-driven cost increases.

The sale of life insurance, and VUL in particular, is generally a complex transaction and unnecessarily so. The trend toward more streamlined (I hesitate to say simplified, although some are) underwriting structures will continue and even accelerate, and will enable the sale to be made faster and more effortlessly.

Such simplification has been one factor in the renewed interest in such offerings, including on the LTC side.

One challenge addressed successfully by a handful of companies is bifurcation of distribution into life, annuity and LTC camps. A common explanation is that one has to be an LTC specialist to sell LTC insurance, so life practitioners don’t sell LTC. However, such specialization does not seem to be essential. Here is why:

A per-diem plan, which provides LTC benefits like a daily or monthly stipend, will largely eliminate the complexities ordinarily faced in determining whether benefits are covered (under stand-alone LTC plans, for instance). A consumer wouldn’t ordinarily see the insurer side of those complexities, but without a simpler payment structure (i.e., per diem), the insured or family would have to deal with significant amounts of paperwork.

Not only can the simpler per-diem structure enhance loyalty at claims time, it also can be communicated successfully to potential customers in marketing materials and campaigns. The ease of the claims process ought to be a compelling advantage.

The combination of streamlined underwriting and design-driven streamlined claims processing (in fact, limited claims processing), in combination with the attractiveness of the benefit, should be major selling points. This should help convince producers to sell the LTC feature as a valuable adjunct to the life sale.

Other factors also have affected the interest in the integrated life and LTC market, as it is being called. One is the need to maintain the appeal of non-variable contracts, which have suffered sales-wise because of lower prevailing interest rates.

The second is the sale of products such as term insurance. Such products are not just term insurance anymore! They include consumer-attractive return-of-premium features, so the insurer can position them as products to have “if you die or if you live.” And the products now will include LTC features as well as other morbidity-based coverages, so that a person also is covered if disabled, in whatever guises the definition of disabled may be (e.g., unable to work, critically ill or chronically ill).

Interested industry observers should be aware legislation has been proposed that will increase the appeal of such offerings in the future, if made law. This is S. 2281, a bill introduced in Congress by Sen. Rick Santorum, R-Pa.

The bill would change the treatment of LTC riders or provisions attached to life contracts. For contracts meeting the bill’s requirements, the LTC piece would be treated as a qualified additional benefit under Section 7702 of the Internal Revenue Code. This would 1) allow buyers to prefund the LTC benefit within the life contract, a treatment not currently available; and 2) make it so that using cash values to pay for LTC would not be considered distributions but simply internal payments to fund the LTC piece. The bill also would greatly ameliorate administrative consequences for insurers.

In sum, the appeal of integrated offerings is likely to continue to increase.


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