Among all the challenges that producers must overcome to make the long term care insurance sale, finding the money to pay the premiums can rank as high as any.
Indeed, there’s no denying premiums can be steep. A couple in their mid-50s purchasing modest coverage ($200 per day, a five-year benefit period and a 90-day elimination period, with inflation protection) can expect to pay at least $3,000 annually. That could easily double or even triple, depending upon the underwriting carrier, other optional benefits and so on.
One method savvy professionals are using to find the funds to buy LTC insurance is to tap the cash value of the prospect’s life insurance policy.
Permanent life insurance with cash value could be a sizeable enough asset to convert to a life policy that includes LTC benefits, thereby insuring the LTC risk without creating a new expense for the customer. This strategy assumes the life insurance has not been earmarked for other needs, and the policy owner understands the trade-offs in the move. If the insured is counting on the cash value to supplement income in retirement, then this strategy should not be pursued. However, using the cash value to buy LTC insurance does not mean the insured must forfeit a death benefit.
Many products on the market today combine life and LTC insurance. For insurance professionals, finding a product to fit the LTC need will probably be the easy part. There are other important considerations with this strategy, however.
First, one must consider underwriting. Moving the cash value asset to a combination life-LTC insurance product means a new risk for the underwriter. The new risk must meet the minimum underwriting standards of the carrier issuing the combination product. In evaluating the risk, the underwriter is likely to review medical records, conduct a cognitive-ability screening test and perhaps order a face-to-face interview. The insured will not have to give up the cash value life policy until the underwriting outcome is known, so there is no risk in applying.
How much is enough?
The second and perhaps most important consideration is the amount of cash value available in the existing policy, how much life-LTC that asset will buy, and whether or not that new combination policy will adequately cover the LTC risk.
The good news is that there is no wrong answer, particularly if the alternative is that the LTC risk will remain uninsured.
The bad news is that it would be impossible to guarantee the new product would cover the entire LTC risk. Unlike life insurance, where the policy owner actively participates in determining the amount of insurance sold, LTC insurance can be a speculative purchase. The life insurance’s absolute value is being traded for a life-LTC insurance product of certain value but uncertain utility. It might be enough, and then again it might not. Traditional LTC insurance is often sold with an unlimited maximum benefit and high daily benefit to lessen uncertainty. However, life-LTC insurance products, with a defined lump sum premium, will have a defined maximum benefit or value.
With proper disclosure and the presentation of several options, the producer and the insured can make the right decision. As little as $150,000 can buy a three-year total LTC insurance benefit with a payment schedule that would cover the monthly costs of nursing care in most areas of the country today as well as include a death benefit. Recent LTC claims studies suggest that a three-year benefit likely would be enough for most of those who claim LTC benefits. Having more LTC insurance is better, but most would argue having some is better than having none at all.
A final consideration is the tax consequence of liquidating the cash value and buying a combination life-LTC insurance product that won’t create a tax liability when LTC benefits are paid. The terms of the life contract will dictate the tax treatment of the cash value. Look for a combination life-LTC product that conforms to the National Association of Insurance Commissioners’ LTC Model regulations and the Health Insurance Portability and Accountability Act for the LTC insurance portion of the contract. Advise your client to check with his/her tax advisor before moving any money around.
Discussing LTC insurance is an important and potentially rewarding experience for you and your clients. Don’t let a lack of disposable income be a barrier to the sale. If there is a sizeable asset in a life policy, you may be able to overcome a common objection, meet the need and make the sale.