Long term care insurance sales in the affluent market have remained relatively flat in recent years, in part because the products are relatively complicated and many states require special licensing to sell them. But there’s another reason for the level trend: Many high net worth individuals believe that being self-insured or maintaining a personal reserve fund is a more attractive option.
There is, however, a unique alternative in the marketplace that provides for a broad range of coverage: LTC-linked or combination insurance.
Combination policies are life insurance and annuity products with LTC riders attached that can be used to provide LTC coverage, life insurance if necessary or a money-back guarantee. New combination products provide income tax-free LTC reimbursements and pass any unused portion to beneficiaries–again, income tax-free–through a death benefit.
As is the case with disability insurance, getting a client to believe that he or she may at some point need long term care is a hurdle that must be overcome. Many clients simply believe they will never need care–be it at home, in an assisted living facility or at a nursing home. Everybody dies, they say, but not everyone will need to use LTC in his or her lifetime. Rather than pay premiums for a benefit they feel they will never use, they would rather put those dollars in a retirement plan or another type of interest-bearing account.
The truth is, people do need LTC, and it’s not cheap. According to a May 2003 study conducted by The American Society on Aging, “Americans Fail to Act on Long-Term Care Protection,” 70% of Americans currently 65 and older will need some type of long-term care. In addition, more than half of all men and women turning 65 will use a nursing home before they die, and about 20% will spend 5 or more years there.
The average annual cost of nursing home care was approximately $70,000 in 2004. The average duration of care is approximately 6 years. The average annual cost of in-home care was $155,000 in 2004.
At those levels, it wouldn’t take long to wipe out one’s assets. In fact, LTC represents one of the greatest threats to retirement income security. Essentially, the high net worth individual who is not interested in LTC is saying, “I can self-insure for that potential liability.”
Combination products can be particularly attractive when presented in terms of repositioning assets to provide value to one’s family, rather than simply as costs and expenses. Since policy designs are based on the notion of asset transfer and leverage, clients should know that $1 invested in a combination policy will yield $6 of LTC coverage and/or $2.25 of life insurance protection.
For example, a high net-worth individual can transfer $100,000 from a CD or other interest-bearing account to a combination universal life policy, which provides 3 potential benefits:
? 6-to-1 ratio long-term care benefit — In the aforementioned example case, the client receives immediate LTC protection of up to $668,000.
? Income tax-free death benefit — If the client doesn’t use the policy for LTC or uses only part of it, there is an income tax-free death benefit available to the family, usually up to 2 1/2 times the premium.
? Money back guarantee — Whether it’s been 1 day, 5 months or 10 years, the client is guaranteed his or her deposit if the policy hasn’t been used and the client feels the premium would be better utilized elsewhere.
Both the LTC payouts and death benefit are income tax-free, and some of these policies have simplified underwriting. In many cases, the application process can easily be conducted over the phone, with a quick decision on the spot. In addition, Congress passed legislation in 2006 that allows for more innovative combination policy designs.
If the client needs care, all of the contingencies will be covered and the LTC bills will be paid. If the client doesn’t need care but dies, his family is protected. If the client decides not to keep the policy, the premium is fully refundable.
The alternative is to do nothing and keep the money available in a CD or other interest-bearing account, where the client will bear the full burden of responsibility should something happen.
When presented in the right manner, the concepts of asset transfer and leverage should make it much more palatable for affluent clients to take action on protecting their future, whatever it may be.