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Rise of the riders

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It’s something long term care insurance consultant Marilee Driscoll cannot fully fathom. People who don’t blink at the prospect of paying premiums on automobile, homeowners or life insurance policies that they may never use in their lifetimes somehow cannot justify purchasing a stand-alone LTCI policy – even though, if they are over age 65, they stand almost a 70 percent chance of needing some form of long term care.

“It seems to me,” says Driscoll, founder of Long-Term Care Planning Month and author of The Complete Idiot’s Guide to Long Term Care Planning , “long term care insurance is the only type of insurance where knowing your money won’t be wasted becomes important. I don’t know why that is, because you never really hear it with other types of insurance.”

When the subject is long term care insurance, a senior client’s first question often is, “Why pay for a policy when I may never need to make a claim on it?” With cash-value life insurance policies that carry a long term care component, advisors who seem destined for another dead-end conversation about stand-alone LTCI coverage now have a means to render the question moot and move discussions with clients toward a more productive end.

While so-called “combo” LI-LTCI policies have been around since the early 1990s, they lately have begun to come into their own, with more insurance carriers angling a growing array of products toward people who, for whatever reason, aren’t suited to or attracted by a stand-alone LTCI policy. Today, explains Carl Friedrich, FSA, MAAA, a consulting actuary and principle in the Chicago office of the consulting firm Milliman, the choices include:

  • First-generation products, with riders that can be added to a universal life chassis to afford the policyholder access to an accelerated death benefit to cover long term care costs. “If you never need long term care you’ll just have more money in the policy to pass on to heirs,” Driscoll notes.
  • Second-generation products that package whole life, universal life or even variable universal life with long-term care benefits that can be drawn independent of the underlying insurance contract.
  • A third group of products that combines features of the first categories with others designed to make the insurance components of the package more palatable, such as return-of-premium riders and compound inflation benefits. A product in this category might combine a single-premium universal life base with a rider that allows the policyholder to draw from the death benefit to cover the cost of two or three years of long term care, with some residual death benefit for the policy beneficiary. The policy also might have a separate LTCI rider that kicks in once the two- or three-year term of the drawdown ends. Return-of-premium and inflation-protection riders might also be part of the package.

Carriers appear increasingly intent on developing products that fit that mold. “We have helped quite a few [carrier] clients develop combination products in the last few years,” Friedrich says. “It is a very hot topic.”

Among the best candidates to purchase those types of products are seniors who clearly need some form of LTCI coverage but are hesitant to purchase a stand-alone policy to gain that coverage. Instead of trying to convince clients they need to purchase an LTCI policy, advisors and agents can steer them to a combo product, which they can roll into if they already own a cash-value life insurance policy or purchase if they don’t. “The great sales hook of the combination policy,” Driscoll says, “is that this combination makes it easier for a person to buy because they may not ever need long term care but they certainly are going to die.”

Even LTCI specialists who tend to favor stand-alone policies for most of their clients say they see combo LI-LTCI products carving out a larger niche in the market. “It’s a concept that really seems to be growing in popularity,” observes long-time LTCI producer Peter Gelbwaks, CLTC, president and founder of Gelbwaks Insurance Services in Plantation, Fla. “You have products coming from top companies like Lincoln Financial, Genworth and John Hancock. It’s not a product that’s going to change the world, but I think you will see more life insurance companies moving in this direction.”

The evolution continues

Though generally still a devotee of stand-alone LTCI policies, Gelbwaks speaks glowingly of combo products such as MoneyGuard Reserve, a universal life policy offered by Lincoln Financial Group that falls into the last of the three product categories. He points to MoneyGuard as an example of how combo policies have evolved for the better in recent years. For instance, underwriting, which historically has been seen as a drawback for life insurance policies with an independent LTCI feature (those in the second or third category) because they require dual underwriting tracks, is a much more straightforward process with LFG’s combo product, he says. The process starts with a quick, simple yes-no questionnaire, advances to a telephone interview and concludes with prompt policy issuance, typically within seven to 10 days, he says.

The underwriting process associated with this type of product has historically “put clients through hell,” Gelbwaks notes. No longer. According to Friedrich, insurance carriers are “becoming smarter in that regard,” with streamlined processes that make more use of telephone interviewing to minimize the burden on producers and their clients.

For policyholders who want long term care coverage, MoneyGuard Reserve features both an accelerated death benefit rider and beyond that, an extension of benefits rider. Gelbwaks prefers also to add a return-of-premium rider (available on single-premium policies) to give the policyholder what amounts to a “forever-free look” that addresses the common client concern about “wasting” premiums should they never actually need long term care.

Another important feature of combo LI-LTCI products purchased via a single premium payment is the ability to dodge premium increases. Rate increases are a fact of life for many owners of stand-alone LTCI policies. Avoiding the ambush of those potentially substantial annual increases appeals to consumers, especially seniors on a fixed income. Whether the single-premium policy includes an accelerated death benefit rider, independent LTCI coverage or both, the policyholder won’t have to worry about premium hikes.

Another common long term care coverage-related worry – that the cost of care itself will escalate, as it has steadily of late, thereby reducing the value of their coverage – can also be addressed with the new generation of combo LI-LTCI products by adding some form of inflation protection rider. With MoneyGuard Reserve and similar policies, account value is guaranteed to grow at a rate of no less than 4 percent on a tax-deferred basis. Further, the product offers inflation protection (simple or compound) features on both the accelerated death benefit rider and the extension of benefits rider.

Protecting the death benefit

Combo products also have an answer for clients who are concerned the cost of long term care could over time entirely exhaust the death benefit. In those instances, MoneyGuard Reserve, for example, offers to pay policy beneficiaries a residual death benefit equal to 10 percent of the death benefit amount specified at the time a policy was purchased. But as Driscoll notes, this amount might not suffice in cases where the policy beneficiary will “really need the [whole] death benefit and a guarantee it’s going to be there” after the insured dies. Here is where using strictly an accelerated death benefit rider to cover long term care costs can turn sour.

So why use only that type of rider when similar or more comprehensive coverage can be secured with an independent LTCI rider that won’t draw down the death benefit? One word: cost. Accelerated-benefit long term care riders cost in the range of 10-20 percent of a stand-alone LTCI policy, according to Friedrich, making it more affordable for less wealthy seniors who lack the liquidity to fund a policy with a rider that provides independent LTCI coverage (or, for that matter, to purchase a single-premium policy). There typically is not much cost difference between that type of rider and a stand-alone LTCI policy, he notes.

Thus combo policies with nothing more than a first-generation accelerated death benefit rider are perhaps best suited for middle-income clients (though such a configuration likely entails some level of self-insurance), while the more expensive combo policies likely will appeal more to wealthier types, especially if it has the return-of-premium “free look.”

“Most of these policies are going to be funded on a lump-sum premium basis,” Gelbwak says. “It takes $50,000 to $100,000 to do anything decent in terms of coverage, and the average Joe might shy away from that.”

Tax benefits

Wealthy or not, clients are bound to appreciate tax benefits associated with investments in LTCI, including existing deductions and new provisions adopted last year that make LTCI riders on life insurance and annuities eligible for similar deductions beginning in 2010.

They specify that the cost of qualified long term care insurance can be covered using the cash value of life insurance and annuity contracts on a before-tax basis. However, according to Friedrich, IRS clarification is being sought on language in those new provisions regarding the tax treatment of certain long term care distributions.

Even with looming uncertainty, Friedrich says he expects more varieties of combo plans to surface between now and 2010. One Gelbwaks says he’d like to see is a single-premium, cash-value life insurance chassis with the option of a cash long term care benefit. Odds are such a product is already on some carrier’s drawing board.