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Long term care insurance alternatives: annuities, waivers, combos and riders

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With the graying of America, there is little doubt that long term care insurance — or something like it — is necessary. Two out of five people over 65 will require nursing home or other long-term assistance. In 2006, an estimated nine million Americans over age 65 fell into this category. By 2020, that number will grow to an estimated
12 million.

Yet, research by organizations ranging from Consumer Reports and AARP to insurance companies indicates that the likelihood of someone having LTCI when they need it is slim. For the individual and his or her family who lack such coverage, the results can be devastating, resulting in bankruptcy, loss of the home and increased stress.

Critical Issues
Three issues emerge as critical when it comes to LTCI. First is the misperception about who pays. Most people erroneously assume that they have coverage through their regular insurance, Medicare, or Medicaid. Therefore, they see no need to purchase LTCI.

The second issue is affordability. LTCI is not cheap, and can be a challenge for middle-income individuals and completely out of reach for those in lower-income brackets.

The final issue is denial of coverage. People tend not to think about LTCI until they hit their 60s. By then, many have developed a health dossier that — even if they can afford the premiums — effectively disqualifies them.
To address these issues requires education regarding who pays, and LTCI alternatives. The insurance industry now offers a variety of products that address the needs of those who, for health or affordability reasons, cannot protect themselves — options that, while not LTCI, can achieve similar results.

Medicare misconceptions and hard, cold facts
Americans are woefully uninformed about LTC and its associated costs. A majority — 59 percent — think that Medicare pays 100 percent for LTC, while another large percentage believe that Medicaid or state programs will cover them. Although these two programs do provide some coverage, the problem with both is that they are restrictive.

For example, Medicare pays only for short-term care — in specified facilities — after a hospital stay. After the first 20 days, the patient or family must kick in a daily $96.40 co-pay. Medicaid recipients must spend down assets and are more likely to end up in a nursing home, because Medicaid won’t cover assisted living or homecare.

When the patient or family is faced with the costs not covered, it’s easy to see how the LTC recipient or a surviving spouse (or adult child) is left destitute.

The disqualifiers: cost and health
Consumer Reports states that for most people, long term care insurance is “too risky and too expensive” — and consumers seem to agree. A mere 9 percent of Americans have such coverage, many of them through their jobs. When they retire, they often cannot afford to keep the policy. Just as they reach the age when they are most likely to need it, retirees find that they simply cannot afford LTCI.

Finally, many Americans are simply unwilling to invest hard-earned money into an LTCI policy that they may not use. If they don’t use it, they may be unable to retrieve their money or pass it along to their beneficiaries. They look at LTCI as a potential waste of money.

Health is the other LTCI disqualifier. Most policies require underwriting, which many prospects find intrusive and time-consuming. Plus, by the time policyholders reach retirement age, they often have pre-existing health problems that preclude coverage or dramatically increase cost.

Can the annuity industry offer consumers options that can help achieve similar goals as long term care insurance? The answer is a resounding “yes”.

Designing a suitable alternative to LTCI
Annuities enable the insurance industry to offer three alternatives to LTCI: confinement waivers, combination products, and riders. One of these options may be a suitable LTCI alternative that is eminently suited to a client’s needs. While you’ll have to ask some personal questions, the process will be much less intrusive than the extensive underwriting required for most LTCI.

Discuss your client’s options and preferences — given the choice, would they prefer home care to a nursing home or hospital? Will adult day care be necessary? Do they want to pass money on to beneficiaries? Once need and preference are determined, find a product that addresses them.

An overview of alternatives
For years the annuity industry has sought solutions to help those who cannot afford, or do not qualify for, standard LTCI. First were annuities with confinement waivers, followed by combination annuity/LTCI products. More recently, riders offer yet another option.

Annuity With Confinement Waiver
As the first attempt to respond to LTC needs, many annuities have a confinement waiver feature at no additional cost to the annuitant. Once requirements are met, such waivers accelerate access to funds free of market value adjustments and surrender charges, and do not require underwriting.

While confinement waivers do not require out-of-pocket expense other than the cost of the annuity, they may not cover total LTC costs. Clients basically spend their own money and there is no additional benefit.

Combination Products
Some annuities come with LTCI built in. While these hybrid products provide the benefits of annuities and many LTCI benefits, there are drawbacks. Only non-qualified money can be used, and some form of simplified underwriting is typically required. Assets must be spent down before the carrier kicks in with payments. The cost is typically less than LTCI, but can increase over time. However, this may be a viable alternative because, unlike the confinement waivers, it can cover more of the actual LTC costs, may have significant tax benefits, and requires no additional out of pocket expense.

Annuities with Riders
As the LTC market expands, the annuity industry continues to respond. The latest offerings are annuities with additional care riders that can be used with qualified or non-qualified money. These riders normally require no underwriting or spend-down of assets and, like the combination products, require no out-of-pocket expense (costs are deducted from the earnings). Once the benefit is triggered, the client controls how it is utilized. Since this is not a reimbursement plan, if the benefit is not spent it can remain in the annuity and become part of the death benefit. Some riders even provide a fixed fee that will not increase over time.

So, be creative. For LTC agents, these alternatives provide additional options for clients. For annuity agents, they open a new market and provide a range of options and choices that would not otherwise be available. In short, it’s a win-win-win situation.

Diane Shemi is director of product management for Legacy. She can be contacted at [email protected].

Combo annuity/long-term care gets a big boost in 2010
The new tax benefits of the Pension Protection Act kick in on Jan. 1, 2010 and the top five objections to
buying LTCI will quickly melt away.

The first annuity-based long term care product was introduced in 1989. What a concept. Instead of paying big and ever-increasing premiums for traditional long term care coverage, your prospects could now put some of their savings into a fixed annuity and let the annuity interest pay the LTC premiums for them. These original products were updated following HIPPA, and the first tax-qualified LTC/annuity combos
were introduced 10 years later in 1999.

Some of these new annuity/LTC combo products will pay three times the annuity value for long term care expenses. In recent years, some insurers, sensing the explosive potential of this new market place, have developed their own versions of annuity-based LTCI. Why all of this recent attention to asset-based LTC? That’s easy to understand if you know about the big glitch.

The glitch was this: Annuity interest used to leverage LTC benefits was considered an interest distribution from a deferred annuity and as such was a taxable distribution. In other words, the annuity owner received a 1099 for the amount of interest that was deducted to pay for the LTC premiums.

On Aug. 17, 2006, the Pension Protection Act was signed into law and the glitch was eliminated. Beginning Jan. 1, 2010, the interest deducted to pay premiums and benefits from tax-qualified LTC coverage will no longer be taxed. This new tax advantage applies only to combo products. The premiums for traditional LTCI will still be paid with after tax dollars.

Think about it: tax-free premiums and tax-free benefits. This powerful combination will open the door to increased LTC sales, and suddenly, several of the strongest objections will disappear, such as:
I’m healthy, have great genes and won’t need long term care insurance.

You may be among the 33 percent of Americans over age 65 that will never need long term care services. If you are not so fortunate, how long can you afford to self-insure? Those with good genes may live well into their 80s, 90s or longer.

The older you become the more likely you will need some form of assisted living. Nursing home expenses can exceed well over $70,000 per year. The advantage of asset-based LTC is you will have LTC benefits if you need them or your annuity value, plus net interest if you don’t. Either way you win.

The premiums are too high.

A stand-alone LTC policy can cost $1,500 to $8,000 per year depending on age at purchase, type of policy, daily benefit, benefit period and other factors. You may want to consider a combo annuity/LTC policy. Utilizing your annuity for the first two years of self-insurance, this type of policy will provide an additional four years of
benefits. This approach can reduce the LTC premiums as much as 60 percent to 75 percent of the cost of a stand-alone LTC policy. Combo policies also allow you to pay these much lower premiums with untaxed dollars.

I’ll give away my assets and qualify for Medicaid. Let the government pay for my nursing home expenses.

Many people have used elder care attorneys to help them plan their estates to “spend down” their assets in order to qualify for Medicaid. The Deficit Reduction Act of 2006 made it more difficult for those with substantial assets to qualify for Medicaid and requires a five-year look-back period for any assets transferred. For many it will make more sense to transfer some of their assets to a combo annuity/LTC policy. This way you can keep control of your assets, have qualified longterm care coverage and you won’t be forced into a Medicaid-approved nursing home in your final years.

If I pay these high premiums and never need the benefits, my money is wasted and my children will have nothing to
show for my efforts.

A combo product may be the solution for your peace of mind. If you transfer some of your assets into a combo annuity that credits 5 percent per year and then 1 percent is withdrawn to pay LTC premiums, your annuity will continue to grow at a net rate of 4 percent. The net yield is higher than money market accounts and most other safe investments. With a combo policy you will have coverage if you need it and continued growth to pass on to your heirs if you don’t. During the rest of your life you will have two or three times the increasing value of your annuity to pay for LTC expenses.

After I pay these high premiums for 5 to 10 years, the insurance company will increase the premiums when I can least afford it.

Many of the early LTC policies were not priced correctly to match benefits and persistency. The companies that sold these policies increased the premiums (after getting permission from the state insurance departments) on all their in-force policies to compensate for the pricing mistakes. You should look for a company that has experience in longterm care and has had a stable premium history. There are several combo products available today that offer lower premiums and have had no premium increases. The combo products will have new tax advantages (tax-free premiums) beginning in 2010. Policies providing tax-qualified LTC bought prior to 2010 will have the same tax advantages.

When choosing the combo product that best fits your client’s needs, it’s important to know the differences. Some have as little as a 90-day elimination period while others have waiting periods from two to five years.
With only 14 months to go, 2010 is right around the corner. The Pension Protection Act has given your LTC prospects new reasons to consider combo annuity/LTC insurance. Knowing how to use these new products to overcome the five most common objections to buying LTCI can help your prospects and clients afford the LTC coverage they need and take your annuity/LTC practice to the next level.

If you’re in the business of including long term care insurance in your offerings, you may be finding your clients have some misconceptions about the need — and offer various objections. Often, the first way we counter these objections is with statistics. However, the truth is, statistics aren’t going to sway anyone when it comes to making the decision to plan for long term care. What will help your client’s decision to plan and protect against this risk is to simply put yourself in their shoes. You would buy LTCI because you love your family and you want to protect them. Just as with life insurance, it is not the family member who has died that has a problem, it’s the family left to handle the issues at hand. When you’re selling LTCI, the most successful position to take with your clients is all about family.

Children take care of their parents because they love them and are concerned for their safety. While they may not want to be the caretakers, they usually can’t be talked out of it. Emphasize that LTCI builds on an existing infrastructure of family support, allowing paid caregivers to provide care for the things the family may find the most difficult or embarrassing to perform. By positioning your services as the family’s support structure, they are no longer defensive and begin to see you as their partner. Start by gaining agreement on these three things:
That beyond a reasonable doubt they will live a long life but at some point require care; Long term care is a family issue and one that can have a devastating effect on the family; Nothing will pay to protect family and retirement plans except long term care insurance.

Selling LCTI is really just like selling life insurance, with word substitutions. In a life insurance presentation, you might say, “I need to talk to you about the consequences an early death could have on your family.” In selling long term care insurance, you would say, “I need to talk to you about the consequences living a long life would have on your family.” Then simply follow the steps you would normally follow to close a life insurance sale.

As you are working through your discussion, establishing beyond a reasonable doubt that without LTCI nothing will pay for long-term care except assets allocated for retirement or a family’s future. Also suggest purchasing a “Medi-Gap” policy. Show your client that he can’t afford not to buy LTCI — remind him that you’ve calculated the payout on living to age 90 and that, at that age, disability and term insurance policies are no longer in force.

Those clients who have already bought LTCI from you did so because they understood the risks and connected that risk directly to their family. Once your client firmly believes that you are saving his retirement fund rather than spending it and that your biggest concern is the well-being of his family, there’s nothing left for him to do but sign on the dotted line.

Tom Riekse, Jr. is managing principal of LTCI partners and has been working in the long-term care insurance business since 1991.


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