The basics of LTCI

Which features does Westling believe clients should avoid? He lists three: return of premium, restoration of benefits and non-forfeiture. He explains his logic: “Insurance is insurance. I hope you buy it and you never need this but it’s for the what-ifs of life. So, I tell people for the cost of return of premium, I don’t see the value.” Although some advisors recommend restoration of benefits for clients under age 55, Westling says the feature’s usage doesn’t justify its cost.

Less than 4 percent of insureds use the rider, he says, which makes him doubt its value. The industry’s experience with forfeiture also leads him to avoid that feature, which he estimates adds about nine percent to a policy’s cost. “Companies are using a 99 percent persistency rate right now, which tells me people that buy this (LTCI insurance) keep it,” says Westling.

Industry trends

William Dyess, CLTC, executive vice-president with Gelbwaks Executive Marketing Corp. in Plantation, Fla., cites several industry trends worth monitoring. The first is the emergence of policies like Prudential’s LTC Evolution that simplify the LTCI coverage and buying process. Insureds select a policy lifetime benefit “pool” from $100,000 to $1 million; eligible LTC charges get reimbursed at 80 percent with the insured paying the balance, eliminating the daily and monthly coverage limits.

Another trend is the growing popularity of partial-cash LTCI policies that allow insureds to collect a percentage of their full reimbursable amount each month in cash. For example, assume the reimbursement contract allows up to $6,000 with a partial-cash limit of 40 percent. If the insured doesn’t need reimbursement in a given month, he or she can request a cash distribution up to the allowed amount of $2,400 (40 percent of $6,000). “(The insurer) will pay that to you in cash to pay for expenses as you see fit,” says Dyess. “The other 60 percent stays in the account to be used at a later date.”

The risk of higher premiums
Unless your clients own a non-cancellable policy, they face the risk of premium increases if they haven’t seen them already. Prospects are also likely to have read about recent increases. How do you deal with this concern if it arises? You can start by researching insurers’ rate increase histories. These histories vary considerably and you can add value for prospects by identifying those carriers that have stable premiums.

The second step: full disclosure. Don’t try to gloss over the risk that the insurer might raise rates, says Winn: “Disclose, disclose, disclose. If you have told your client all of the material facts about the product or strategy that you’re recommending, you’ve done your job, I think, as an advisor, assuming that you’ve done all the other things.”

You can also show clients the premiums required to obtain comparable coverage at their current ages, a cost that will frequently be much higher than their existing policy, even after the increase. Additionally, Westling observes that some LTCI owners would fail to qualify for new coverage because of health declines since they purchased coverage originally.

While no one wants to pay more for their policy, Westling says, keeping the existing policies and paying the higher premiums makes economic sense: “Even with these increases that they are getting, it’s still better than what they would be purchasing today.”