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The basics of LTCI

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If your plans for 2011 call for adding long-term care insurance to your list of products, you need a solid foundation upon which to base your sales. Here’s a concise overview of the basics of LTCI.

The need
It’s natural to focus on custodial-care nursing home stays because of their cost. According to the American Association for Long-Term Care Insurance’s 2010 Sourcebook, a private room cost an average $220 per day ($80,300 annually) in 2009. Local costs vary, but obviously a nursing home stay can be financially devastating.

Nursing homes are only one delivery method for long-term care, however. In his continuing education training program for, “Long-Term Care Fundamentals,” Paul Winn, CLU, ChFC, notes that LTC involves a range of health care services. Custodial care provides individuals with assistance in the activities of daily living: bathing, dressing, eating, etc.

Depending on the person’s needs, other health care services can range from intermediate to intensive care. LTC can be provided in a person’s home, community-based facilities and alternate care facilities, as well as nursing homes.

Winn cites several statistics to highlight the likelihood that clients will require LTC at some point in their lives. At age 40, he reports that the risk of needing LTC in a nursing home at some point in the person’s lifetime is 36 percent. That percentage increases to 49 percent by age 65 and 56 percent by age 85. Those probabilities are much higher than the risk of being in an auto accident (0.4 percent) or having fire damage a home (0.08 percent).

Key benefits

Most LTCI policies allow buyers to customize their coverage significantly. So which benefits should you recommend clients consider and which should they ignore? Mike Westling, CLTC, an LTCI specialist with Newman Long Term Care in Richfield, Minn., says that inflation protection is “number one” to include.

He notes that the industry norm previously was a 5 percent inflation-increase compounded annually, but that’s been changing. Some companies are moving to 3 percent annual compounding and others are shifting to the Consumer Price Index for their increases.

A second feature Westling recommends for a couple is shared care, which allows insureds to share the coverage pool. “If one person needs to dip into the other person’s pool, they can do that,” he says. “If the one insured doesn’t need it or dies before being able to use it, the pool transfers over to the other spouse.

The good news is they get the whole pool but they don’t have to pay the premium for the insured who is now deceased.” Westling also recommends a zero-day elimination period and 100 percent payout for homecare. Most baby boomers want to receive care at home, he says, and this feature provides them the ability to be able to pay for it on day one.

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.”