Linked LTCI-life insurance policies offer several compelling benefits that make them attractive, especially while yields on conservative investments and bank products remain low. First, they include a life insurance benefit. Second, they can provide extended LTC benefits at a reduced cost. Additionally, most contracts offer a refund-of-premium provision for insureds who decide to cancel the policies within a stated period.
What’s more, the Pension Protection Act of 2006 and changes to tax laws that took effect on Jan. 1, 2010 have been good for life insurance policies that include long-term care (LTC) benefits. According to the American Association for Long-Term Care Insurance (AALTCI) 2011 LTCI Sourcebook, placed lives of linked policies grew to 3,498 in 2010, an 83 percent increase over 2009. Premiums also rose year-over-year, increasing by 79 percent in 2010 to $274.5 million. The policies were substantial: AALTCI reports that two-thirds of the single premium policies’ face amounts were over $100,000.
How the policies work
The policies’ mechanics vary among issuers and by policy type: universal or whole life, single- or multi-payment. Carl Friedrich, FSA, MAAA, principal and consulting actuary with Milliman in Lake Forest, Ill., says the most common universal life structure features a first layer of coverage that is provided through an accelerated death benefit when long-term care requirements are met.
Monthly payouts are provided to help cover the cost of long-term care, with the payout period often spread over 24 to 48 months and can continue until the entire face amount of the policy is depleted. At that point, the optional extended benefit is paid. For example, if the policy has a $120,000 death benefit and the insured chooses a 36-month benefit period, the maximum monthly benefit would be $3,333.33 ($120,000 divided by 36).
The amounts paid out typically reduce the life insurance benefit dollar-for-dollar and reduce the contract’s cash value on a pro-rata basis. The policies also provide a residual benefit: If the insured dies after exhausting the hypothetical policy’s $120,000 death grant, the residual death benefit will pay, for example, 10 percent ($12,000) to the beneficiaries.
The Asset-Care(R) whole life-plus LTC policies from the State Life Insurance Co. take a different approach from the UL policies, according to Bruce Moon, vice president of marketing for State Life Insurance Co. in Indianapolis. Asset-Care is available in single premium, limited-pay and whole life plans and on a single- or joint-life basis. The policies provide up to 2 percent of the death benefit as a monthly LTC benefit, although insureds can increase that to 3 percent or 4 percent for an additional premium. The company also offers an extended benefits rider for a specified period or lifetime.
Linked versus separate policies
Linked policies’ LTC features are usually comparable to those found in standalone policies. Elimination
periods, covered services, policy exclusions and benefit triggers–the conditions required for an insured to collect the LTC benefit–are generally similar. Obtaining LTC insurance in a single, linked policy can be less expensive than buying comparable benefits through a separate LTCI policy, however. Although it can be difficult to compare the products, Friedrich says that in general “the long-term care package (in a linked policy) costs typically 40 percent or 50 percent of the cost of a comparable long-term care policy that started paying after a 90-day elimination period.”
Underwriting requirements vary among insurers. Some companies closely follow their usual life- and LTCI-policy underwriting. More commonly, though, says Friedrich, companies use a somewhat simplified process for linked policies. “Most companies have found that the most effective way to market these plans—and the one that makes the most sense in terms of the reduced risk elements for many components of the coverage–is to not utilize the normal medical underwriting,” he says. “That means not collecting blood or urine specimens that often would be used in life insurance underwriting
and not using attending physician statements, which can be a slow process. So the typical approach is the use of a short-form application.”
To date, most of the linked benefit policy buyers have been older. The AALTCI 2011 LTCI Sourcebook reports that roughly 90 percent of the male and female buyers in 2010 were age 55 and over. Doug Burkle, linked benefit product development leader at Genworth Financial in Richmond, Va., cites similar stats for Genworth’s Total Living Coverage(R) universal life-plus LTCI policy: about 50 percent of buyers are in their 60s, 21 percent in their 70s and the rest are mostly in their 50s. The mass affluent and high net-worth markets are important for this product, says Burkle, but advisors shouldn’t overlook the very wealthy. That group likes to control their assets, he says, and they find the return-of-premium feature attractive.
Ginger Snyder, CFP and senior vice president, investments with the 360 Wealth Management Group of Raymond James in Tampa, Fla., considers several factors when determining client suitability. “We look at lump sums as being the best method to purchase the asset-based long-term care insurance,” she says. “If a client doesn’t have their income needs met, then obviously that’s not going to be something that they are going to be able to afford. So we look at basically what their asset value is, what their income needs are and then make a determination as to whether or not they’re going to be able to actually afford the life insurance.”
Scott Wirtz, CLTC, senior investment strategist with Eslick Financial Group in Waterloo, Iowa, also takes a holistic approach to the linked policies. He isn’t convinced “this product is suitable for most of Middle America” because clients need an adequate amount of non-qualified, liquid resources to accomplish their retirement and estate goals. In his experience, Wirtz says, most people lack sufficient liquid resources to make this a viable product. “If they have $200,000 or $250,000 or more in non-qualified assets that [they] don’t really have a use for, then this product might make sense,” he says. “Oftentimes, they’ve got those dollars earmarked for the next project and the next thing that they want to do in their life.”
How life insurance can fund LTC
The growing boomer and senior population of this country are driving the need to fund more LTC costs through private dollars. Unfortunately, there is a lack of consumer awareness about how life insurance can be used to fund long-term care needs.
According to NAIC, there was $10 trillion of in-force life insurance in the U.S. last year. But insurance carriers are resistant to inform policy owners about their legal rights of ownership, and a majority of these uniformed seniors allow their policies to lapse or surrender without ever knowing about how that life insurance contract can pay for long-term care services.
The National Conference of Insurance Legislators (NCOIL) understood the implications of billions of dollars of life insurance policies in the hands of seniors being discarded every year when they unanimously passed the Life Insurance Consumer Disclosure Model Act in November 2010. The law’s intent is to make sure that insurance carriers disclose to their policy owners that there are alternative options beyond lapse or surrender of a policy. A number of states including California, Connecticut, Kentucky, Maine, New Hampshire, Oregon, Washington State, Virginia and Wisconsin already have passed or are now considering “life insurance consumer” disclosure laws in their states to help seniors pay for long-term care.
State Rep. Robert Damron (D-KY), immediate past president of NCOIL, upon adoption of the model, said, “It is imperative that policy holders understand that they have alternatives to merely to lapsing or surrendering their policy.”
States are looking to private-market funding solutions to help keep Medicaid expenditures down and help overcome the long-term care funding crisis–and this is a big move in that direction.
Millions more seniors own life insurance than LTCI, and for many their policy is an unneeded, undervalued and illiquid asset. “Many seniors and their families are unaware that their life insurance policies are valuable assets and can be used in this way, and as a result some let active policies lapse,” said Jayne Sallerson, EVP, sales and marketing at Emeritus Senior Living. “We hope that we can help educate seniors about their resources, so that more seniors can have access to the long-term care they need.”
With mandated access to information and resources, those most in need of financial solutions can make an informed decision about what is the more important priority for them–the value of a death benefit and keeping the policy in force, or the value of a living benefit and converting the policy to its present day value to pay for long-term care.