Hybrids can be hardy. (U.S. Fish and Wildlife Service image)

Last month, I discussed the evolution of the long-term care insurance (LTCI) industry and why LTCI is so needed.

Recently, Fidelity Investments calculated that a 65-year-old couple needs more $250,000 after-tax savings to cover medical expenses in retirement. Note that the Fidelity figure does not include long-term care (LTC) expenses.

Private LTC insurance is one answer. Here are three LTC designs that insurance companies use to manage LTC risk:

  • Traditional LTCI, or “pure” LTCI.
  • Life-LTC hybrids (also known as asset-linked or asset-based LTC), generally funded with a single-premium policy–as an alternative to a CD–and built on a life insurance chassis.
  • Life-LTC hybrids created with life insurance and an LTC rider associated with an accelerated death benefit (DB) feature.

Over the last 200 years, the life insurance industry has become a master at creating many types and uses of life insurance that go beyond income replacement.

The LTCI industry needs to adopt that kind of flexibility. Participants need to recognize that the new world of LTCI is based upon combo/hybrid products.

Well-educated agents can translate these new plan designs into applications based upon the minimal incremental cost of providing the LTC riders and benefits. Here are four applications:

1. Buy-sell funding tool. Life insurance can be used to fund a buy-sell agreement between business partners.

In this type of buy-sell arrangement, adding a LTC rider (accelerated death benefit feature based on the LTC triggers) is an inexpensive way to get LTC benefits.

This type of agreement addresses two risks to the business.

First, it protects the owners in their working years against the risk of a chronic disability. Then at retirement, this permanent hybrid life policy can be rolled out to both reinsure retirement income and support a business succession plan or estate planning wealth transfers.

2. Bonus 162 plans are a standard part of well-established executive comp programs.

The addition of the LTC-accelerated DB rider provides the same living benefits as shown above. If the corporation owns the policy, use the brands that incorporate the indemnity style of claiming benefits. If the executive owns the policy, then the reimbursement style is an option in the design.

3. Vested executive comp programs with LTC benefits are a creative way to bind key management to a company and make the insurance do double duty.

The company protects key managers against premature death while also providing living benefits for chronic care risk management, all in one efficient policy. Since issuers of traditional LTCI policies have virtually eliminated the “10 pay” (the option to have a policy paid up in 10 years), the use of a life insurance vehicle with the accelerated DB-LTC rider can get to a shortened paid-up policy design.

A life insurance chassis can be designed with a 10-pay, 20-pay, paid-up-at-67 or other design to match the vesting schedule.

Executive ownership of the policy with a collateral assignment back to the company allows for the less expensive reimbursement claims style and avoids the third-party ownership issues.

Otherwise, use the indemnity style if the company owns the policy.

4. Helping divorce proceedings go smoother is not the typical role of an insurance professional, yet the leveraged benefit of hybrid asset-linked LTC can do just that.

For a 58-year-old female, a $100,000 single-deposit linked-asset LTC hybrid can generate more than $400,000 of LTC benefits in addition to being 100 percent liquid from day one with 100 percent premium cash surrender value.

The life insurance component is a minor part of this tool. The flexibility of this financial vehicle can help the divorcing couple solve the financial fears of one party and generate good will for both divorcing parties.

Life insurance is a flexible financial instrument, highly customizable, and a great tactical tool with leveraged benefits for pennies on the dollar. Become an expert in just these four applications and not only will your LTC business grow, but so will your reputation as a creative problem solver who listens to his or her clients.

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