LifeHealthPro senior editor Warren S. Hersch recently interviewed two executives with Lincoln Financial Group: Mike Hamilton, vice president of product development for Lincoln Financial’s MoneyGuard Solutions; and Steve Schoonveld, head of Linked Benefit Products.
The interview explored hybrid or linked benefit solutions — permanent life insurance policies with riders covering long-term care and chronic illness expenses — that are increasingly displacing stand-alone long-term care products. The following are excerpts.
Hersch: Describe for me the typical long-term care or chronic care scenario and how a hybrid solution might aid in meeting the resulting financial need.
Hamilton: We have a tool that helps show what can happen following a long-term care event. In a hypothetical scenario, a 65-year-old couple with a $1 million nest egg needs to draw down the retirement asset by $35,000 annually. Factoring in other assumptions — a 5 percent annual growth on the asset, a 3 percent rate of inflation, a long-term care event at age 81 and end-of-life LTC expenses averaging $100,000 annually over three years — the retirement savings declines significantly in value, placing the couple’s retirement and legacy planning goals in jeopardy.
Schoonveld: Research findings have shown that about 70 percent of people age 65 will need some type of long-term care — and it won’t come cheap. The Bipartisan Policy Center estimates that Americans have at least a 25 percent chance of incurring $25,000 or more in long-term expenses during their lifetime.
Hersch: Can you speak to differences in claims required to invoke a long-term care or chronic illness payout on a hybrid product?
Schoonveld: Hybrid long-term care products provide for recoverable conditions, such as a broken hip requiring three months of care. But with a chronic illness rider, the expectation is that the physical or mental condition is permanent.
Hersch: Is a linked benefit product with the chronic illness rider generally less expensive than a hybrid long-term care solution?
Schoonveld: Yes, for a couple of reasons. The CI rider calls for an acceleration of the life insurance policy’s death benefit — nothing more. The hybrid LTC product provides for an acceleration of the death benefit, plus additional funding to cover long-term care needs.
Hamilton: Someone interested in the chronic illness rider usually starts the conversation with the need for life insurance. The additional expense of adding a CI rider generally ranges between 7 and 10 percent of the life premium.
Schoonveld: The low cost of hybrid products relative to stand-alone long-term solutions accounts for much of their growing appeal. A LIMRA report shows five straight years of double-digit growth for hybrid products, whereas sales are plummeting in the LTCI only market.
Hersch: We’ve been talking so far about hybrid products riding on a permanent life insurance chassis. Are the LTC and chronic illness riders also available on term life insurance products?
Schoonveld: They are. I own a 20-year term life policy that comes with a chronic illness rider attached. I purchased the policy through my employer, but carriers apart from Lincoln offer hybrid term life products sold at the worksite.
Hamilton: Term life hybrid products in the individual market are not, however, widely available. One reason likely has to do with cost: The additional premium needed to fund a long-term care or chronic illness rider on a term policy would likely be greater than on a permanent life contract. With the rider attached, fewer term policies would lapse; an increase in the premium would therefore be needed to fund the anticipated increase in claims.
Hersch: Point noted. Nonetheless, many middle class households depend on term insurance to cover most of their income replacement needs. If a hybrid permanent insurance product provides for only a portion of the death benefit — say 10, 20 or 30 percent — can these households reasonably expect to fund long-term care or chronic illness costs?
Hamilton: Maybe not all costs, but a good portion of them. With a modest amount of permanent coverage, a hybrid solution can go a long way for middle class families, particularly if inflation protection is included.
Schoonveld: Also to consider is the flexibility of the product. With our MoneyGuard solution, policyholders have three options: use the money to cover long-term care expenses; secure a return of premium; or, on their passing, have the death benefit paid to the policy beneficiary.
Hersch: Turning to distribution, are the advisors who sell hybrid products also in the stand-alone LTC market and vise-versa? Or do producers tend to focus on one or the other of the two product lines?