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?
Schoonveld: The advisors who sell hybrid products tend not to be the same sales people who sell traditional stand-alone long-term products. Generally with hybrids, the advisor knows clients’ assets and can talk about protecting them within the context of a comprehensive financial plan. Advisors who market stand-alone LTC products often don’t do such planning.
Hersch: Are hybrid products also available for couples that, like certain stand-alone permanent life products, only pay a long-term care or chronic illness benefit for just one or another spouse?
Hamilton: Some policies have shared long-term care benefits, but we haven’t seen joint policies in the market. Typically, each spouse would buy a separate policy.
Schoonveld: Often among budget-conscious couples, long-term care coverage will be purchased only for a surviving spouse who won’t have anyone to rely upon financially. Usually this is the wife because she has a longer life expectancy.
Hersch: Do you also see situations where adult children purchase long-term care policies on parents in order to limit the financial burden the kids might otherwise incur if they have to cover long-term care costs out of pocket?
Schoonveld: Indeed we do. In these cases, the advisor may actually have four potential clients: the parents and their adult children. Advisors love that — being able to sell to four people at the same time. But the best time to do this is when parents are nearing retirement, not after, when policy premiums may be prohibitively expensive.
Hersch: You alluded earlier to other LTC carriers. How do you see Lincoln positioned relative to its competitors and the market for all the key players?
Schoonveld: We’ve been in this business for 26 years. And for the last 7 years, we’ve grown the business to the point where we’re starting to become a very strong player. All carriers in the hybrid market — Lincoln and other insurers, some that have been in this space for as long a period — are enjoying a maturing market that avails consumers of a broadening array of products, both linked-benefit and stand-alone long-term solutions.
Hersch: Given advances in technology that more efficiently enable direct carrier-to-consumer transactions, do you expect that hybrid products will remain chiefly advisor-sold products? Or might we see more products sold through direct sales channels?
Hamilton: Certain types of insurance are more amenable to a direct sale, such as simplified term insurance that doesn’t entail a lot of moving parts. But a significant part of the population still looks to financial professionals for advice on covering long-term care and other aspects of a financial plan.
Sometimes talking about long-term care is not easy for the advisor. One way to broach the subject is to ask prospects whether they’ve personally seen a friend or relative deal with the emotional and financial hardship resulting from a long-term care or chronic illness event. This and other topics addressed covered a conversation, such as the desire to preserve wealth and provide for a secure retirement, can ease the sale.
Hersch: Does Lincoln have certain expectations in respect to sales for its hybrid products in the years ahead?
Hamilton: The Lincoln MoneyGuard solution has been a very strong part of Lincoln’s success, in part because the offering appeals to a lot of advisors who have never sold a linked benefit product before. And we expect this to continue across all of our distribution channels: independent advisors who sell under the Lincoln name, life brokerage agencies, banks, wirehouses and financial planners. We have a very broad reach across distribution channels.
Schoonveld: But this isn’t just a Lincoln success story. Over the last five years, while sales have increased by double-digits on the hybrid side, the actual number of advisors who are talking about long-term care and chronic illness has probably quadrupled because all carriers marketing hybrid solutions are bringing new advisors into the new fold. As a result, there is now at least three to four times the number of advisors placing hybrid products as there are those writing stand-alone long-term care solutions.