I know, I know – hybrids are all the rage. No matter where you look, what you read or what webinar you attend, someone is telling you that traditional long-term care insurance (LTCI) is dead and hybrids will save the world.
Maybe I’ve just never been one to go with the flow, but I think we all just need to take a step back and examine these products more closely. We need to ask the question “Is the hybrid sale good for the client sitting in front of me?”
I can remember when these products first hit the marketplace. They weren’t very competitive. The long-term care (LTC) benefits in a traditional LTCI policy far outweighed the LTC benefits in a hybrid, most clients didn’t have the amount of money it took to fund a hybrid correctly, and most of the hybrids were sold without any kind of cost-of-living rider.
What’s changed? In 2014, some have objections to selling traditional LTCI. Some of the criticisms of traditional LTCI are: It’s too expensive, the underwriting is too stringent and there have been too many rate increases. You can read many articles about why hybrids are better than LTCI.
I would postulate that each product has its place. Purchasing a hybrid allows customers to “check the box” and think they’ve done their long-term care planning. Unfortunately, some hybrids are sold incorrectly, and potentially at great harm to the client.
Here are some concerns I have about use of life-LTCI hybrids in some planning situations.
1. The LTC benefit is not flexible.
Since the size of the LTC benefit is determined by the size of the death benefit, it may or may not provide enough coverage. In some instances it’s way too much and in others it’s way too little. Some producers rationalize this by saying, “This is a high-net-worth client who would be willing to self-insure anyway. He/She understands this might not be enough coverage and is willing to pay the difference.” While this product allows the customers to “check the box” and think they’ve done their long term care planning, the benefit they are purchasing might not be appropriate.
2. Some hybrids are sold without a cost of living increase (COLA) rider.
This is because, when a COLA rider is added to the policy, the LTC benefits may not look nearly as good. Once again, the rationale is, “It doesn’t matter. This is a high-net-worth individual who is willing to self-insure anyway.” I would argue that many clients don’t really understand the implication of purchasing an LTC benefit of $2,500 with no COLA rider at age 55. We have to ask: What will happen at claim time? Do you think the client will be satisfied? Do you think the bulk of their LTC costs will be covered?
3. Some clients don’t need the life insurance.
If a client needs a significant amount of life insurance, then LTC claims could reduce the amount of benefits available to the beneficiary. If clients don’t need any life insurance at all, why are you selling them life insurance?
This type of sale can be a helpful response to the objection of “What if I never use it?” The producer can say “Well Mr. Client – even if you don’t need the long-term care, there will still be a death benefit – so someone will receive a benefit” and the client is pacified. After all, that sounds like one heck of a deal, right? I would argue that dumping $100,000 into a policy that only gives you $208,000 in life insurance OR six years of LTC coverage is a bad investment. The client should be asking “What if I never use it?” for this sale!!
Here’s a typical scenario.
We have a 60-year-old-male, who puts $100,000 into a nationally recognized hybrid. He gets:
- $207,891 life insurance OR
- $5,476 month in LTC benefits for six years, with a 3 percent compound COLA rider.
We’ll ignore the life insurance part, because, in my opinion, no one who really needs life insurance should be buying a hybrid. But, if this man is getting $5,476 a month in LTCI benefits: What would the premium be for the same coverage from an LTCI policy? $3,798 annually.
So the question becomes: If LTCI coverage only costs $3,798 annually, why would anyone willingly tie up $100,000 instead? Wouldn’t it be better to take whatever interest the $100,000 earns, pay the LTCI premium, and keep control of the $100,000?
4. At claim time, the first claims will be paid out of the client’s $100,000.
The next money to be used is the client’s interest. Only when all of the client’s money is exhausted will the carrier actually tap into their funds. No wonder the carriers are all jumping into the fray. What a deal for them.
5. Hybrid premiums are not tax deductible.
6. The benefits do not qualify the client for Partnership protection.
7. Lastly, many producers don’t know the difference between a hybrid, a chronic illness rider or a viatical settlement and are unintentionally misrepresenting the products. Not understanding the differences can have disastrous tax consequences for the client. Unfortunately, the results won’t be known for many years. For the client, it will be too late.
LTCI is not the answer for everyone. Neither are hybrids. With 79 million baby boomers as potential clients, there is room and need for all sorts of products. However, it is critical that we understand exactly what we are selling to our clients and what the end result will be.
Please remember: By the time clients go on claim, it will be because they are nearing the end of their lives. These policies will determine how that time will go. Will the clients be well cared for? Will their families be protected? Will they be able to die with dignity? These are the reasons people buy long-term care insurance. It is our obligation as insurance professionals to ensure we are meeting their needs.