This article was originally written by Marc Glickman, FSA, CLTC for Broker World magazine as part of the Ask the Actuary section
Dear Actuary,
What types of long-term care insurance products are you finding to be most popular amongst LTC specialist agents today?
- Inquisitive in Iowa
Dear Inquisitive,
"Come with me and you’ll be in a world of pure imagination…” Willy Wonka
I have worked closely over the last several years with agents whose primary business is long term care insurance. Many of them are very successful at offering traditional long-term care. Often these LTCi specialists have expanded their offerings to solve a wider range of client needs using a suite of different insurance tools.
I attended an LTCi conference last year featuring the latest product designs from a variety of insurance companies. A walk through the aisles was much like a walk-through Willy Wonka’s Chocolate Factory. It turns out there is more to a chocolate bar than just sugar and chocolate: likewise, there is more to LTCi policy designs than just a limited, cookie-cutter approach. Clients have options. Multitudes of them.
The actuaries in the insurance company home offices have continued to cook up new recipes while still updating the classics. Broadly speaking, the three main ingredients that go into plan designs are health underwriting, pricing, and benefits.
The top insurance products can typically excel at offering two of these three ingredients:
- Good pricing and benefits, but tighter underwriting.
- Easier underwriting and good pricing, but plans with limited benefits.
- Easier underwriting with richer benefits, but premiums at a higher price point.
LTC specialists often start the conversation with a detailed health assessment after understanding why the client is interested in LTC planning. This allows them to focus on the best options for the client based on their health. The primary objective is to maximize insurance leverage or protection, which is the maximum LTC benefits at point-of-claim for the premium dollar. This allows the client to spend the least, but receive the most insurance benefits. For clients with significant health issues, LTC specialists are continuing to think out-of-the-box and offer alternative solutions.
Once health is assessed, LTC specialists evaluate the clients’ financial situation. What assets are they looking to protect? How are the clients funding the plan? And last, but not least, what are they comfortable spending in the first place? This consultative approach will not only engage the clients in the buying process and answer their questions, but will often clearly point to the flavor of product that will suit them best. Along the way, funding strategies can emerge to provide additional tax savings or benefits. This adds the cherry to the top of the plan.
In Part 1, I discuss an overview of the major types of LTCi solutions on the market today in order from the most insurance leverage to the least. In Part 2, I discuss planning strategies and tax-advantaged funding sources. It is best to plan early to keep all of the options on the table, but even for someone already needing services, it is never too late to put an LTC plan together.
PART 1 LTCI PRODUCT FLAVORS
“We’ll begin, with a spin…”
Traditional, or Stand-Alone LTCi This is the original option.
These policies are treated like health insurance by regulators and the IRS. The strength of these products lies in their affordability, insurance leverage, funding flexibility, and tax advantages. Like term life insurance, auto, or home-owners insurance, they provide the maximum coverage if you need the benefits, while hoping never to have to activate the policy. The number of insurance companies offering new traditional LTCi products has consolidated to a few core carriers. Yet, there are still a wide range of offerings and plan designs. Older LTCi policies that were underpriced have required rate increases. Newer policies are more conservatively priced, yet still offer an outstanding value proposition from the best products. LTCi has a higher likelihood of price stability moving forward largely due to more careful health underwriting and plan designs.
Hybrid Life Insurance with Extension of LTCi Benefits
These life products are designed to minimize the cost of the life insurance component and maximize the LTCi benefits. Many of the popular plans offer LTC protection beyond the life insurance death benefit and also compound inflation increases on the benefits. The premiums are often guaranteed and the life insurance death benefit is paid even if LTC is not needed. More products have emerged with funding flexibility and creative benefit designs. There are also products that pay cash indemnity benefits and more robust international coverage. Like traditional LTCi, hybrid plans are often more careful with health underwriting. Most LTC specialists offer both traditional LTCi and hybrid life extension products for their healthier clients.
In this marketplace, about half of clients choose traditional and half choose hybrids.
Life Insurance with LTCi or Chronic Illness Benefits
These products focus mostly on the life insurance component, but offer flexibility to provide LTCi benefits up to the death benefit. The point-of-claim LTCi benefits tend to be more limited and the benefits generally do not increase with inflation. However, this allows the companies to provide richer life insurance features and in some cases the life insurance underwriting can be more favorable for the customer. While there are more policies sold in this category than the traditional or hybrids combined, most insurance plans are based on the life insurance features of the policy, and not necessarily because the primary need is the LTC benefits.
Annuities with LTCi Benefits
These products use the annuity account value to offer tax-free LTC benefits. Several products provide a multiplier on the account value when the client qualifies for the LTC benefits. These annuities may be liberally underwritten and may also be designed to maximize a guaranteed income stream in the future. These products are typically funded as a large single premium, so LTC specialists often use them with clients that have accumulated significant assets and who might have significant health issues.
Short Term Care (STC) Insurance
STC is a health insurance product where insurance companies have been offering shorter term care funding solutions. These products can provide up to one year of coverage often without an elimination period deductible for either facility care, home care, or both. The products have been approved by regulators in over 40 states, but are not approved at this time in CA, NY, CT, FL, MA, MN, NH, and VT. STC offers features, premium structures, and future rate stability that can vary by product or by state.
The popularity of STC amongst LTC specialists has been as an alternative to long-term care for individuals that have significant health issues, but are looking for more affordable premiums. Even limited benefits can help a family during a stressful time and allow them more flexibility to address the longer-term needs. They offer a reasonable pay-as-you-go price point, but as a product with less actuarial experience, may be subject to future rate increases depending on future claims data.
Medicaid Planning Products
Often families find themselves in situations where a parent or spouse is incurring significant out of pocket nursing home costs. The care provided might qualify under Medicaid services, but the individual is ineligible unless spending down most of the estate. LTC specialists can partner with a Medicaid planning attorney with programs designed to spend down the remaining assets in the estate with strategies such as using Medicaid compliant annuities.
PART 2 LTCI PLANNING STRATEGY TOPPINGS
“If you want to view paradise, simply look around and view it…”
With all of the different insurance product options, the age of imaginative product designs has commenced. There are high-end products aimed at affluent buyers and also affordable products with LTC Partnership protection for the middle market. There are tax deductible LTCi strategies for business owners and executives, and LTCi worksite programs that can be funded with health savings account (HSA) dollars.
There are strategies that can be funded from qualified IRA accounts or as a tax-free 1035 exchange of existing non-qualified life insurance or annuity products.
You can mix and match funding strategies and combine multiple products together.
With all of these additional planning ideas, many LTC specialists are beginning to feel like a kid in a candy store. Those agents that are not LTCi experts can be left, well, in a bit of a sugar coma. Never fear, this article will help you identify a planning solution to fit your client.
Lifetime Benefits and Shared Care
Innovation in LTCi product design has brought about the availability of lifetime benefits and shared care. Lifetime benefits provide an unlimited duration of coverage. Shared care can allow couples to also extend their own benefits at an affordable cost by sharing benefit pools or creating an additional pool of benefits.
LTC Partnership Program
Traditional LTCi can often be designed as LTC Partnership qualified in most states, which means that an LTCi product can protect the family in Medicaid spend-down situations. Traditional LTC insurance can pay the initial benefits for care when it is needed. In an extended long-term care scenario, the insured may still qualify for Medicaid services while still keeping assets equal to the amount that the insurance policy paid.
The decision to use this benefit will likely depend on the types of services that each state’s Medicaid program offers in the future. Nonetheless this feature provides more financial flexibility, and in most states does not cost extra, besides selecting a policy with a minimum level of inflation protection. The four original LTC Partnership states of CA, NY, CT, and IN have unique programs and all have proposed redesigns to make them more accessible to the masses.
“What we’ll see will defy explanation…”
Tax Deductions for Business Owners and Executives
Traditional LTCi and certain hybrids allow most business owners and their spouses to deduct LTCi premiums from business income as a business expense. The amount of the deduction may vary based on the tax structure of the business, the LTC portion of the premium in the case of hybrids, and the age of the insureds. The LTC benefits received from the policy are generally tax-free, so there is little downside to funding the premium with the business checkbook. Plans can be carved out for the business owners exclusively or for any group of employees based on criteria that the owner chooses. This allows for tax-deductible executive benefit programs and encourages employer funding of LTC plans in the worksite.
LTCi Worksite Marketplace
Rising like the Phoenix from the ashes is a sudden proliferation of LTCi solutions in the worksite. There are both traditional LTCi and hybrid solutions that are now available. There are fully underwritten unisex-priced plans with robust benefits or quasi-simplified issue plans for larger groups. Voluntary plans are often enrolled by LTC specialist firms or agents using one or several different products. However, tax deductible employer funding, even in small amounts, can encourage high participation rates. You may use a 401(k)-like approach where you define an LTCi contribution amount, and have the employer offer a matching contribution. You are limited only by your imagination.
Funding LTCi from Health Savings Accounts (HSAs)
With the Affordable Care Act and increased popularity of high deductible health plans, there is suddenly more money accumulating in HSAs. In 2008, there was approximately $5 billion in HSAs. In 2019, this is expected to top $60 billion. HSAs can be used pre-tax to pay LTCi premiums or the LTCi portion of certain hybrid product premiums, up to the annual age-based IRS limit. Either spouse’s HSA may be used to fund both spouses’ LTCi plans.
1035 Exchanges
The Pension Protection Act allowed another significantly tax-advantaged sales opportunity for both traditional LTCi and hybrid policies. For individuals who own a non-qualified annuity, they can take both the principal and tax-deferred gains and move the money over through a 1035 taxfree exchange to pay the premiums for traditional LTCI or an annuity with an LTC rider. Non-qualified life insurance can also be exchanged tax-free into traditional LTCi or Life with an LTC rider. LTC benefits can still be received tax-free.
THE BOTTOM LINE
"Wanna change the world? There’s nothing to it…"
There are many different LTCi planning solutions available to serve the over 100 million individuals in the U.S. who are planning for or have reached retirement. Additionally, many of those in the sandwich generation are currently dealing with the burden of paying for long-term health care costs for one of their relatives. The majority of them do not realize that looming long-term care costs can be solved with an array of insurance solutions already available in the market.
Going forward, I expect to see continued innovation addressing many of these market segments with carriers gravitating toward the most popular solutions. The government has also been receptive over the past few years in supporting private alternatives and increasing existing tax incentives since the majority of the long-term care burden eventually falls on state and federal budgets through Medicaid. Luckily, this looming crisis can still be prevented from becoming a catastrophe. The cost of insuring against this future risk is accessible to many Americans, especially if they plan in advance, while they are still healthy enough to qualify for all of their options.
