As many in our society near retirement age, a major worry is whether their income will last through retirement and if their desired outcomes will be in jeopardy due to a long-term care event. Is that likely?
Recent stats indicate that 70%1 of retirement age couples will have an LTC event. That’s a majority of retirees facing the possibility that they’ll need to access their retirement savings to pay for the associated costs.
What can be hard to understand though is the apparent disconnect between these concerns of the pre- and post-retirement segment of the market and their actual purchasing habits.
But if we think about it — it does make sense.
The Current State of Long-Term Care
Many families approaching retirement have looked into purchasing traditional stand-alone long-term care policies. And what they’ve found are expensive products with a history of substantial rate increases with the specter of zero return on money spent if an LTC event doesn’t occur.
This instability and history of increasing premium costs and the “use it or lose it” nature of the standalone LTC products can leave many without any type of coverage at all and being forced to dip into other retirement savings.
Ignoring the potential impact of healthcare expenses in retirement can be extremely detrimental.
Especially in light of a recent article published on plansponsor.com, which stated that “a 65-year old couple retiring in 2019 can expect to spend $285,000 in health care and medical expenses throughout retirement, compared with $280,000 in 2018, according to Fidelity’s annual Retiree Care Cost Estimate.”
With fewer and fewer carriers offering stand-alone LTC insurance, a recent Forbes article reports that “Americans bought only about 60,000 stand-alone long-term care (LTC) insurance policies in 2018, down 13 percent from 2017.” This downward trend over the last few years has created an opening in the marketplace for a more versatile alternative.
So, what are some of the other options your clients have?
Hybrid Long-Term Care Products
At Partners Advantage- A Gallagher Company, we work with carriers who offer primarily asset-based solutions. This means the long-term care features or living benefits are tied to another asset, such as an annuity or life insurance policy. These products provide solid asset growth on a tax deferred basis. They can also help retirees leave a legacy to family or a charity. Plus, they provide dial-able solutions to the long- term care issue. Meaning, the owner has the ability to choose products with higher levels of long-term care type benefits OR stronger annuity and life insurance benefits depending on their particular need.
The hybrid products built on a life insurance chassis have the unique ability to provide tax deferred growth, legacy enhancing death benefits, and a full range of long-term care benefits.
The benefits generally fall into two categories.
(1) Life insurance with chronic and/or critical illness riders. These are designed to meet most client needs. They are characterized by the following:
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- May or may not require a permanent condition.
- Require no fee until exercised.
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The death benefit acceleration is usually discounted based on age and severity of the condition; however, some cutting-edge products specify the benefit in the illustration.
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Are indemnity based so receipts are not required after certification.
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Cannot be marketed as Long Term Care and are governed by IRC Sec. 101(g).
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(2) True LTC benefits qualified under IRC Sec. 7702(b) but in conjunction with the purchase of a life insurance policy. These solutions typically provide a broader array of benefits than chronic or critical illness riders. LTC benefits can take the form of an LTC rider on a traditional life policy or could be part of a true linked benefit product. They have the following characteristics:
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They qualify as LTC and the agent needs the proper LTC certification.
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They can be indemnity or reimbursement based.
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There is a charge during the life of the policy even if the LTC is not used.
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There is not reduction in benefits based on age and the amount of benefits is specifically stated.
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The qualifying condition need not be permanent.
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Finding a Suitable Solution
While there are many carriers participating in this space, each with its own take on what’s best for the consumer, let’s look at what insurance professionals can be doing to provide favorable solutions.
First, what is the client’s goal in purchasing life insurance? Is it legacy planning, death benefit, and cash value buildup?
If so, then a traditional life policy with a modest chronic illness rider may suffice.
However, if LTC protection is paramount — then a true linked benefit product offering a modest death benefit could be more suitable than an accumulation-focused life insurance policy, for example.
The second consideration is whether the policy is reimbursement or indemnity based. True LTC is usually reimbursement based. On the other hand, most life insurance policies with a chronic and/or critical illness rider are indemnity plans. A few LTC plans are indemnity based as well.
Reimbursement plans usually offer a little higher benefit for the money, but the client is only reimbursed for receipts presented to the insurance company by the licensed care giving professional.
An indemnity plan does not require receipts, but the client must prove the claim before benefits are paid. Indemnity plans are more flexible regarding informal care givers, meaning the insured may not need to be in a qualified nursing care facility but could be receiving home care.
In Closing...
Asset-based solutions can help mitigate the LTC crisis facing many retirees. The products are a different approach from a stand-alone LTC product and come with substantial benefits. Depending on the product, they can provide a strong solution for the unexpected costs of long-term care events. In addition, these products provide all the benefits associated with Annuities and Life Insurance. Benefits like family protection, guaranteed lifetime income, index strategy growth potential, and tax deferral.
This is an ever-changing and complex landscape. Look to Partners Advantage to help you find an appropriate solution for your clients.
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