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May 17, 2022 • Ramona Neal

Life Insurance with LTC benefits -how to decipher the key differences

 

Urban magnetism Row of yachts docked in Burnham Harbor by Soldier Field, home of the Chicago Bears professional football team, along the lakefront on a sunny spring morning in Chicago

LTCI Partners Note:  Below is a article written by Ramona Neal, CLU, ChFC, CLTC of Living Benefit Review. We highly recommend Ramona's service for comparisons of the various types of Life Insurance with living benefit riders.  Learn more at www.livingbenefitreview.com.

Adapting:

The more life insurance changes, the more it changes.  Life insurance has transformed into a kind of Swiss army knife with functions designed to harness the power of living benefits for long-term care.  That's right, you don't have to die to access a policy's death benefit.  Gone are the days when the darling of life insurance was LIRP (life insurance retirement plan). Today, even LIRP sales applications have had to acquiesce and bow down to make room for rider solutions to cover long-term care expenses. In these scenarios, Chronic Illness riders are typically subordinate to having no up-front charges for the priority focus to remain on accumulation and distribution.(i.e., the tradeoff of no up-front charges to maintain the integrity of the accumulation emphasis - results in the likelihood of only a fraction of the death benefit being eligible to accelerate for chronic illness needs).

Extension of Benefits.  What's in a Name you ask?  Everything.

Let's start by identifying which insurers offer LTC Extension of Benefit solutions on a life insurance chassis: Lincoln (MoneyGuard), OneAmerica (Asset Care), Nationwide (CareMatters), Brighthouse (SmartCare), MassMutual (CareChoice), Securian SecureCare), Thrivent (CareForward), New York Life (Asset Flex), and RiverSource (TrioSource).

Now, if you ask an insurance professional what category they use to describe these products you will hear: Hybrid, Linked Benefit, Asset Based, or Combination products.  Although I concede that these are not wrong, they are lacking.  The problem is sometimes they are used interchangeably to describe LTC and Chronic Illness riders on life insurance, and quite frankly, that's an insult to LTC Extension of Benefit Products.

The point is Extension of Benefit products offer more robust LTC benefits.  Specifically, they allow one to (1) accelerate the entire guaranteed death benefit amount; (2) plus accelerate a second pool of guaranteed monies after the death benefit has been exhausted (hence "extension of benefits"); (3) they have premiums which are guaranteed (no in-force rate actions to increase charges for existing policy holders); (4) they have monthly LTC benefit amounts which are guaranteed; and (5) most offer guaranteed return of premiums or cash values - up to 100% of the premiums paid. As a result, they are sometimes sold as repositioning lazy assets (savings account or CD) where your investment guarantees a return of premium should you surrender the policy and if you don't surrender - then if affords a leveraged death benefit or leveraged LTC benefit.

If a picture is worth a thousand words, then let me paint this to illustrate the superiority of LTC Extension of Benefit products.  Although each vessel will get you to the other side, the benefits/experience are entirely different.

Solution Vessel
Chronic Illness Rider with No Up-front Charges Canoe
Chronic Illness Rider with Up-front Charges Boat
Long-Term Care Acceleration Rider Motorboat
LTC Extension of Benefit Products Yacht

 

If you are selling a:

Canoe:  Chronic Illness Rider, No up-front charges, 101(g), then you are selling Life Insurance. Regulations prohibit you from describing or marketing the Chronic Illness benefit as long-term care.  Only a fraction of the death benefit may be eligible to be accelerated to help cover chronic illness expenses, and often there is no remaining death benefits. Amounts eligible for acceleration can vary significantly[1] and could be $0.00.

Boat: Chronic Illness Rider, Yes, up-front charges, 101(g), then you are selling Life Insurance. Regulations prohibit you from describing or marketing the Chronic Illness benefit as long-term care. The entire death benefit is eligible to be accelerated to cover chronic illness expenses or to be paid out as a remainder death benefit to beneficiaries.

Motorboat: Long-Term Care Rider, 7702B [2], then you are selling Life Insurance. These rides are qualified long-term care with built in consumer protections. They are permitted to be described and marketed as long-term care.  The entire death benefit is eligible to be accelerated to cover long-term care expenses or to be paid out as a remainder death benefit to beneficiaries.

Yacht: Extension of Benefits, 7702B, then you are selling both Long-Term Care Insurance and Life Insurance. The LTC component is qualified long-term care with built in consumer protections.  This product can be described and marketed as long-term care. The entire death benefit (base benefit) is eligible to be accelerated to cover long-term care expenses. In addition, a second pool of money (LTC Extension of Benefits) is also eligible to be accelerated to cover long-term care expenses. The Extension of Benefit pool will pay monthly benefits for the duration selected such as an additional period of 2 years, 4 years, or 6 years (and in the case of one company payable for life). Inflation options can be elected which is vital to planning. If the base benefit is not used for long-term care, then it will be paid out as a death benefit to beneficiaries.

Trends

Within the context of a once in a 100-year pandemic combined with the rising cost of health care, a consumer demand for long-term care solutions will only continue to grow.  Then when we add that 12+ states are considering state mandated long-term care, it increases the likelihood that new insurance company entrants will capitalize by offering solutions which meet states' criteria. (In the case of Washington, Extension of Benefit products, LTC riders and Traditional Long-Term Care insurance met the eligibility criteria to exempt residents from the payroll tax.  But Chronic Illness riders did not). BTW: if you don't already have your Health license and CE to sell qualified long-term care insurance, then what are you waiting for?

Unfortunately for insurers, they continue to be plagued by historically low interest rates which impacts both the pricing and guarantees they offer.  In the 4Q2021 alone, four insurers implemented up to double digit rate increases on their Extension of Benefit products.  A rising interest rate environment may change things in the future.

Shift towards Long-Term Care Benefit Growth Opportunities that are Not Guaranteed

Today insurers who offer LTC Extension of Benefit products have come up with creative solutions to grow long-term care benefit pools subject to non-guaranteed elements.  For example:

1. Some companies allow non-guaranteed dividends on whole life to increase the death and LTC benefit.

2. Some allow the non-guaranteed growth of Indexed Universal Life to increase the LTC benefit

3. Some allow the non-guaranteed growth of Variable Universal Life to increase the LTC benefit and

4. Some offer inflation options that track a non-guaranteed index, where the greater the performance of the index or a roll-up rate will increase the LTC benefit.

The monthly LTC benefit amounts can be increased or the number of months for which the stated LTC benefit is paid out can be prolonged subject to non-guaranteed assumptions.  Maybe one day we will even see wellness initiatives being utilized to increase either the benefit amount or duration.

Predictions

Based on state filings of LTC Extension of Benefit products, we can predict:

  • More insurers will enter this market
  • Lower Return of Premiums in return for Higher Monthly LTC benefit amounts
  • Extended pay premium options such as 15-year, 20-year, and premiums payable for life
  • Waiver of Premiums for Extended pays

Summary

For LTC Extension of Benefit products, when we consider the likelihood of continued rate increases for new business on the horizon, along with a trend toward declining return of premiums, and the erosion of guaranteed elements, perhaps we should run and not walk to sell todays products.

With regard to Chronic Illness rider variations and LTC acceleration riders, life insurance will always be life insurance first with a suitable need for life insurance to justify the sale.

Insurance companies have done a fine job adapting their offering with the precision of a Swiss army knife to meet consumer needs.  The question is, "Have you?  do you know which solutions are the best fit to meet your clients' needs based on their priorities?  Do you know which type of riders you are selling?"

The genetic market distinguishing LTC Extension of Benefit products from LTC riders and Chronic Illness riders is their ability to extend long-term care benefits beyond the death benefit.  So, what's in a name?  Everything.  Because if we don't know what we are selling, than how can our clients know what they are buying?"

 

[1] The onus is on you (the advisor) to know which type of Chronic Illness rider you are selling.  What does the illustration say?  What does the rider guide or rider F.A.Q say?  

[2] Most LTC riders are filed in this manner, however there are a few companies that file LTC riders under IRS code 101(g) paired with the NAIC LTC Model Regulations. These products may be referred to as long-term care and have the same consumer protection requirements as do LTC Riders filed under IRS Code 7702B

 

This article is intended for Financial Professional Use Only.  Living Benefit Review, LLC makes no warranties or representations as to its accuracy.  This article should not be construed as rendering tax, insurance, investment, or legal advice.  You acknowledge that any reliance on this material or any opinion, statement or information shall be at your sole risk. If you take any action based on the information in this article, you take full responsibility for the results of that action.  You should independently verify its content. Nothing in this article constitutes an offer to sell of buy any insurance product or rider. Products and riders, including benefits, exclusions, limitations, terms and definitions vary by insurance company and vary by state.



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Ramona Neal

Written by Ramona Neal

Ramona Neal has 30 years of experience in the life insurance industry with roles in field sales, competitive intelligence, advanced sales and policy administration. She has an extensive history helping advisors and wholesalers position insurance products. Today, Ramona is President of Living Benefit Review, LLC. This company provides independent, impartial, competitive intelligence services for life insurance with LTC solutions: Hybrid products, Chronic Illness, Critical Illness and LTC Riders. Prior to the insurance industry, Ramona served as an Information Manager in the Ohio Air National Guard where she was awarded the Air Force Achievement Medal. She has her Bachelor of Arts degree from The Ohio State University in Psychology and Communication. She holds the following insurance designations: CLU, ChFC, CLTC, REBC
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