Long-term Care Solutions with Hybrid Products

By Elaine Marvin

The best financial professionals freely accept that they have a responsibility to help people prepare for a secure financial future. They do so by taking a comprehensive approach to all aspects of a client’s finances, from retirement to estate preservation to life insurance. Too often, however, one element of significant future financial risk is left unaddressed in the process.

Long-term care is a reality that, according to the National Clearinghouse for Long-Term Care Information, at least 70 percent of people age 65 or older will require at some point in their lives. But in the financial review process, it’s often given too low a priority. Long-term care funding often becomes an afterthought, and that can result in clients or their beneficiaries helplessly watching as even the most complete retirement strategy drains to nothing in just a few years’ time.

This article examines the current state of the long-term care coverage market, highlighting the real challenges that producers face, focusing on one option that is quickly emerging as a viable, attainable, and sellable series of products for a wide range of clients — asset-based long-term care products that use life insurance or annuities.

The first long-term care policies appeared more than 30 years ago. These were mainly facilities-only policies and offered limited coverage. Over the years, policies grew to include other types of care. In fact, according to an article published by the Society of Actuaries, by 2006 home health care was representing between 30 percent and 70 percent of claims for some companies.

Despite the availability of these products and the expanding options, there are common barriers standing in the way of sales. These barriers are caused by natural human behaviors and concerns. For potential customers, they include the “it won’t happen to me” defense, the assumption that care will be provided by family or the belief that long-term care coverage is unaffordable.

And in the producer world, sometimes other concerns or perceptions can kick in that help keep long-term care products from becoming a sales priority. Some see it as too difficult to sell because of the expense hurdles they would have to clear with the consumer. Nobody wants to think about long-term care, including the producer.

These common hesitations regarding long-term care coverage also stem from the fact that it’s easy to perceive traditional health insurance-based long-term care policies as a type of rental coverage. But another option exists, called asset-based long-term care, that allows permanent ownership of benefits throughout the lifetime of the policy holder. These products are commonly referred to as “combo” or “hybrid” products.

Now is the time for financial professionals to take a fresh look at the long-term care market and understand how current events, economic factors, and changes in the law make preparing for potential long-term care needs even more important AND achievable.

First are demographics and the aging of America. As more baby boomers hit retirement age, the need for long-term care will escalate. Also, increasing life expectancies and medical achievements are factors, meaning long-term care may be needed for longer periods of time. Finally, the reality that health care cost trends are far outpacing inflation hint at a dire future for the funding of long-term care.

Some companies that offer “pay as you go,” or health-based long-term care coverage, have been forced to seek premium increases, and others have announced that they will leave the business altogether. These are products where you pay a premium year after year, hoping you’ll never need the coverage. While these products struggle with pricing and sustainability issues on top of prohibitive costs, asset-based long-term care products are gaining traction.

For years, consumers have relied on life insurance to provide protection for their families. Similarly, deferred annuities have been a strategy for retirement. Now, the insurance industry is using these product structures to provide protection for long-term care costs.

Consumers are reacting favorably, as evidenced by record sales over the past two years. The primary attraction is that both life insurance and annuity products can be used for long-term care and the full death benefit or cash value is still available should care never be needed. Nothing is lost if care is not needed. And with recent tax law changes, withdrawals used for qualifying long-term care expenses can be income-tax free.

Using life insurance policies offers triple tax advantages. In addition to tax-deferred cash value accumulation and tax-free death benefit, because of the federal HIPAA law, the full death benefit can be accessed tax-free to pay for qualifying long-term care expenses.

The typical life insurance-based approach to long-term care funding uses the structure of whole or universal life insurance. These policies are sold on a recurring (10- pay or annual premiums) or single-premium basis and are typically geared toward clients between ages 55 and 80. These consumers often have an amount of money set aside for possible long-term care expenses or have other assets not needed for retirement income. These monies might be set aside in a CD, mutual fund, IRA, or 403(b). These potential customers are often dissuaded from purchasing health insurance-based long-term care coverage because of the “use-it-or-lose-it” dilemma. They might be more attracted to a solution where they can move the CD, mutual fund, IRA, or 403(b) into an asset-based product.

There are various options you can find in both health-based and asset-based long-term care. These include the ability to buy lifetime benefits and inflation protection. Another aspect that’s not very common, but can be found, are non-cancellable features that mean your premiums are guaranteed not to increase.

Life insurance-based long-term care protection may not be for everyone, but for consumers who are interested in a guaranteed-premium approach that provides benefits if care is ever needed, or passes an amount to their heirs if long-term care isn’t needed, it should be considered.

An emerging set of asset-based combo products are annuity-linked long-term care solutions. Known as growth vehicles, annuities have a unique niche in the long-term care marketplace due to another more recent federal law, the Pension Protection Act of 2006 (PPA). This legislation was significant because, as of January 1, 2010, it allows for specific annuities with long-term care benefits to be distributed on a tax-free basis if the withdrawals are used for qualifying long-term care benefits or insurance.

As with all other annuities, they grow tax-deferred. But with a PPA-compliant annuity, if the growth is used for long-term care, it’s not subject to federal income tax. As with life-based products, these specific annuities with long-term care benefits can offer coverage beyond the annuity’s cash value, including the option of lifetime protection.

Currently, annuities with long-term care benefits are available from select few companies, but are growing in popularity partly because they provide an option that doesn’t minimize the client’s monthly income. It merely means a repositioning of existing assets. In addition, these products may be available for clients beyond age 80 and, because of their structure, they may not be underwritten as stringently as health-based or life-based long-term care products.

As life progresses, there are three possible scenarios for clients: they’ll need their cash values for income, they’ll need benefits for long-term care or, for the fortunate few, they won’t need long-term care and these long-term care benefits will go to their beneficiaries. With asset-based long-term care products, clients can maintain all three options. They can be a true win-win-win solution. Financial professionals should examine the pros and cons of each option for long-term care protection for their clients in order to offer them protection that will work in their best interest.

Elaine Marvin, CFP® is a regional vice president for The State Life Insurance Company, a OneAmerica company. She is based in the Tampa, Fla. area, and has focused on asset-based long-term care solutions for 20 years.