A Linked Benefit Primer
MEETING CLIENT NEEDS WITH THE LATEST INSURANCE SOLUTIONS
THE LTC PLANNIDNG MARKET HAS CHANGE
Historically, the main private, insurance-based solution for Long-Term Care (LTC) planning has been traditional or “standalone” LTC Insurance (LTCI). While it has served the market well by putting hundreds of thousands of policies in force and creating pools of benefits for clients in the billions of dollars, recent economic changes have created some instability in the market.
That instability, in part, has led to the creation of newer generation private insurance solutions that go a long way toward satisfying two main concerns in the mind of some consumers:
- Rate instability with standalone LTCI (what if my premium goes up later?)
- Concerns over “what if I never use it?” (what if I never need LTC services?)
From a pure “benefit per premium dollar” standpoint, standalone LTCI still provides the most leverage in building a pool of benefits to pay for LTC services. For some consumers, however, the above concerns remain, and may present an impediment to taking positive steps to plan for an LTC or extended care event. The insurance industry has responded by designing policies which potentially mitigate BOTH of those aforementioned concerns, while still providing meaningful benefits for LTC planning for clients.
WHY THE BIG DEAL
In short, the problem is not going away! In fact, if anything, the demographic and care provider availability changes we are seeing in our society will make it more important than ever for clients to have well thought out extended care plans in place. Public funding of LTC needs continues to be challenged by strained budgets and increased usage by baby boomers, putting the ultimate onus on individuals to plan properly.
That means that many consumers will be faced with the need to rely on friends and family to provide care or, in the absence of that availability, on their own income and saved and invested assets to pay for formal care.
Many consumers have accumulated funds in “safe money” accounts such as bank accounts, money market accounts, CDs and the like, that they would likely liquidate in order to pay for care should the need arise. Or they plan to use their investments to meet this need – with the inherent risk of a market downturn at the time the funds are needed for care. That begs the question “is there a better way?”
ENTER THE AGE OF “LINKED BENEFITS”
The term “Linked Benefits” refers to a fairly specific type of policy, yet the term has also become commonly used interchangeably in the insurance and financial communities with several types of policies which contain some level of benefit for LTC or extended care services on top of a life insurance (or, in some states, annuity) benefit.
The various types of policies have also been referred to as “asset based,” “combo plans,” “hybrids” and other names. However, there is a difference, and they can become confusing to both advisors and consumers.
DISTRINCTION BETWEEN “LINKED BENEFITS” AND “ACCELERATED BENEFITS”
It is important to draw distinctions between the different types of policies available in the market today, so that clients can properly plan for these events.
- Linked Benefits – these policies are also referred to as “asset based” because they are often funded by a reallocation of funds (assets) from another source (e.g. “rainy day” or “safe money”), or perhaps from a “1035” (tax free) exchange of values coming over from an older life insurance policy which may no longer suit the client’s needs. These policies are comprised of a base life insurance death benefit and have a [typically] Long-Term Care rider attached to them. They are often funded by a single premium deposit, but more recent product designs may allow for systematic, annual premium payments over 3,5,7 or 10 years (or longer). In exchange for that, for example, single premium payment, a death benefit of some multiple of that premium is purchased, and an LTC benefit “pool” of an even higher multiple is also purchased. Thus, one is able to “leverage” an amount of money – which may otherwise have to be used to pay for care on a dollar for dollar basis – into a much larger pool of available funds to offset the cost of care.
- For purely example purposes, a 60 year old woman may make a $100,000 deposit and get a death benefit of ~$175,000 and an LTC benefit pool of ~$450,000, which may be structured to provide a monthly LTC benefit for up to 6 years.
- Many policies also offer a “Return of Premium” option, which allows the policyholder to surrender the contact and receive [typically] 80-100% of her premium back, depending on the age of the policy. Inflation protection may also be offered.
- Accelerated Benefits – these policies are also life insurance policies (most commonly universal life (UL), but may also be whole life or even term) that have a rider which allows the policyholder to “accelerate” (pay out early) the death benefit to pay for LTC expenses. Some policies allow 100% of the death benefit to be accelerated, while others calculate the amount available at the time of claim based on actuarial assumptions (see “Other Things to Consider” section below).
ANNUITY LINKED BENEFITS
Similar to its life insurance brethren, annuity based linked benefit policies provide leverage to a client interested in providing for their LTC needs, while not sacrificing their liquid assets in the process. However, unlike their life insurance brethren, the degree of leverage one is able to obtain with annuity based linked benefit policies is typically not as high. For example, most annuity based plans offer leverage on the order of (generally) 2-3 times the premium deposit, vs. the (generally) 4-5 times with life insurance based plans as described above. Also worth noting is that annuity based plans typically do not offer the ability to make multiple premiums, simply allowing for one premium deposit. Finally, it is important to note that, as of the time of this paper, some annuity based Linked Benefit products were only available in about 30-35 states.
One potential advantage of annuity based linked benefit plans is that, because of the relatively lower exposure to the insurance company for potential LTC needs, one may be able to more easily qualify for an annuity based linked benefit plan if a health situation that may compromise their ability to get a life insurance based plan exists.
OTHER THINGS TO CONSIDER
As one evaluates the different types of linked benefit, or accelerated benefit, plans available in the market, it is also important to consider the following characteristics (and this is not meant to be an exhaustive list):
- Reimbursement vs. Indemnity/Cash – this refers to the manner in which a particular policy pays out its LTC (or sometimes referred to as “Chronic Illness” – see below) benefits. Reimbursement benefits typically use the tax qualified definition – unable to perform at least 2 out of the 6 “ADLs” (Activities of Daily Living) or have a Cognitive Impairment – to trigger benefits, and actual costs of care are reimbursed up to the policy maximum. Indemnity/Cash benefits generally require the same tax qualified benefit trigger (2 of 6 ADLs or Cognitive Impairment, with one exception, see below), but a stated amount of benefit is generally paid out, regardless of actual care costs. Some indemnity riders may require formal care services for a short period of time – sometimes even just one formal care visit – before the remaining indemnity/cash benefits are paid out.
- Expectation of Permanence – usually found on indemnity or cash based “Chronic Illness” riders, some life insurance policies with acceleration riders may require, in addition to the normal tax qualified benefit triggers (2 of 6 ADLs or Cognitive Impairment), that the condition be certified be expected to be permanent in nature. Outside of NY, a number of carriers have removed this language from their riders, while some have retained it. In NY, at the time of writing this paper, which recently changed its regulation regarding these riders, only 1 carrier currently has the rider WITHOUT the expectation of permanence language. It is presumed that other carriers will follow suit in the near future.
- Full Death Benefit Available for Acceleration vs. Discounted Benefit – it is also important to note that some riders on life insurance policies that allow a policyholder to accelerate the death benefit for LTC (or Chronic Illness) require the payment of a separate rider premium, while others do not. The main distinction between these riders is:
- Premium paying rider – the entire death benefit is typically available for acceleration for LTC (or Chronic Illness) at time of claim.
- Rider without a premium charge – the entire death benefit is NOT available for acceleration. At the time the insured decides to accelerate the death benefit, an actuarial calculation is done, taking into account current interest rates, insured’s life expectancy, etc., and a “discount” is applied to the death benefit to determine the maximum amount available.
Note: it is important to remember that the life policies with the no premium charge riders are not “FREE” riders, as some have opined. The reality is that the policyholder is paying for the rider, either by the premium being paid or, if exercised, the discounting in the benefit calculation. Of course, if the client is averse to paying a rider premium, and never needs LTC/chronic care services and thus never exercises the rider, one could argue that, in that instance, the rider has been “free.”
The riders which do not require a premium may be attractive for clients who:
- Are purchasing the life insurance primarily for the life insurance death benefit and, perhaps secondarily, for the LTC or Chronic Illness benefit
- Wish to have SOME level of LTC or Chronic Illness protection in place, but may not want to pay extra premium to get it.
The LTC – and LTC Insurance – markets continue to see constant change. The one thing on which most everyone agrees, is that the one thing that is NOT changing, is the NEED to plan for an extended care event.
Some consumers may take a “head in the sand” approach to planning for the financing of LTC needs, mistakenly thinking that a public funding mechanism will be readily available if they ever need care. This is a dangerous assumption, and one that most experts agree may put the best thought out retirement and financial plans in peril.
We have seen a great deal of change in the private (insurance) LTC financing world in recent years. More than ever, it is important for consumers – and agents and financial advisors – to educate themselves on ALL of the potential tools to help protect against the consequences of an LTC event, and preserve consumers’ ability to make their own choices as it relates to their care – now and, more important, in the future.
Linked benefit – or accelerated benefit – policies can fill an important part of clients’ overall financial and retirement plans, by providing a safety net for LTC needs, as well as piece of mind if premium volatility and/or lack of benefits at death are an overriding concern for the client.
Working with a firm that understands the subtle nuances of the various product solutions available in the market today is vital. Advisors Insurance Brokers – AIB – is very well versed in all the products available today, and can provide strong support to agents and advisors, as well as their clients.
Call AIB today at 800.695.8224 for any further needed clarification, or for a client proposal(s).