The LTCI Cost Problem and "Blended" Solutions
What separates outstanding financial advisors from the pack? In my experience, top advisors have an ability to keep their clients a step ahead of major changes in financial services. They are nimble in their thinking and planning. When strategies or solutions start to lose advantages, these advisors can move to alternatives.
I believe the best advisors are now making such a shift in long-term care insurance (LTCI). In this article, I'll explain why and identify an attractive alternative they are offering senior clients.
Today's LTCI market has fallen under a cloud that won't soon lift. To understand it, look no farther than a feature article in the April issue of what may be the most powerful publication among seniors, the AARP Journal. The article focused on large premium increases that have jolted the LTCI market. Quoting the Kansas Commissioner of Insurance, the article observed that "only three of the top 10 [LTCI] companies did not have fairly significant rate increases" in 2003.
Changing LTCI Economics
The rationale behind LTCI is changing in a dynamic marketplace for delivering long-term care choices. Originally, LTCI was designed to pay for nursing homes. Just as life insurance policies benefit from a natural deterrent factor—nobody wants to die—LTCI underwriters built into their pricing the deterrent of bleak nursing home environments, where very few elderly people really want to live.
However, two other choices are eroding the pricing built into LTCI premiums: 1) home health care; and 2) community-based living delivered through Assisted Living Facilities (ALFs). All over the United States, and especially in warm-weather climates, new ALFs are being opened at a staggering rate. Many of these facilities feature private living quarters, recreational amenities and active senior communities, along with restaurant-like meals and full medical services. Some ALFs even offer college-level continuing education courses and golf course privileges. Elderly Americans with health problems are flocking to be admitted to ALFs, and they expect their LTCI programs to foot the bills.
To qualify for LTCI benefits, a common requirement is certification that a person needs assistance with two or more Activities of Daily Living (ADLs) after a waiting period. If an LTCI program agrees to cover any type of treatment (nursing home, ALF or home care) under this requirement, you can predict with near certainty that premiums for the program will increase. The deterrent to filing claims just isn't there.
The original design of LTCI was that premiums would stay level, because that is what retired people can budget. But in a world of constantly rising LTCI premiums, the design may be fundamentally flawed. Also, rising costs expose what may be an even greater problem—lack of flexibility. In droves, elderly people are complaining that once LTCI premiums become unaffordable, they have no choice except to cancel coverage, just when they need protection the most. The basic compact underlying the product—"buy it young and use it later"—feels betrayed.
Salvaging Sales Momentum
Premium uncertainty, combined with product inflexibility, makes LTCI a harder product to sell. After you've sold it, you will face service problems and loss of client goodwill with each premium increase.
The insurance industry is doing its best to salvage LTCI's sales momentum, but the direction in which some companies are heading may be wrong. Their solution is to unbundle coverage, so that consumers can choose policies that cover nursing homes only, ALFs only, or home care only. For example, Blue Cross has introduced a plan, LTC blue, that lets the insured mix different levels of coverage such as 100% for nursing homes, 75% for ALFs, and 50% for home care. (In this example, if the maximum monthly benefit is $4,000 for a nursing home, it would be $3,000 for an ALF and $2,000 for home care.) LTC blue's "Nursing Home Only" option offers a 0% benefit for ALFs or home care.
The problem with this approach is obvious to anyone who has ever participated in the intricate process of placing an elderly person in an LTC program. It can involve months of coordination among medical and mental health professionals, social services organizations, family members, and financial advisors. The placement ultimately may depend on compatibility and availability—where the elderly person feels most comfortable among affordable programs with capacity. Do you want to be the financial advisor who recommends a 0% home care benefit for a client who ultimately (years from now) needs and wants home care instead of a nursing home? If so, make sure you have E&O coverage.
Where the LTCI market stands today, and the direction (described above) in which some companies are heading, creates a nightmare of complexity and responsibility for financial advisors. But also emerging is an attractive alternative that can solve virtually all these problems in one transaction.
Prepaying LTC Costs
This solution is to prepay long-term care (LTC) costs with a one-time premium, while bundling guaranteed lifetime coverage into life insurance. In one package, for one payment, the client gets:- Life insurance coverage
- Long-term care protection
- Tax-deferred accumulation of cash value
- Access to cash value (if needed) through withdrawals
New York Life is promoting "accelerated death benefits" for long-term care with its Asset Preserver product, available for single premiums as low as $10,000. At the time of purchase, the client can select an accelerated death benefit payout period of 24 months, 36 months or 48 months. Then, long-term care accelerated benefits are triggered upon either a "chronic illness" (two or more ADLs) or terminal illness. In the case of a chronic illness, the net death benefit is paid out gradually over the period selected, after a 90-day waiting period, and all levels of care (nursing home, ALF or home care) are covered. In the case of a terminal illness, the death benefit can be accelerated into a lump-sum.
New York Life is developing Asset Preserver in a marketing niche it calls "blended products." The concept makes great sense for protecting estates, because estates are vulnerable to both death and LTC—and it is impossible to predict which will occur first.
Costs and Leverage
The financial press has already started to criticize the "blended product" concept, claiming that it's more expensive for clients than buying life insurance and LTCI separately. But this analysis misses several salient points, which are as follows: - Single-premium life insurance leverages the client's own assets to provide blended protection (life and LTC). Younger clients get more leverage than older clients, and women get more leverage than men (because women live longer).
- Whichever side of the blended protection you don't use (life or LTC) winds up costing very little at all. In Asset Preserver and several competitive products, there is no extra charge for the accelerated death benefit. (The cost is built into standard premiums.) So, if you never need LTC, you still have your death benefit intact, and the LTC protection becomes economical.
- Your LTC premiums won't increase, because you have already paid the premium and coverage terms are written into the contract. Also, your death benefit is guaranteed to stay level for life—which means LTC protection is constant. (In some contracts, a maximum fixed percentage of the death benefit can be accelerated.)
- Insurance companies have incentive to write "blended policies," because a significant deterrent factor is built into them. To understand it, imagine a family that must fund LTC for grandma at age 80, when grandma has Alzheimer's and also a $200,000 death benefit that can be accelerated. The family can help grandma decide to either: 1) keep the death benefit intact for heirs and fund the LTC out-of-pocket; or 2) accelerate the benefit and apply it to LTC. Since it's the family's future benefit that is being spent on grandma's ALF, you can bet it will be spent wisely.
One attraction of "blended" single-pay policies is in the leverage they offer older women. Women are statistically more likely to need LTC than men because they live longer and are less likely to have caregivers at home. To illustrate this leverage, imagine a 70-year old woman who puts a $100,000 single premium into another attractive blended product—Liberty Life's Estate Maximizer II. Her leverage factor is 1.70, which means every dollar of single premium immediately earns $1.70 of death benefit. Since this product accelerates up to 90% of death benefit, $100,000 of premium would leverage into $153,000 of LTC coverage—enough to pay for about 2-3 years in a nursing home or 3-4 years in an ALF. (For a male age 70, the same premium would buy a bit less LTC coverage, about $140,000.)
Liberty Life will write this product up to age 85 for premiums as low as $10,000. A minimum interest rate guarantee on cash value of 5% (gross) helps to cover insurance costs or increase cash value, and agents can earn a 5% commission on the single premium through age 80. The product (with accelerated death benefit) is available in all states except New York.
Older Women = Great Prospects
How many couples age 65+ have you offered life insurance in the past month? How many older women? Our country is just full of older, active women who are in great health, have never owned much life insurance, and wouldn't even open the door to talk to you about it. But they are very concerned about the rising cost of LTCI.
You can get in the door (and more) with blended products like New York Life's Asset Preserver and Liberty Life's Estate Maximizer II. Other single-pay blended products worth considering include Lincoln National's Moneyguard and MassMutual's UltraCare Life.
Stay flexible in your thinking. When clients have problems with rising LTCI premiums (and they will for years to come) be the solution.
freeERISA.com FOCUS:
Offer Small Business Owners SDBOs
For the past decade, mutual funds have dominated the investment menus of self-directed small business retirement plans. But if you want to "go where the growth is," offer small business owners in your market a self-directed brokerage option (SDBO).
These options are the equivalent of a brokerage account inside a participant-directed retirement plan. Cerulli Associates reports that about 15% of all 401(k) plans now include SDBOs. According to Charles Schwab, three-fourths of the new plans it has opened recently offer SDBOs, and the firm's total assets in these accounts now exceeds $5 billion.
Many large 401(k) plans have shied away from SDBOs due to their added recordkeeping cost (typically $50-100 per participant per year) and the perception that these options increase fiduciary risk and administrative complexity. But small businesses with 25 or fewer participants are a natural market for SDBOs, especially when key participants have diverse investment goals, along with a common desire to reduce costs.
For example, suppose that a small medical practice has three partners, each with about $200,000 invested in a 401(k) plan. One partner wants to buy stocks, another wants to hold bonds, and a third wants to diversify among exchange-traded funds (ETFs). Even with SDBOs' extra recordkeeping costs, total investment expenses for all three partners will probably be several thousand dollars lower in SDBOs than in a mutual fund turnkey plan averaging a 2.0% management and expense ratio (MER). You can build into the SDBO an asset-based fee for yourself (similar to a fee-based brokerage account) and still beat the all-in investment costs of most mutual fund plans.
To start prospecting, take advantage of a new feature now available in the Fund Finder service of Premium ERISA. For more information about Fund Finder, look here:
http://www.freeerisa.com/Insight/january_2004.asp
The new feature allows you to search plans in your market by mutual fund provider and ZIP CODE. In a few minutes, you can generate a list of funds in nearby zip codes that offer their participants (let's say) Janus Funds.
In an SDBO, participants who want to pay the cost of Janus Funds (and many other fund groups) can continue to do so. But other participants would have the option of reducing costs by buying and holding individual stocks, bonds or ETFs.
Fixed-income investors are worried about the impact that higher interest rates could have on bond fund NAVs. But in an SDBO, participants can buy individual bonds and hold them to maturity, greatly reducing bond price risk.
The steps in the suggested prospecting track are as follows:- Use Fund Finder to generate a list of small plans in your market area, sorted by fund sponsor and zip code.
- Research the MERs of popular funds groups on your list. Focus on high-cost funds groups.
- Call decision-makers at the plans and offer information on comparing their all-in mutual fund expenses with the costs of buy-and-hold investing in SDBOs. The more assets a business owner personally has in the plan, the greater the SDBO's cost savings can be.
- Probe for other areas of dissatisfaction with specific mutual fund providers, and be prepared to address them with benefits of SDBOs.
Don't spread your prospecting efforts too thinly among fund groups. You'll find that some fund groups in your market are more vulnerable than others. Have the ammunition you need to discuss the pros and cons of selected fund groups, and explain how SDBOs can help individual plan participants expand investment choices while managing personal costs.
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