Long term care insurance is one of the most critical components of a client’s financial plan, especially for those wishing to preserve assets in the case of a chronic care need.
While today’s products, especially hybrid products, allow for much more lenient underwriting than previous iterations of long-term care insurance, there are still those that are uninsurable for a number of reasons.
In two parts, we’ll review sources of opportunity to provide those individuals with valuable coverage, whether they’re not yet in need of care or they’re already receiving care.
Client Profile:
Ages: 50-80
States: All except CA, NY, IN
Funding: Single pay or 5 pay – NQ for single pay
Type: Clients who have been declined or are otherwise uninsurable for traditional or hybrid life/annuity LTC
There are many reasons that a client may be uninsurable for long term care. From fairly straightforward issues like major heart issues/current cancer/etc. to musculoskeletal issues like ongoing back pain with medications and PT.
Because a client may be uninsurable through the majority of the marketplace doesn’t mean they can’t secure coverage!
While annuity lifetime income “doublers” are available, their distributions are woefully inadequate, especially for someone receiving facility care which can average 10-15k+ PER MONTH. With an average stay of almost 2.5 years, that’s a cost of over 300k for the average client. These costs get prohibitively expensive should the client enter a memory care facility, where a six to eight year need is not uncommon.
For those that are not yet receiving care, repositioning assets into a guaranteed acceptance long term care annuity makes sense.
Often, these policies are funded with 1035 exchanges from existing life and/or annuity policies, cash from a brokerage account or bank, or using RMDs ( or taking IRA distributions early in one’s 60s).
Guaranteed issue long term care annuities have two main components.
The first is the coverage ratio. This is the initial leverage provided to the premium deposit for the purposes of long-term care. Similar to an annuity with a lifetime income rider, these products have two buckets: an accumulation value and a benefit base. Except that instead of lifetime income being derived from the benefit base, the client’s long term care is predicated on it.
The coverage ratio for guaranteed issue long term care will vary by age, but as a rule of thumb, a 55yo would typically have a coverage ratio around 150%, whereas a 65yo would be ≈140% and a 75yo would be ≈130%.
This leverage is immediately applied to all premiums received in the first 5 years. Additionally, the benefit base for LTC (which is distributed tax-free over 5 years once on claim) will grow at a guaranteed 3% annually.
EXAMPLE
A 55yo male purchasing a guaranteed long term care annuity receives a coverage ratio of 150%. On a 100k deposit, the immediate benefit base for long term care purposes is 150k, which will grow at a guaranteed 3% for up to 20 years.
So, assuming no accumulation growth (we’ll get to that in the next section), at age 75 the client has a guaranteed LTC benefit base of $270,197. Distributed over 5 years, that equates to over 54k annually for LTC purposes.
There is a caveat to the long-term care benefit base of these products. To avoid adverse selection (people who are in need of care imminently), the benefit base will “vest” over a 4-year schedule. Here is the vesting schedule:
Year 1: 20%
Year 2: 40%
Year 3: 60%
Year 4: 80%
Year 5+: 100%
As mentioned earlier, there are two components to these products. The guaranteed elements of the benefit base are very attractive; however where these products truly become compelling is the accumulation valuation over a long period of time when used for long term care.
Not only can the accumulation value exceed the benefit base, but if used for care, the distributions are tax-free.
Currently, there are both fixed and indexed components available. At the time of the writing of this article, the current fixed rate was 5%. Of the indexed options, the S&P 500 annual point to point cap was 9% and the S&P 500 annual point to point spread was 50%. Both of these crediting strategies offer significant upside to the accumulation value and even if reduced modestly, are still likely to eventually supersede the LTC benefit base over time.
As currently structured, a 50/50 split between these two indexed strategies starting at age 55 could yield a $426,433 benefit base at age 75 (instead of the guaranteed $270,197), allowing for $85,284 in annual LTC benefits over 5 years.
Keep in mind, these guaranteed issue LTC fixed annuities can be purchased as a single pay BUT allow for additions over the first five years of the contract.
This flexibility is important. The majority of the LTC annuities on the market only accept single payments, which largely precludes the use of any qualified money. Since the majority of these products only accept non-qualified money, the qualified money would need to be withdrawn, taxed, and then placed into the annuity. Most advisors and clients are reluctant to create a large one time tax bill.
Instead, utilizing a 5 pay structure, the purchaser can spread out the tax liability on withdrawals and still get leverage (coverage ratio) on every dollar deposited into the contract.
The Process
Because there is no underwriting for a guaranteed issue LTC annuity, the process of writing these products is very straightforward.
Many fixed annuity carriers have migrated their applications to eApp only and this is no different. Although the application does have health questions, anyone who has uninsurable conditions will automatically bypass underwriting and go straight to guaranteed issue pricing/benefits.
If you’re curious about how to run an illustration or what the application process looks like, CLICK HERE to download the new business guide.
Once issued, the client will have checked an important box on their financial plan. Being able to leverage an asset for the purposes of long term care, especially for those who are uninsurable, makes these products very unique in a relatively sparse marketplace.
Compensation on these policies mimics that of a long term fixed indexed annuity, with typical street commission of 8.5% year one and 4.25% years 2-5 up to age 75. Ages 76-80 have a 25% reduction.
Conclusion
If you have clients who have been previously denied long term care due to health issues AND they have assets that they wish to protect, then leveraging a portion of those assets in a guaranteed issue long term annuity makes sense.
Reach out to us today if you’re interested in offering one of the most unique products in the long-term care space, guaranteed issue LTC annuities. One of our team members will walk you through the process so that you can confidently help those clients in need of LTC coverage, even if they wouldn’t otherwise qualify.