LTC

Creative Ways to Pay for LTC Insurance Premiums
by Tom Riekse, Jr.

Asurprising thing happened when long-term care (LTC) insurance first came into prominence in the early 1990s -- surprising to the actuaries who initially determined the pricing of the products. These early products were priced based on the assumption that a percentage of policyholders would lapse each year, similar to the carriers’ experience with products, such as disability income or Medicare supplement plans. These lapse assumptions (as high as 5% annually) lowered initial premiums because a lapsed policyholder would not become a claimant. There was nothing sinister about assuming that a certain number of policyholders would lapse each year. However, the surprising thing is that those early purchasers didn’t lapse their policies -- they cherished them.
Even with some premium adjustments on in-force business, it is rare that someone drops an LTC insurance policy they purchased regardless of the purchase date. It’s not surprising that people want to keep their policies when the hourly cost of a home healthcare aid is $19 in Los Angeles, $20 in San Diego, and $23 in San Francisco – that’s $200,000 per year for 24-hour care.
Once the actuaries discovered that lapse rates were much lower than expected, they brought out new policies with assumptions of no lapses or minimal lapses. Of course, these policies ended up being more expensive. The average annual premium in 2006 was $2,043 for individuals and approximately $4,000 for a couple compared to an average premium price of $1,500, which we saw in the 1990s, according to the California-based American Association for Long-Term Care Insurance (www.AALTCI.org).
Selling more expensive policies is a challenge. Even very affluent clients have a premium expectation, which results in pushback and possibly a failed sale. Below are several observations and practical tips to help overcome the “it’s too expensive” premium objections raised by LTC insurance prospects.

1. Screen for Initial Premium Suitability

As someone who put 20% down to purchase a house, it was always amazing to see the growth in no-down payment subprime mortgages. Looking at the problems that these mortgages are causing, perhaps it isn’t best to sell something to people who can’t afford it. Likewise, I think that it is a bad idea to have clients struggle to pay LTC insurance premiums. A February 26th Wall Street Journal article pointed out the potential pitfalls of greater awareness of LTC insurance coverage – people who can’t afford LTC insurance policies but want to buy them. It mentions California’s LTC insurance awareness campaign, in which “six million letters bearing Governor Arnold Schwarzenegger’s name and official seal went out to Californians urging many low-and middle income residents to buy long-term care insurance to cover any future nursing home bills.” Although the article was a little one-sided, it mentions an 87-year-old-widow who was paying a yearly premium of $4,080 from an income of $19,200. This woman is clearly not an appropriate LTC insurance customer. Clients should be able to afford premiums comfortably, even with potential rate increases.

2. People with Personal Experience Are Less Price Sensitive

In our experience, clients who have parents who went through an expensive nursing home stay really understand the cost of care. They may have seen their account balance decline when writing the monthly checks for $6,000. For them, a couple of thousand dollars a year translates into insurance against the cost of several hundred thousand dollars. Therefore, it might be better to focus on the desired benefits for these clients instead.

3. Keep the Initial Benefits Reasonable

A program that pays for care in any type of setting (in cash) for an unlimited benefit period with no deductible and 5% compound inflation protection will be very expensive. The sticker shock may turn off a client. Consider tailoring the benefits for a reasonable premium amount. Some ways to do this include proposing a five-year plan instead of a lifetime one, recommending automatic CPI inflation protection or 3% compound, and choosing a 90-day elimination period instead of a 30-day elimination period.

4. Purchase a Partnership Policy

California is fortunate in that California Partnership policies are available to consumers. With a partnership plan, someone can purchase less than unlimited benefit amounts. To qualify for Medi-Cal to cover the costs of long-term care, individuals must spend down virtually all of their savings until they are considered at poverty level. However, individuals who have purchased a Partnership policy will be able to retain savings and other investments equal to the amount their private insurance pays out for long-term care. For example, if an individual has a two-year long-term care policy, but actually needs five years of care, their policy will pay benefits for two years (say, equal to $100,000) and Medi-Cal will allow them to keep $100,000 of their assets when determining their eligibility for Medi-Cal coverage for the remaining years.

5. Base Premiums as a Percentage of Investment Earnings

Since LTC insurance provides a firewall against someone’s retirement savings, consider basing the premium as a percentage of annual income from those earnings. For example, if someone’s retirement portfolio earns $50,000 per year in income, $2,000 of that (or 4%) can be allocated for LTC insurance protection. This is a sensible way to frame the value of the protection and keep it in perspective.

6. Pay Premiums through a Company

A client who owns a business can deduct LTC insurance premiums like health insurance premiums. Self-employed owners of S-Corporations, LLCs, and partners can deduct 100% of premiums for themselves and a spouse up to certain limits. These limits, which are indexed by the IRS, increase each year while premiums are designed to remain level. C-Corporation owners can deduct 100% of the premium for themselves and spouse with no limit. For C-Corporation owners, popular options are accelerated-pay LTC insurance plans, such as 10-pay or pay-to-age 65.

7. Pay premiums through a Health Savings Account (HSA)

Premiums for LTC insurance can be paid using HSA dollars up to certain scheduled limits. With changes to the HSA contribution rules, you could deposit money each year into an HSA and use that money to pay LTC insurance premiums. This is a great way to purchase premiums on a pre-tax basis.

8. Use an Immediate Annuity to Pay LTC Insurance Premiums

How can someone guarantee that there will always be money available to pay premiums? They can purchase an immediate annuity that can help pay. Here’s how it works, according to the Genworth Financial Advanced Marketing Department:
• Purchase a LTC insurance policy.
• Purchase an immediate annuity with benefit payments that are equal to the LTC insurance premium plus projected income taxes on the annuity benefit payment.
• A portion of the benefit payments received from your immediate annuity can be set up to pay directly for the LTC insurance policy premiums. The remaining portion of the benefit payment can be used to pay taxes on the interest income portion.
The immediate annuity won’t guarantee continuing LTC insurance because premiums may increase, but it can help avoid lapses. The funding for an immediate annuity can come from savings accounts or CDs, proceeds from a home sale, inheritance, or other sources.
Purchase a Single Premium Life/LTC Insurance Plan

A single premium life/LTC insurance plan may be a good choice for clients who dread paying premiums for a number of years without using the benefits or those who think they can self-insure. These programs allow someone to take an asset, such as savings or a CD, purchase a single premium universal life plan, and leverage LTC insurance benefits. For example, a client who pays a single premium of $100,000 receives an immediate death benefit, a credited interest rate applied to a universal life policy, and an LTC insurance benefit that can be two to three times the initial premium with inflation protection built in.

The underwriting for a life/LTC insurance combination product is a little more comprehensive than traditional LTC insurance because both elements require underwriting. The good news is that the benefit triggers and rewards are similar to traditional LTC insurance products. However, clients may not be eligible for the California Partnership for long-term care.
Getting a reverse mortgage and dipping early into qualified plan retirement figures are probably not the best ways to pay for LTC insurance. In addition, it is prudent to plan for potential in-force premium increases. A good rule of thumb might be a 10% adjustment every 10 years.
For those who can afford LTC insurance premiums, there are ways to budget and plan for the cost. However, if people wait, their health situation can change and no amount of premium will be able to secure a plan. It is true that LTC insurance premiums can seem overwhelming. But looking at creative ways to help pay for and lower premiums will result in piece of mind, access to quality care, and portfolio protection.
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Tom Riekse, Jr., CEBS, ChFC is a managing principal at LTC insurance Partners LLC, Libertyville, Ill., a nationwide brokerage agency serving the long-term care industry. LTC insurance Partners offers marketing, sales and administrative support and a wide variety of long-term care products from the largest and most-respected carriers. For more information, visit www.ltcipartners.com or call 800-245-8108.