Linked Products Gain Consumer Acceptance – Putting More Life in Long-Term Care

by Sue Devlin

The response to Long-Term Care (LTC) insurance policies has been the same for the past 20 years. Although consumers continue to affirm the need for the coverage, the price tag on individual policies has been too high to win them over in any numbers, particularly as rates continued to go up, sometimes dramatically.

Price has not been the only deal breaker for most consumers. That came when they heard the answer to the question, “What happens to all my paid premiums if I never use it?” The “you lose it” answer ended the discussion, more often than not.

While group LTC programs provide some coverage with a low cost, the coverage was generally so anemic that it was little more than a Band-Aid. Taken together, the results have been underwhelming, to the point that a number of carriers dropped their individual LTC products.

What was needed was an LTC coverage solution that made good sense in terms of coverage, protection and cost to a broad range of consumers and, at the same time, was a product advisors recognized as having significant sales potential.

To its credit, the life insurance industry came up with an answer that realistically addresses the need for sufficiently robust protection (depending on a consumer’s circumstances) and avoids ever-rising rates, while providing advisors with products with significant sales potential: the long-term care rider. Currently, 30% to 40% of life insurance policies are sold with one at an additional cost that attracts customers.

At the same time, advisors should recognize that it’s important for consumers to understand what they are purchasing when they buy a life insurance policy with a linked LTC rider:  LTC riders don’t come with a built-in inflation factor. Because of this, the funds available for LTC benefits cannot exceed the face amount of the contract. The funds will not last as long if the cost of care increases, as it has over time. If this is a client concern, then a life policy with a larger face amount can be considered, since this would increase the amount available for LTC benefits.

When the LTC benefit is accessed, the death benefit shrinks dollar-for-dollar. In other words, as the LTC benefits are drawn down to pay for care, the life insurance policy’s death benefit shrinks accordingly. Again, this may or may not be a client consideration, but it’s important for the consumer to have a clear understanding of how the policy is structured.

Rates are guaranteed and can’t increase. If policyholders don’t use the LTC benefit, they do not lose any money because 100% of the face amount is available for the death benefit. This overcomes the often-heard compliant about standalone LTC policies — if the policy owner doesn’t use it, the money is gone.

Even though life insurance policies with linked LTC riders are generally quite straightforward, there are several issues that are particularly important so consumers can make informed decisions and avoid unpleasant surprises, such as the difference between 101(g) and 7702B riders. It’s easy for consumers to think they are buying long-term care coverage, when, in fact, it turns out to be a chronic illness rider that only pays benefits if a physician certifies that the policyholder is permanently disabled. Indemnity payments are, in effect, accelerated death benefits. With little or no upfront cost and with fewer underwriting requirements than a 7702B, this type of rider, known as a 101(g), can be appealing. However, the words “long-term care” can’t be used in marketing this type of rider.

In contrast, a 7702B is a true LTC rider, and requires a special license to sell the product. Benefits can be accessed when a physician certifies that for at least 90 days, the policyholder is unable to perform at least two activities of daily living (ADLs) or suffers from a severe cognitive impairment.

7702B riders offer indemnity or reimbursement payments. The difference goes beyond who receives benefit checks — a policyowner or a third party service provider. The reimbursement option offers the flexibility of making the payments to the policyowner or through a third-party service provider, based on submitting paid receipts to the insurance company. Indemnity payments are made directly to those who provide services.

With reimbursement, payments are limited to the actual charges for the services, even though the amount stated in the policy may be higher. Indemnity plans pay the maximum amount allowed by the policy, no matter what the actual charges happen to be.

Marketing the 7702B LTC rider

It’s fair to say that anyone expressing an interest in LTC true coverage is thinking about the type of coverage provided by a standalone LTC policy or a 7702B rider. If cost isn’t a factor, a standalone LTC may the best choice. Otherwise, a 7702B rider can be appropriate for meeting the LTC need.

An LTC rider ensures that, if clients don’t use the benefits, they have not lost their money as they would with a standalone LTC policy. At the same time, prospects must recognize that they must qualify and buy insurance before they can buy an LTC rider. Buying the life insurance with a rider when healthy should be a priority (and rates are lower, as well). Prospects should also understand that a rider’s benefits are only available if the premiums are paid on time.

While there’s never a perfect solution, some may come closer than others to meeting a client’s need and expectations. Based on sales performance, it’s fair to say that a LTC rider on a life insurance policy meets with an overwhelmingly positive response from consumers. While it may not be perfect, it’s filling a huge need.

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Sue Devlin is a long-term care insurance specialist at First American Insurance Underwriters, Inc., Needham, Mass., a national life insurance, annuity and disability income brokerage firm. For more information, contact Sue Devlin at 800-444-8715 or sdevilin@faiu.com.