By Louis Brownstone
Life is becoming complicated, especially for the long-term care specialist agent. Back in the good old days, agents merely had to compare traditional long-term care policies which were largely similar in structure and comparable in benefits. It was easy to spreadsheet different policies and to ascertain which policy would bring the greatest value to the prospect.
Those simple days are gone. Traditional long-term care policies contain some meaningful differences. In addition, a variety of solutions to long-term care needs are available. Hybrid life insurance, linked life insurance, linked annuities, critical illness, short-term care, life settlements, reverse mortgages, etc. It’s almost impossible for a single agent or financial planner to acquire all the knowledge necessary to truly understand all of these solutions and to have the ability to accurately compare them and intelligently present them.
Maybe it’s best for the agent to limit one’s area of expertise so as not to confuse his prospects and himself. One alternative is to pick one favorite traditional long-term care product and one favorite hybrid life insurance product and become a true expert in presenting them. It would seem to be relatively easy to understand the strengths and weaknesses of each. Then the agent could pivot the presentation to which product the prospect would prefer and which product would be the best value for the prospect. Other long-term care solutions would only occasionally be utilized, and would involve obtaining advice from others.
However, the ability to compare different products is not as easy as it sounds.
Let’s compare the current favorite traditional long-term care product in California, Mutual of Omaha’s Custom Solution, with the current favorite hybrid life insurance product in California, One America’s Asset-Care IV. One would expect the Omaha product to contain generally lower premiums, as it contains only one type of benefit versus two in the One America product…life insurance plus long-term care. Of course, the Mutual of Omaha rates could increase over time. The Omaha product also has tax advantages, care coordination, and some special riders, such as shared care. Its main disadvantage is that if you are lucky enough not to have to use it, you lose it. At today’s average premium of over $ 2,500 per year, paying for 30 years plus and then dying could reduce an estate by $ 75,000 or more.
On the other hand, the One America product contains a death benefit and guaranteed premiums, and its benefit triggers are very similar to the Omaha product. Many prospects do not relish the idea of paying large sums of money with the possibility of no return. This occurs all the time with fire insurance, automobile insurance, homeowner’s insurance, term life insurance, disability insurance, etc. Long-term care insurance seems to be the proverbial straw that broke the camel’s back, and “use it or lose it” is a huge not-to-buy factor. Folks may be willing to pay more for the One America product than for the traditional long-term-care product. Of course, that also depends on how much more premium they would have to pay.
There is an additional factor which is less understood but which can make a major difference in determining which is the best value for the prospect. It’s gender pricing, especially for single individuals. In long-term care insurance, the female has to pay 50 percent to 70 percent more than the male. Conversely, in life insurance, the female gets to pay about 20 percent less than the male.
Let’s take one example, which may or may not be true of other examples. Let’s compare the Mutual of Omaha Custom Solution with One America’s Asset-Care IV. This example involves 57-year-olds with an initial long-term care benefit of $4,000 per month for 50 months with 3 percent compound inflation. The Mutual of Omaha long-term care initial benefit limit would be $200,000. The One America initial long-term care benefit limit would also be $200,000, including the 25-month extension of benefits rider from a life insurance death benefit of $100,000.
Here are the annual premiums:
Female Male Couple
Mutual of Omaha $ 3,991 $ 2,308 $ 4,412
One America $ 4,143 $ 4,143 $ 4,084
Granted, this is not truly an apples and apples comparison, only an attempt to achieve one. But look at the differences! One has to absolutely consider who would be applying. The Mutual of Omaha product contains gender-based pricing, whereas the One America product does not. An agent would have to run premium comparisons in order to properly recommend one product or the other.
For single females, the One America Asset-Care IV policy provides a death benefit of $100,000 for only $152 more than the Mutual of Omaha Custom Solution. This small difference might indicate to most that the best value is the One America product.
For single males, the Mutual of Omaha product costs 44 percent less than the One America product. This large premium difference might indicate to most that the best value is the Mutual of Omaha product.
The big surprise for me was in the premium for couples. For couples, the One America Asset-Care IV with its $100,000 death benefit plus a 25-month extension of benefits for long-term care actually costs 7 percent less than the Mutual of Omaha Custom Solution. A major part of the reason is that the One America death benefit is a second-to-die benefit, which makes the cost very reasonable because it will normally take longer for the death benefit to pay out.
But there is another major reason which is a part of why it’s so difficult to make an apples-to-apples comparison with these two products. In Asset-Care IV, there is no 3 percent compound inflation on the first $100,000 paid out, as the compound inflation only applies to the extension of benefits rider. The long-term care benefit on the One America product in this example will only be $4,000/month for the first 25 months. However, the long-term care benefit on the Mutual of Omaha product will inflate to $8,000/month after 24 years and therefore give a benefit more than $100,000 larger than the One America product at age 81 for the first 25 months when the policy is most likely to be used.
Once the 25 months has been reached, the long-term care pay out from the two policies will be the same, as both inflation riders inflate the $4,000 long-term care pay out by 3 percent compound from the effective dates of the policies.
We believe that long-term care benefits longer than 90 days are needed roughly half the time. When long-term care is needed, Custom Solution will give the policyholder more value than Asset-Care IV after paying for 25 months. But If no long-term care benefits are needed, Asset-Care IV will give the policyholder’s heirs a death benefit of $100,000, whereas there would be no benefit from Custom Solution. Unfortunately, the agent is unable to predict whether a long-term care scenario will occur and for how long a period.
What are the conclusions? Maybe the actuaries know what they are doing, and in general, you get what you pay for on an actuarial basis. However, price is a major consideration for prospects in making an insurance decision. For most single males, Custom Solutions would appear to be the obvious choice because the premium is so much lower than Asset-Care IV.
For single females and couples, the relative values of the two products are similar. For them, if life insurance is important in their thinking, they may prefer Asset-Care IV. If they object to the “use it or lose it” feature of long-term care insurance, they may also prefer Asset-Care IV. But if their primary goal is to protect themselves against a long-term care scenario, Custom Solution attains that goal.
The agent’s or financial planner’s job is first to understand the differences between these two products. Then he or she is in a position to determine which solution fits the needs of the prospect. Then one solution, not two, can be presented, with a good chance of success.
Louis H. Brownstone, a member of the 2019 Cal Broker editorial advisory board, is chairman of California Long Term Care Insurance Services, Inc., located in Burlingame, California. California Long Term Care is the largest independent specialist long term care insurance agency in California, and is broker for a group of high-producing long term care specialist agents. Brownstone is also very active in NAIFA, the National Association of Insurance and Financial