Life insurance shows potential to solve growing LTC concerns

Life insurance is a versatile product that Americans use for protection, tax planning, a savings tool and many other important life planning options.

Of late, Americans are turning to life insurance to solve long-term care concerns as well.

While life insurance-LTC combo products have existed for years, recent activism on LTC issues is pushing these products to the forefront. To put it another way, life-LTC is now a concept agents and advisors need to be fully educated about and prepared to sell.

“One common concern among clients is the potential depletion of assets and the impact on their ability to leave an inheritance due to long-term care expenses,” said Todd E. Wolfe, senior insurance associate with Telemus Capital in Southfield, Mich. “However, by incorporating long-term care benefits into a life insurance policy, clients can address this concern effectively.”

An estimated 7 million to 8 million Americans have private long-term care insurance, which can be costly and generally requires applicants to pass a health screening. Many assume Medicare covers long-term care, but that’s not the case except for limited care for skilled nursing or rehabilitation. Medicaid requires applicants to have low income and spend down all life savings to $2,000 or less to qualify.

In 2022, combination products represented 20% of life insurance sales based on total premium, while their share of annualized premium was 22%, LIMRA reported.

Two societal trends are behind the big LTC sales push. The first is simple demographics; millions of aging baby boomers are in or approaching retirement with the confidence they can live at least a couple more decades.

Many of those Americans saw their parents retire without long-term care protection and want to dictate a different outcome for themselves. Approximately 70% of people who turn 65 today will require long-term care at some point, according to the U.S. Department of Health and Human Services.

Secondly, public policy officials are trying to head off future costs by making LTC a priority. Washington state passed the nation’s first public LTC benefit, WA Cares Fund, to be paid by for a controversial tax.

Washington workers started paying into the WA Cares Fund at the start of July. Each worker contributes .58% of their total pay per paycheck. The result is a lifetime maximum benefit of $36,500, with annual increases based on inflation.

Product details

Life combo products have been around for more than 30 years. For most of that time, however, the majority of carriers preferred to rely on acceleration-only risk through chronic illness riders.

Long-term care insurance existed as its own category and proved very popular throughout the 1990s and early 2000s. As time went on, many of the assumptions made by insurers proved inaccurate. People lived longer. Quality of care and options increased as seniors looked to long-term care as a life extension. They did not lapse their policies at rates anywhere close to what actuaries had predicted.

“Traditional long-term care is notorious for drastically raising your premiums,” said Kevin Ross, senior managing director of Bridgeway Wealth Partners in New York City. “Many traditional LTC policyholders have had to reduce their policy’s benefits in order to afford the skyrocketing premium and prevent the policy from lapsing. Additionally, you could pay into a long-term policy for 20 or 30 years, die and never get any benefit from the policy.”

Many carriers have either left the LTC insurance business entirely or are seeking repeated rate hikes. Meanwhile, the products that remain on the market are selling well but reflect the continued evolution of LTC insurance from its beginnings as a nursing home care product in the 1970s.

The desire for long-term care coverage is stronger than ever. LTC continues to skyrocket. According to Genworth, the national average cost for assisted living is $54,000 annually, home health aides cost $62,000 annually and nursing homes cost $108,000 annually.

LIMRA research finds that one in four consumers is extremely or very likely to consider a life combination product when shopping for life insurance. The top reasons they give for considering life combination products are:

» The ability to choose whether they receive care at home or in a facility.

» Coverage for temporary illnesses/conditions.

» The ability to use benefits to pay for home modifications or equipment that helps them stay at home.

A life policy with an LTC component is very often a better experience for clients, Ross said.

“You generally have a level premium with your policy and don’t have to worry about your annual premiums skyrocketing,” he explained. “Additionally, if you paid into the policy for many years and then died before needing any long-term care, since it’s a life insurance policy, you have a cost recovery mechanism built in. Your beneficiary will receive the policy’s full death benefit, which includes all of the cash value.”

Canceling a traditional LTC policy means all the premiums paid in the past are gone. But with cash value life insurance with a long-term care rider, owners are entitled to the full cash surrender value.

“It is no wonder that more and more people are turning to these hybrid or combo products to meet their long-term care insurance needs,” Ross said.

Other options can work

A chronic illness rider is the closely related cousin of the LTC rider. But it is important for advisors and clients to know the differences.

LTC riders typically require owners to have specific long-term care needs, while critical or chronic illness riders might not. Long-term care riders might require the payout to be used specifically for long-term care, while critical and chronic illness rider payouts can usually be used however the owner wants.

Some of the riders allow owners to accelerate the entire death benefit, while other types of riders only permit acceleration, a fraction of the death benefit.

The growth of LTC and chronic illness riders with many different options makes it a lot easier for advisors to tailor coverage to a client’s specific needs, said Kelly Gilbert, fiduciary investment advisor at EFG Financial in Grand Rapids, Mich.

“We began helping existing clients reapply to see if they could add chronic illness riders to existing policies for virtually no extra cost except the reduction in cash value growth,” Gilbert said. “We were successful for many widows, and that added peace of mind for them. Today, we never illustrate a policy without chronic and terminal illness riders. It does not make sense not to.”

A new trend known as a critical illness accelerated death benefit is becoming popular, Gilbert said. This concept offers a negotiated early death benefit amount if the owner’s quality of life is impacted by illnesses such as major body burns, disabilities, cancers or heart attacks that create a loss of income or increased medical bills that could drain other savings.

“But unlike the terminal or chronic illness accelerated death benefits, these are negotiated settlements with the insurance carrier to get a percentage of your death benefit now and forfeit the full death benefit at passing,” Gilbert explained.

Fluctuating sales numbers

As much as any product, life-LTC combo sales were influenced by economic and political trends in recent years. In 2020, sales fell off as COVID-19 raged. LIMRA research showed that there were nearly 559,000 policies sold in 2021, up 37% compared with 2020 results.

The 2021 sales binge was driven by WA Cares, which required Washington residents to get LTC coverage or face the LTC tax. Sales especially soared within whole life and fixed universal life products, LIMRA pointed out.

Washington’s payroll deduction approach to long-term care funding is getting the attention of policymakers around the country, including in California and New York, which are developing programs similar to WA Cares.

In California, legislation to create a long-term care task force passed in October 2019. A 15-member board is made up of various care providers, consumer advocates and one industry representative.

Work has progressed steadily toward a goal of producing a final recommendation by the end of 2023. Insurance Commissioner Ricardo Lara’s office cited opinion surveys in launching the task force.

Two-thirds of respondents in the research said that they are apprehensive about being able to afford long-term care. Sixty-three percent of respondents worry as much about paying for long-term care as they do about their future health care.

That recognition and desire for long-term care coverage are certain to drive up demand. So will simple demographics. According to Pew Research Center, the rate of retirement for baby boomers has accelerated since COVID-19 began. Nearly 29 million boomers retired in 2020, 3 million more than in 2019. Seventy-five million boomers are expected to retire by 2030.

Surveys show that most LTC insurance purchases are made in the years leading up to retirement.
All these trends are only making the advisor a more important asset to clients. LTC insurance comes with a lot of different benefits, noted Yair Klyman of Klyman Financial in Manhattan, N.Y. — for example, whether a home health aide is covered and whether in-home care is covered.

In New York, Klyman frequently recommends Nationwide for their cash indemnity feature, allowing clients to receive benefits even if they choose to stay at home for care rather than opting for a nursing facility. Other insurers, like National Life Group and American National Insurance, provide life insurance policies with chronic illness coverage at no additional cost, he added.

“These riders serve as a vital safety net, ensuring financial security for individuals and their families during challenging times,” Klyman said.

The Associated Press contributed to this report.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.