Linking Long-Term Care

Transcription

1 Linking Long-Term Care The Disappearing Line Between Life, Annuity and LTCi Products

2 Table of Contents The Opportunity 1 What Has Changed? 2 Hybrid Products Breakdown 3 Advantages and Limitations of Hybrids 6 Target Market for Hybrids 7 Answers to Frequently Asked Questions 10

3 The Opportunity Let s face it, Long-Term Care insurance can be a tough sale right now, which is unfortunate because the public s need for some form of LTCi has never been greater. The cost of long-term care services is extraordinary $77,000 a year for a room in a nursing home (national average) and our recession-depleted retirement accounts have hindered our ability to self-insure. Despite all that, sales are down significantly in And the conundrum we face is that the very reason people need LTCi more than ever depleted savings is the same reason that many are not buying it. So what s the solution? How can you sell in this environment? One emerging solution is life and annuity products with linked LTCi benefits, also known as Combo or Hybrid products. Many in the industry are predicting a huge spike in demand for these products in 2010 due to a new tax law that goes into effect January 1st. The new law says money withdrawn from certain annuities and life insurance products for the purpose of funding long-term care costs can no longer be taxed as income. Think you can sell a product that offers tax-deferred growth, lifetime income, a death benefit and tax-free funding for long-term care expenses? It s a win-win-win for your clients. And it s the reason many are saying hybrids could be the next big opportunity for agents to reach consumers in the market. This paper is your guide to exploring this opportunity. What s a Hybrid Product? For the purposes of this paper, we are lumping a variety of products under the label Hybrid. These include life and annuity products with built-in LTCi benefits and life and annuity products with LTC riders. See page 4 for more information on hybrid products available from Senior Market Sales. 1

4 Tax Laws What Has Changed? The Pension Protection Act, passed in 2006, included a provision that makes withdrawals from non-qualified annuities or life contracts tax-free if the proceeds are used to pay for long-term care services. The new tax treatment takes effect January 1st, Product Design Since the Pension Protection Act was passed in 2006, several insurers have introduced new products designed to help agents and consumers take advantage of the new tax law. United of Omaha released its Living Care Annuity in early Genworth Financial s Total Living Coverage UL was introduced in These products allow your clients retirement dollars to do double duty for them. In other words, you can sell an annuity that not only covers the risk of living too long but is also covers the risk of health problems. Or you can sell a linked-benefit life product that offers both a death benefit and living benefits if they get sick. These products help prevent your clients from becoming burdens on their families both in life and in death. Lagging LTCi Market Fixed annuities are more popular than ever, while LTCi sales have been down the last two years. Put it all together and there is a strong indication that more and more consumers will be turning to annuities and life insurance to insure their long-term care risk in the future. That s not to say that stand-alone LTCi is now obsolete. One thing that has not changed is that LTCi is still the ideal product for insuring your clients long-term care risks. It offers robust, flexible benefits that hybrid life and annuity products simply can t compete with. Hybrid products are not really direct competition for LTCi. They offer a great tool for life and annuity producers to bring flexibility to their clients portfolios and add even greater value to their products. And they serve as a great back-up plan for LTCi producers who encounter consistent objections to LTCi or have prospects who don t qualify. 2

5 Hybrid Products Breakdown Annuity-LTCi Hybrids Annuity-LCTi hybrids have several design variations. From something as simple as a rider that pays out a certain percentage of the account value when the policyholder has a qualifying LTC need, to products that basically combine a fixed deferred annuity and long-term care under one contract. To varying degrees these products essentially allow the consumer to get double-duty from their retirement dollars, using them to build cash value taxdeferred and, if needed, fund their long-term care need. Typically Hybrids are priced cheaper than stand-alone products, though the LTCi benefits are not as comprehensive. Hybrids must be funded with non-qualified money to qualify for the tax breaks in

6 Available from SMS Mutual of Omaha s Living Care Annuity A nonqualified annuity that allows the buyer to receive $3 in longterm care benefit for every $1 they put into the annuity. So if they fund a $100,000 annuity, they would be able to access $300,000 for LTC expenses after the contract has been inforce for two years. Covers 10 different levels of care, including home health care, homemaker services, personal care, respite care, adult day care, alternative care services and traditional nursing home care. Easy underwriting and application process. Issue ages: Elimination period: 90 days Minimum premium: $50,000 Underwriting: Issue Time: Client answers 12 yes/no questions, telephone interview with geriatric nurse Typically five business days BPASelect with Income Advantage Rider The best income rider on the planet also has some powerful Long-Term Care benefits to go with it. Income Advantage actually doubles the income benefit when the policyholder becomes confined to a qualified care facility. For example, a $26,000 a year Lifetime Income benefit would become $52,000 a year if the policyholder went into a long-term care facility. Note: The Income Advantage has an 8% compounded accumulation value on the income base and its fees do not invade principal--so the client only pays for the rider if there s a gain on the contract. Income Advantage is sold with the BPASelect 6, BPASelect 10 and BPASelect 12 fixed indexed annuities. 4

7 Life-LTCi Hybrids Similar to annuity hybrids, there are a number of different ways to package LTC benefits with life insurance. There are products that package whole life, universal life or even variable universal life with long-term care benefits that can be drawn independently of the underlying insurance contract. They are priced and structured more like stand-alone LTCI. There are also accelerated death benefit riders that allow the policyholder to access their death benefit to pay for qualifying LTC costs. Available from SMS Genworth Total Living Coverage Universal life insurance with long-term care benefits linked together in one product, Total Living Coverage provides a pool of benefit dollars for covered long-term care expenses, a death benefit or both. Benefits are based on the policy s Specified Amount, which is calculated according to the initial premium amount, the insured s age, sex, health status and benefits chosen. Clients can choose 24, 36 or 48 month LTC payout, plus they can opt for an Extension of Benefits Rider that extends LTC benefits beyond the specified amount. Example $200,000 specified amount 24 month payout = $8,333 per month Optional: 48-month Extension of Benefits 48 x $8,333 = $400,000 Total LTC benefit = $600,000 Issue ages: 18 to 79 Inflation Protection options: Accelerated Benefit Rider: Extension of Benefits Rider: 3% - 5% simple or compound. Applies to LTC benefits, not the death benefit. LTC benefits to be paid over 24, 36, or 48 months. Allows extension of LTC benefits for 24 months, 48 months or lifetime, depending on specified amount. 5

8 Advantages and Limitations of Hybrids Hybrid Advantages Maintain control of funds. With a hybrid, money not used for LTCi can be taken as income or as a death benefit. Hybrids are cheaper than an income annuity and an LTCi policy purchased separately because they pool two very different risk groups. People who expect to live longer tend to purchase annuities, while those who are looking to cover themselves for LTC expenses are probably doing so for a reason: they expect to face disability sooner. Hybrid annuities combine those opposing risk groups, which would lower the cost. Generate tax-deferred gains. Can be easier to qualify for than stand-alone LTCi. If you have prospects who don t qualify for LTCi, a hybrid product may be a good second option for them. Although certain hybrid products, like the Genworth TLC, do require full LTCi underwriting. Starting in 2010, income used for LTC is free. Hybrid Limitations Generally require the beneficiary to spend down their own death benefit or cash value in the policy before insurance payments kick in. Do not qualify for Partnership Benefits. Could be difficult for the client to understand. Do not offer the comprehensive benefit options of a stand-alone LTCi policy. Most last about three years. Plus, if you don t deposit enough up front, your benefits may not cover a significant amount of your LTC costs. May have to pay surrender fees for withdrawals taken within the surrender period. Require significant amount of capital to get coverage in the first place. Can t space payments out over time. 6

9 Target Market for Hybrids As with any product, life and annuity hybrids are not right for everyone. But there are several occasions where hybrids make sense. Ideal Hybrid Prospect Composite Sketch Typically range in age from Optimistic about their health and don t expect to need long-term care, but want to be prepared just in case Have significant assets and were prepared to self-insure for long-term care Like the fact that their money can serve dual purposes Hybrids by the Numbers 85 Percentage of buyers who are between 58 and 72 years old 60 Percentage of buyers who are female 1.3 million Average total portfolio of hybrid buyers According to sales figures from Genworth financial Objections to LTCi Stand-alone LTC policies offer the most robust benefits to help individuals to insure their LTC needs. However, with the average premium coming in at more than $2,000 a year, sales can be tough to come by. 7

10 Cost is just one objection agents face when selling LTCi. Other obstacles include: Denial about their need for insurance. Many either don t want to think about their need for coverage or think they re already covered through programs like Medicare. Consumers don t know about the need or the available solutions Confusion and indecision brought on by policy complexities Concerns about company stability in the marketplace Uninsurable individuals Resistance to paying into a policy for years and then dying without ever making a claim So if you can t convince a client that LTCi is worth the premium, what do you do? Isn t some coverage better than none? If you have a client who balks at standalone LTCi, remind them of their options for funding a long-term care stay: Personal savings Medicare Medicaid Employer-based or individual medical insurance LTC insurance A life or annuity product with LTCi built in (hybrid product) A stand-alone LTCi policy may be the best solution for protecting your clients, but Hybrid products are the next best solution in terms of benefits and may answer many of the objections your clients have. But how do you know when to pivot in your sales approach from the stand-alone product to a hybrid? 8

11 Here are some situations where Hybrids might make sense: Cost-based refusals to LTCi Afraid that they ll pay high premiums for years and then never need the coverage. Prefer a single-premium payment to avoid the risk of premiums increasing in the future. (Although Mutual of Omaha does offer a stand-alone LTCi product with a single premium payment option.) They have a significant lump sum that can be used to purchase a hybrid policy. We urge you to remember during Long-Term Care Awareness Month that there are many ways to create a plan for long-term care. If your client balks at a traditional LTCi policy or doesn t make it through underwriting, don t stop there. There are a number of alternatives to help secure your clients future. For more information on LTCi and Hybrid products call a marketing coordinator. LTCi Department (option 4) Annuities Department Life Department

12 Answers to Frequently Asked Questions How does the Pension Protection Act treat long-term care riders on life insurance and annuity contracts? The PPA separates the benefits of the life insurance contract or the annuity contract from the benefits provided by the LTC rider. The LTC rider is treated as a separate contract, independent from the underlying life insurance or annuity contract, for purposes of determining whether it is qualified long-term care insurance and the taxation of the benefits provided under the rider. Can an LTC rider be added to a life insurance contract or to an annuity? The PPA added specific language stating that the addition of an LTC rider to a life insurance contract or to an annuity will not cause the life insurance contract or the annuity to fail to qualify as valid insurance or annuity contracts. If an LTC rider is added to an annuity, will the rider charge be considered taxable income? Prior to the PPA, the rider charge would be treated as a charge against the cash value in the contract, which would be included in the annuity owner s income. As of January 1st, 2010, LTC rider charges against the cash value of an annuity contract will not be included in income but will reduce the basis in the annuity. Can I do a tax-free Section 1035 exchange of a long-term care contract for a new long-term care contract? The PPA added paragraph (a)(4) to IRS Code 1035, stating that as of January 1st, 2010, a LTC contract can be exchanged tax-free for another LTC contract. Can I do a tax-free Section 1035 exchange of a life insurance policy or an annuity for a long-term care contract? The PPA has amended IRC 1035 (b), so that as of January 1st, 2010, tax-free exchanges of annuity or life insurance contracts for a long-term care contract are allowed. 10

13 Can I do a tax-free Section 1035 exchange of a life insurance contract for a life insurance contract with an LTC rider? The PPA has amended IRC 1035(b) so that as of January 1st, 2010, it will be possible to do a tax-free exchange of a life insurance contract for a life insurance contract with an LTC rider. Can I do a tax-free Section 1035 exchange of an annuity contract for an annuity contract with an LTC rider? The PPA has amended IRC 1035(b) so that as of January 1st, 2010, it will be possible to do a tax-free exchange of an annuity contract for an annuity contract with an LTC rider. 11