Selling LTC: Uncovering the Benefits to a Life Insurance Policy

by Ray Kathawa

Your clients have many concerns as they grow older, and long-term care is certainly one of them. They’re also likely to be concerned about inflation, taxes, their family and their legacy, their income and who will be there when and if they need substantial help. Clients are looking for comprehensive planning and simple solutions that fit multiple scenarios. They also want value for what they pay for. This makes life insurance with an LTC or chronic illness rider an outstanding solution for planning purposes.

We must first acknowledge the naysayers who continually suggest that LTC riders and chronic illness riders are not good tools for helping clients protect against their long-term care needs. On a regular basis, I run into those who argue that these riders are not reliable and do not stand up to a good long-term care policy. They may be right — well, almost right. Traditional LTC policies are not what they once were. Policies with no lifetime benefits, with increased costs of coverage, and with non-guaranteed premiums have taken a toll on the industry. Market forces are no longer in the driver’s seat as most insurance carriers exit the market, leaving only a small number to compete. Also, policy holders don’t typically drop coverage in spite of almost-constant rate increases. As a result, carriers are scrambling to prepare for record claims. Many financial professionals argue that life insurance riders offer limited coverage; that they are not adequate planning tools. They also argue that, in many cases, they simply offer return of cash value in the client’s policy. All of these objections can be best addressed by walking through a typical client scenario.

Let’s look at a 65-year-old Baby Boomer who has done moderately well in his career. He has a wife, two children, and several grandchildren. He and his wife consider helping their grandchildren as a high priority in the planning process. They would like to help with future college costs, and have high hopes that they will do well and be successful. They are also concerned about the cost of health care and particularly, the cost of long-term care — whether they would be in an assisted living center or professional home care. They still have an income, but plan to finish out their careers in the next five years. They have amassed an IRA of $800,000 and have sufficient income between pension and expected Social Security payments. Combined with their investment accounts, they firmly believe that they won’t ever need the IRA money to live on. However, they are hesitant to give away assets in their IRAs because of their concern over rising health care costs and the possibility of needing extended care.

One potential solution would be to use a life insurance policy with a guaranteed death benefit that also contains a chronic illness rider or LTC rider. In these policies, the rider accesses the death benefit, as an advance, to provide funds for expenses associated with longterm care. Many options are available including paying only reimbursement of actual expenses, paying a specified monthly amount based on selections at purchase, and providing a specified percentage of the death benefit at the time of the acceleration. For our purposes, we will select a chronic illness rider that offers an acceleration of the death benefit at the time of claim. Here is how to best position this with our example client and how to explain why it may be a better solution than ordinary LTC policies: First and foremost, this option offers a significant death benefit as a life insurance policy with a guaranteed death benefit. It can be used to leave a legacy for children or grandchildren, provide for college costs, endow their Alma mater, or whatever suits the clients’ wishes. In addition, that death benefit is guaranteed. Unless the policy rider is accelerated, nothing short of a policy lapse will prevent this. As a side note, while mentioning policy lapse, we should address using short-pay and single-pay policies. They are used heavily for planning or structuring an annuity to guarantee future payments to avoid this possibility. Carriers structure that the lapse risk into the policy pricing as they predict claims. The most relevant difference from traditional LTC coverage is that your client will get what they paid for — a death benefit paid directly to their beneficiary as they intended.

Next, we should look at the policy’s flexibility. Usually, these policies only have a 90-day waiting period and pay any amount up to the specified yearly limit directly to the policy owner. The payments can be used for almost anything, such as paying your grandchild to live with you and care for you, for example. This could be one of the most appealing aspects for your clients. Many clients dread the idea of a cold institution being responsible for their care and find the idea of home care appealing in comparison. In addition, the policy allows flexibility around the amount accelerated. Clients don’t need to take more out than necessary, which leaves the tax efficient death benefit intact as much as possible. The policy becomes an asset with flexibility around how and when to access. Clients and their families can use it at their discretion.

Of course we can’t discuss all of the options and variables of life insurance policies with LTC or chronic illness riders, but it does make sense to at least mention one that most agents are not aware of. There is a single premium policy with some unique design features for clients, including a guaranteed return-of-premium from day one. In other words, this product might be extraordinarily appealing to clients who have money in CDs or money market accounts that provide no ancillary benefits. In addition, this particular policy offers an LTC rider with a specific monthly benefit. Most unusual is that the product covers not just one client, but also covers the spouse on the same policy with the same premium, and would allow both to go on claim at the same time. On top of all of that, it has a significant life insurance death benefit. Products like this are changing the industry and allowing clients incredible flexibility with significant coverage for their health-related concerns. With all these options available, if you are not considering and positioning life insurance products with these additional benefits to your clients, there is a good chance someone else is, or will be soon.

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Ray Kathawa has been working with agents and advisors for over 10 years, shepherding nearly $1 billion of business in that time. The last seven of those 10 years have been spent at M&O Marketing, where Ray operates as one of the top national marketing consultants. In his time at M&O Ray has achieved the Bo Johnson award as Marketer of Year, two consecutive years, making him the only national marketer to achieve that level of success. When Ray is away from M&O, he is devoting his time to his wife, son, and the St Jude’s March of Dimes organization. Kathawa’s work ethic and attitude about what he does and how he does it is what truly sets him apart and makes him an invaluable addition to this industry.