Using Annuities for Long-term Care
As sales of LTC insurance plummet, combination products — including annuities with LTC riders — are picking up some of the slack as a useful alternative for some clients.
As sales of LTC insurance plummet, annuities with LTC riders are picking up some of the slack.
With millions of baby boomers already in retirement or nearing it, the need for long-term care insurance may seem obvious. Retirees face extended life expectancy as well as rising costs for nursing home stays, assisted living facilities and home care.
The fact that annual premiums may unexpectedly be increased is one factor that causes some clients to be leery of LTC policies.
Nevertheless, stand-alone policy sales declined nearly 70% from $550 million in premiums in 2012 to just $176 million in 2017, according to the U.S. Individual LTCI Sales Survey conducted by LIMRA, a research, learning and development organization.
One reason is increasing costs: According to the National Long-term Care Insurance Price Index, published by the American Association for Long-term Care Insurance, a married couple, both 55 years old, had an average annual premium of $2,466 in the 2012 survey. By 2018, that number had increased to $3,000.
Demand for LTC coverage is actually on the rise, but dollars are flowing into other types of contracts, including annuities with LTC riders. LIMRA reports that annuity-ltc combos surpassed individual LTC policies in sales for the first time in 2014.
Two years later, the combo product totaled $480 million in sales, more than double stand-alone policies, which brought in $228 million. LIMRA’S numbers for annuity-ltc combos sold in 2017 have not yet been released.
In view of the fact that a common stand-alone LTC insurance policy might charge annual premiums but pay Advisor Jimmy Lee says clients worry about possible big jumps in LTC insurance premiums. benefits only if care is eventually needed, a client might prefer to pay a larger upfront sum for an annuity-ltc combo that will pay out certain amounts of cash, regardless of need.
If care is needed, such an annuity will be able to provide either increased liquidity or additional cash flow.
Coming on Strong
By the numbers, it’s apparent that annuities with long-term care benefits are among the arrangements that are replacing traditional LTC policies. In fact, products with some LTC features accounted for 12% to 15% of total annuity sales last year, estimates Jeremy Alexander, CEO of Beacon Research in Northfield, Illinois.
Such annuities may deliver protection from potentially disastrous LTC
costs, including, for instance, the $8,121 national median monthly cost of a private room in a nursing home, as reported in the Genworth 2017 Cost of Care Survey.
What’s more, for some clients, the lump sum upfront is more attractive than the uncertainty associated with paying an annual premium, which could rise over time.
“Many clients do not like the high premiums of long-term care insurance and the possibility that insurers will raise premiums in future years,” says Jimmy Lee, founder and CEO of the Wealth Consulting Group in Las Vegas.
“We have to educate clients to make sure they understand premiums can go up, and that multiple companies have done so on existing contracts,” Lee adds.
Beyond the current and potential future premium expense, prospective LTC insurance buyers may object to the idea of never receiving a benefit if care isn’t needed.
Although the exact guidelines may vary by contract, policyholders often can access benefits only if they qualify for care that is needed because of a diagnosis of some type of dementia or the inability to perform two of six activities of daily living: bathing, eating, dressing, toileting, transferring from place to place and refraining from incontinence.
Clients react “very positively” to the idea of having less rigid requirements in order to gain access to benefits, says Robert Schneider, vice president and relationship manager at Milwaukeebased Cleary Gull Advisors, a Johnson Financial Group company.
“Clients are often hesitant to discuss LTC insurance because they immediately think of the stand-alone policies,” he says.
Some prospective buyers of LTC insurance object to the idea of paying premiums for years and never receiving a benefit.
“The usual responses are variations of ‘that’s too expensive’ and ‘I might not ever need it.’ However, they open up once they learn of the available alternatives. Knowing that the money can be taken back if needed or go to beneficiaries in the form of a death benefit is comforting.”
Indeed, combos making use of Clients of advisor Robert Schneider have reacted positively to the flexibility of combo policies. fixed-index annuities can deliver some return even if long-term care is never actually required.
“The annuities I have used for this purpose have mostly been FIAS with lifetime income riders,” says Jeremy Kisner, chief planning officer at Planning Great Retirements in Phoenix. “The LTC rider increases the monthly or annual payout to 150% or 200% of the regular payout once the policyowner cannot perform two of six activities of daily living.”
The increased payout may be limited by time or account value, according to Kisner.
“For example, if the lifetime payout is $20,000, the insurance company may increase the payout when LTC is needed to $40,000 per year for up to five years or until the policy value reaches zero. Then, the payout would return to $20,000 for the remainder of the client’s life,” Kisner says.
Drawbacks of Combo Plans
Of course, annuities with LTC benefits are not without their flaws.
“There are many drawbacks to buying an annuity with a long-term care rider,” says Scott Olson, co-owner of Ltcshop.com, an insurance firm based in Camano Island, Washington.
“The opportunity cost is high because the return on the annuity is
usually less than 1%, often 0%. With some of these annuities, the return is negative every year: the cash surrender value decreases every year instead of increasing.
In addition, someone who puts $100,000 into one of these annuities is essentially buying a $100,000 deductible; the buyer has to use all the money that was paid in before the insurance company starts using its money.”
Hybrid products are ideal for those with high cash value in a life insurance policy whose death benefit is no longer needed.
Some observers question the fees that come with annuities, including those with LTC riders, but Kisner is not one of them.
“Annuities represent less than 10% of my business, but I am happy to defend them when clients raise questions about fees,” Kisner says. “They solve important financial planning problems when used appropriately. I welcome and usually initiate the conversation about fees.”
According to Kisner, he usually says something like, “It is true that annuities have higher fees than other investments. This is because annuities are insurance products and, just like auto insurance or homeowners insurance, you are transferring risk to the insurance company.”
Kisner goes on to explain that an annuity is transferring investment risk, interest rate risk and longevity risk to the insurer.
“Naturally,” he points out to clients, “the only reason an insurance company is willing to absorb those risks is because it is being paid a fee. The fee for this annuity is XYZ amount.
“I think it makes sense to pay those fees for this portion of your money because the annuity helps with your two biggest objectives: lifetime income and some level of protection in the event of long-term care. The remainder of your investments will have lower fees, more liquidity, more upside potential, etc., but will not have the guarantees of the annuity.”
‘The Ideal Client’
Some clients will be more receptive than others to the idea of getting some LTC coverage through an annuity.
“The ideal client for using these hybrid annuities for LTC coverage is someone who does not want to pay annual premiums for a traditional policy and wants their money in a safe, yet low-yielding investment,” Lee says. “If the long-term care benefits are not triggered, the client can earn a low yield from the annuity.”
Schneider believes that hybrid annuities are appropriate for nearly every level of client, but he has discovered one particularly welcoming scenario.
“We find that many retirees have significant cash value built up in life insurance policies in which the death benefit is no longer needed,” Schneider says. “Exchanging the cash value into a hybrid product to address the potential future long-term care need is a great way to get long-term care insurance with no additional out-of-pocket expense.”
Annuity-ltc combos may gain even more popularity if they’re embraced by fee-oriented advisors.
“We have found RIAS to be highly interested in no-load versions of both hybrid life and annuity products with a long-term care benefit,” says David Lau, founder and CEO of DPL Financial Partners, an insurance firm in Louisville, Kentucky, that is developing such contracts.
“Annuity products with LTC riders, particularly the fixed annuities, generate interest from RIAS because they are less Fees for annuities are justified in light of the risk insurers are absorbing, says planner Jeremy Kisner. complicated than the life versions.”
Annuities with LTC riders, Lau explains, present clients with an opportunity to reallocate cash assets into a product that delivers similar yields while providing a benefit for long-term care.
“They’re kind of a no-brainer,” he says. “Why sit in cash earning very little interest when you can allocate to a product that pays a competitive rate and two to three times your account balance in an LTC benefit?”
Annuities with LTC features will be described as “no, thanks” by some, rather than as “no-brainers.”
Yet they offer advisors another tool for their toolbox, one that may deliver some custodial care protection to clients who feel traditional long-term care insurance has become the high-priced screwdriver.