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.

Financial Planning - - Contents - BY DON­ALD JAY KORN

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.

Ac­cess­ing Ben­e­fits

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.

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