As brokers have observed changes in the LTCi industry, including past rate increases and carriers leaving the market, some have looked for alternatives to traditional LTCi. They want something that addresses the client concern of “use it or lose it.” Combo/hybrid products can be a solution.

What is a combo product?

Combo products, often called hybrid or asset-based products, combine a life insurance or annuity contract with a long-term care benefit. In addition to allowing the client to accelerate the death benefit/annuity value to use for long-term care, some products offer an additional extension of benefits that can be used if the long-term care need continues after the death benefit is exhausted.  This creates a better way to “self-insure”.  The client self-insures with the death benefit/annuity benefit that might otherwise go to heirs and because of that, they can buy an inexpensive partial catastrophe coverage (partial “stop loss” coverage).

For life/LTCi combos, there are two basic types, determined by their tax status. §7702(b) qualifies as LTCi, hence can be marketed as LTCi, and benefits for LTCi will trigger the same as they would for a traditional LTCi policy.  That is, the client is certified by a licensed health care professional to be unable to perform 2 of the activities of daily living for 90 days or longer, or the client is diagnosed with a severe cognitive impairment. Any product with extension of benefits or (compound) benefit increases is a 7702(b) product (except we have one work-site §1.01(g) product with an extension of benefits). They focus more on LTCi than on cash value and often they are paid in one single lump sum payment, or over only a few years.

The other option, §1.01(g), offers an accelerated death benefit that can be used for long-term care and sometimes for a terminal illness. §1.01(g) policies vary widely. The accelerated death benefit rider might be included in the policy with no upfront fee.  Alternatively, fees may be charged when the client uses it. Benefits are often paid in a lump sum, as opposed to monthly payments received from a §7702(b) plan.  Benefits are always on a “cash” or “indemnity” basis rather than “reimbursing” actual expenses.  Sometimes they require a “permanent” ADL lost, but the trend is away from that requirement.

The information here will focus on §7702(b) plans.

When to consider a combo product (versus traditional LTCi)

  • The client is concerned about rate increases on traditional LTCi (Note: we believe stand-alone LTCi policies issued today are stable, but some people are uncomfortable due to the past.)
  • The client is not eligible for tax breaks which apply to stand-alone LTCi.
  • The client is not likely to benefit from Partnership “asset disregard”.
  • Client doesn’t like the idea of use-it-or-lose it associated with traditional LTCi

 

Qualifying for combo product:

While some of the combo carriers offer a streamlined underwriting process, underwriting is still required. In general, the same conditions that are uninsurable for LTCi are uninsurable for a life/LTCi combo. There are generally fewer rate classes on combo products.  Streamlined underwriting may result in an issue to someone who would be declined under full underwriting or the reverse could be true.

Use our health pre-qualification form before you meet with your client to allow you get an accurate feel for the most likely rate class.

 

How does a combo product with an extension of benefits work:

7702(b) combo products combine a whole or universal life insurance chassis with an extension of benefits rider. These two pieces allow for a death benefit if the client doesn’t need LTCi, or a larger bucket of money to use if the client does need LTC.

Based on the premium, age, underwriting class, etc. the policy generates a “Specified Amount” which is the minimum death benefit (the death benefit might be higher early in the policy and late in the policy, but at likely ages of death, this minimum death benefit would apply.  If the client needs LTCi, the first thing the policy will do is to accelerate the death benefit. It is usually accelerated over a period of two or three years. The two-year acceleration generates a larger monthly amount since the death benefit is being spread out over only 24 months. If the three-year acceleration is selected the minimum death benefit is spread out over 36 months.  These are reimbursement benefits, so, if the full amount is not used each month, the accelerated death benefit will take more than 2 or 3 years to get paid out.

At the time the policy is purchased, the client can also choose an extension of benefits. Four-year or endless (lifetime) extension of benefits is most common. The extension has the same maximum monthly benefit as applied for the first two or three years of the policy, except to the degree that compounding applies. The extension doesn’t reduce the death benefit (the death benefit has already been used up),  It’s like a second pool of money with a long elimination period (since it can’t be accessed until the first pool is used).

If the client uses the entire death benefit, there’s usually a residual death benefit (ranging from 5-20%, depending on carrier).

A $x/month two-year benefit period (possibly with extension) can cost less than a $x/month three-year benefit period (possibly with extension) because the three-year benefit period generates a specified amount of 36 x $x whereas the 24-month period generates a specified amount of only 24 x $x.

At older ages, extension of benefits or the benefit increase options might not be available with some carriers.

 Return of premium and payment options:

Most combo products offer a cash value if you no longer want the policy. Because most clients don’t surrender these policies, and because high cash values require that the insurer hold higher reserves, the industry is migrating toward cash values equal to 80% of the premiums paid (less 100% of claims).  There is often an option to grade the cash value up, over 5  years, to 100% of premiums (less claims).  Most people prefer more death benefit and LTCi benefit rather than more cash value.

 

Which product to quote:

Combo products are hard to compare to each other. Quoting several options leads to “analysis paralysis” for both the advisor and client.  We focus in on the best options for your client if your client answers these  supplemental questions. Based on their answers, we will let you know which product best addresses their needs.

Use our customizable combo fliers to discuss opportunities with your clients.

 

Return of premium and payment options:

One of the biggest attractions for a combo product is the possibility of deciding you don’t want the policy and getting your money back. Because most clients don’t surrender these policies, and because a full return of premium requires that the insurers hold higher reserves, we are seeing more of the carriers offer a return of premium that starts a little lower and grades up to 100%. Or, they will offer a lower return of premium at any time. The lower return of premium allows for a higher face amount and a higher monthly LTCi benefits.

 

Which product to quote:

Even more so than traditional LTCi, combo products vary widely. Quoting multiple options can lead to “analysis paralysis” for both you and your client. We help you narrow down the choices by having your client answer these  supplemental questions. Based on their answers, we will let you know which product best addresses their needs.

Use our customizable combo fliers to discuss opportunities with your clients.