The “Missing Link”: The Broadening Extended and LTC Planning Options
By Carroll Golden, CLU, ChFC, CLTC, CASL, LECP, FLMI, the Executive Director, Limited and Extended Care Planning Center (LECP Center) for the National Association of Insurance and Financial Advisors
What are the Realities and Impact of Extended Long-term Care Today?
An aging population is not the only one impacted. The problem spans generations.
We often see the statistic that 10,000 people are turning 65 a day. We can now update that statement by saying that 10,000 individuals are turning 70 each day. By the year 2035, it is projected that the number of individuals over the age of 65 will outnumber the number of individuals under the age of 18.
One of the effects we will cover later is what this reality does to the continuing availability and cost of care. According to a 2009 Wells Fargo survey where the participant had an average age of 70, when asked where their primary source of funds for retirement comes from, a startling number – 86 percent – said Social Security and pension. Just 5% called out IRAs or 401(k)s. Boomers look to Social Security for 41% of their retirement expenses and pensions for 19%. In the case of the Millennials, only 25% expected to rely on Social Security or 12% for pension plans.
What is the Effect of the Caregiving Crisis Today?
There is a severe shortage of facilities now with trained personnel and health care aides. Let’s look at the impact that caregiving costs may have on their funding caregiving, given the need to fund IRAs and 401(k) plans.
Most employers do not even measure the effect of caregiving on the employee, and only 24% of the employers acknowledged the impact caregiving has on productivity on workers according to research from in 2019 Transamerica Center Retirement Studies. Eighty percent of employees with caregiving responsibilities admitted that caregiving affected their productivity.
Today’s workers plan to live to an average age of 90 or longer. Planning to live longer requires a more robust plan to fund retirement, but it also directly relates to funding care needs.
The increase since 2004 in the cost of extended care in an assisted living facility is 69%. The percentage increase since 2004 in the cost of extended care with a home health aide is 25%. For 2019, the median cost of a home health aide or an assisted living facility is around $50,000.
What Information Should You Gather from Clients to Plan for Extended or LTC?
You can generally use the same approach for each client. The results will reveal individualized options to cover this risk. Be sure to ask:
- What the client can afford for care now?
- What can the client afford to maintain during retirement years?
- Did they share a story about what they think “retirement” will look like?
- Who and what is important to them?
- What support can they reasonably expect from family, friends, the government?
- Do they have a legacy to protect?
- Are there “consequences” to needing care that concern them the most?
- Did they have a family member or friend who needed extended or LTC? Who paid for it?
- Do they understand there are “can” and “cannot do’s” from products/services?
- Did you adequately uncover objections?
Basic Options for Funding Extended and Long-term Care
Let’s start with the two ends of the spectrum. Most wealthy people do not quickly move to self-funding, given the opportunity to analyze the cost of care with the cost of insurance self-funding. One source of self-funding is using an HSA (health savings account) to pay LTC premiums up to an annual limit. Any individual with a qualifying high-deductible health plan can open an HSA. There are a few exceptions. Although HSA funds cannot be used to pay regular health insurance premiums, you can withdraw money to pay specialized types of insurance. Long-term care insurance premium payments qualify.
At the other end of the spectrum is a reliance on the government to cover the cost of care. Government programs are limited by financial resources and availability. The most obvious challenges include a lack of control. It was one thing to have a random roommate in college. It’s another thing to have it when you’re not feeling well, and you suddenly find your room another person who’s not feeling well. There is also the growing shortage of services and trained personnel and the infamous paperwork.
State budgets are starting to become noticeably impacted by the cost and availability of services and trained care personnel. As a result, states are learning to pay more attention to this growing budget issue. For example, kudos to the governor of Maryland. He signed Bill 953 into law, creating the Maryland task force on long-term care education and planning. Arkansas, Vermont North Dakota, California, and the membership of the National Association of Insurance Commissioners and AIC voted unanimously to create a task force focused on long-term care insurance.
Market stability also has significantly changed LTC. A shopper’s guide was recently adopted at the federal level of the National Association of Insurance (NAIC). The National Association of Insurance Financial Advisors (NAIFA) represented insurance professionals and advisors at the federal interagency task force on LTC interagency. They discussed policy recommendations to complement the reforms by the states relating to LTCI regulation.
A Basic Review of Extended and Long-Term Care Insurance Options
As advisors, we need to carefully read the specimen contract or work with specialists that have done so. There’s no such thing as a perfect solution in terms of extended and LTC contracts. Each contract, whether insurance or non-insurance, must be carefully looked at it and explained about what it does and certainly, what it does not do, how it does it, when it does it, where it does it, and for how long it does it.
Let’s start with traditional long-term care insurance. To trigger long-term care benefits in a traditional long-term care contract or an LTC rider, the policyholder must be able to qualify in one of two ways: the inability to perform at least two activities of daily living or suffer a cognitive impairment that requires care to protect the insured. It must be certified by a licensed healthcare practitioner.
The sales of traditional standalone long-term care policies accounted for 20% of the 2017 policies sold, while claims incurred totaled $11 billion. In the 2019 Milliman long-term care survey, 15 carriers reported a 13 percent drop in the number of policies and a five percent drop in the amount of new annualized premiums.
What are the reasons? Since 2012 premiums have noticeably increased. Rate increases have been well-publicized. There are also additional advisor education requirements that only apply to selling standalone long-term care that has contributed to declining distribution as well as limiting joint sales.
Hybrid combo products are considered the hot market now. The Pension Protection Act (PPA) signed into law on August 17, 2006, became effective in 2010. It allows life insurance and annuity companies to offer long-term care riders on top of regular policies. The PPA also provided that the internal charges against the values in annuities and permanent life insurance policies used to pay long-term care insurance premiums aren’t taxed. The long-term care rider and the critical illness rider are both accelerated death benefit riders, which means that the benefits paid out diminish the asset on which the rider rests. Some people were concerned that if the death benefit were used for care expenses and the money ran out, what would happen? Some companies may offer – for an additional fee – an extended death benefit (EOB) once the death benefit has been fully exhausted. The policy will continue to pay benefits.
After the death benefit has been used up, sometimes they provide a residual death benefit. There have been two innovations in the EOB world that are worth calling out.
- The shift from the single pay to annual pay periods. It has opened the market to younger and less affluent buyers as well as increasing the advisor and agent interest. This is very significant.
- Some policies are now offering compound benefit increased options, but that comes with a price tag that some consumers may not want to pay. It can be expensive.
The devil is in the details.
All in all, according to the Life Insurance Marketing Research Association (LIMRA), combo life and LTC policies represented 16 percent of new 2017 annualized life insurance premiums. If you include a hundred percent of the single premium sales, the figure moves to 4.1 billion. We can expect this trend to continue.
A lot of us are familiar with traditional long-term care insurance, and we’ve heard about hybrid products or combo products. A lot of us are not that familiar with short term care, with nearly 40 States approving some form of short-term care products. The market is taking shape as a reliable solution for those who may not be able to qualify for long-term care insurance or riders, or maybe they have an affordability issue. The most appealing aspect of this option is its affordability. Premiums can be as low as $100 per month and provide a benefit that could cover 360 days of care. There are a couple of useful applications for short term care. Clients facing health issues, especially at older ages, may provide a little more time to work with their family or with a planner to prepare for the longer-term care options that may be available to them.
Others may use short term care insurance on the front end of their long-term care plan to lower the premiums because then they could select a longer elimination period. Another option is Home Health Care policies and riders, according to the AARP Public Policy Institute. When asked, almost 90% of adults want to stay in their home for as long as possible, so we see policies that address this need gaining popularity now.
What is the State of Worksite Long-term Coverage?
Some employers may see more value in offering an insurance product that affects employees in their current employment rather than a traditional LTC policy, which is frankly more likely to be used after leaving employment.
It’s important to note that there is the ability to do a Section 1035 exchange under the IRS code provision that allows for a tax-free transfer of an existing annuity, contract life insurance policy, long-term care product, or endowment for another one of like kind. The primary beneficiary for those with an existing life insurance policy that may either have significant cash built up, or it’s no longer needed, or a non-qualified annuity with significant tax-free build-up. It can be exchanged for a policy that includes paying for long-term care. There is a little bit of a challenge there because you must make sure that a carrier is equipped or is willing to do such exchanges.
The percentage of traditional long-term care policies bought in 2018 in the worksite was 15% of total traditional LTC sales. However, worksite policy sales have decreased by 41 percent. Why is this significant? For starters, a major carrier withdrew from the market; but what really affected the level of sales was the requirement for unisex pricing for products sold at the worksite. As a result, males may get a better deal purchasing individual coverage outside the worksite because before, males were traditionally less expensive. When you walk into an elder facility, you will find that most everyone is female.
What Concerns Might Your Clients Have Regarding Long-term and Extended Care Policies?
Let’s address some of the public issues concerning rate increases because I think that that’s affected souring some people on considering what to do to ensure this missing link in a solid retirement plan.
Some clients may have friends who have a carrier that exited the business, but that doesn’t mean the carrier no longer sells long-term care products. Assure them that existing policies are never canceled. The contract becomes part of a closed block of business, and they’re either handled by the carrier or a third-party administrator (TPA).
The only way to cancel a traditional long-term care product is to default on premium payments. Even then, for a limited time, reinstatement may be possible. In some cases where the worksite program is in place, some carriers who no longer sell individual policies may also still be offering new employees the ability to participate.
What about liquidation and the role of the State Guarantee Association? Each state operates an Insurance Guarantee Association. It’s sort of the insurance industry’s FDIC (Federal Deposit Insurance Corporation for banks).
If an insurance company fails, policyholders are protected up to certain limits. Those limits, in some cases, can be as much as a half a million dollars. Every insurance company that sells health policies in the state is assessed a fee to cover any costs.
The reason for increased premiums is to cover the current policies that were sold previously. One size doesn’t fit all. Each carrier has had to look at each block of sold policies, and within the block, consider a number of variables like how old it is and what is in the block. They are obligated to make a sound financial case to each state who then may grant the premium increase request, or frankly, they may modify it. We’ve seen that before. Granting a request for the need for additional carrier profit is not a valid argument.
There is very little historical data upon which to base policy lapses. They used a percentage from non-LTC policies. Some expectations were as high as six percent, but LTC lapses are often less than 2%. We’re talking even after the rate increases have been put in place.
Interest rates were substantially higher when policies were priced back then, while fluctuations might have been expected. A prolonged low-interest-rate environment was not accounted for. In addition, higher-than-expected claims, as well as early claim experience lasting longer than expected, has negatively impacted pricing. So, faced with the financial realities of reserves being seriously underfunded, the carriers had to create options and alternatives for dealing with them.
All insurance carriers allow clients to reduce the maximum daily monthly benefits, and all allow clients to move to shorter than originally available benefit options. Eighty percent of today’s insurers allow clients to select a longer elimination period. Carriers may include a specific interval of time where policyholders may exercise the contingent non-forfeiture benefit that allows the policyholder to retain the policy as a paid-up benefit.
In addition to evaluating which offer alternative best fits a client’s situation, there are, of course, the new products out there. Generally, though, I want to remind everyone that it’s not in the client’s best interest to replace an older policy.
What about sales of new policies? Is it beneficial for advisors to approach rate increases? We are beginning to see more rate increase hearings. Maryland, Maine, Massachusetts, Minnesota, Pennsylvania, and South Dakota. The Long-term Care Insurance Rate Model and Act and the American Council of Life Insurance has established a working group to specifically address future increases and issues that may relate to combo or hybrid products.
Non-insurance Extended and Long-Term Care Options
Non-insurance options to consider offsetting the very expensive impact of long-term care include:
- Reverse Mortgage Funding
- Life Settlement Funding
- Veteran Benefits
- Crowd Funding
Reverse mortgages can improve a retirement income plan by spending coordination with a client portfolio by using a line of credit as a standby feature, in case the market is not a place that you want to go for funding bridge income to delay Social Security benefits. It is also a significant funding option to pay taxes for a Roth IRA conversion, providing a larger inheritance or contingency fund, or using it for unexpected care needs. Reverse mortgages have come a long way in terms of being regulated, with regulation such as the Reverse Mortgage Stabilization Act of 2013, which made them safe and sustainable.
Life insurance policies can also help pay for long-term care. A client may be able to raise cash by selling his or her life insurance policy for its current value.
Consumers think that the long-term care services (LTSS) (editor’s note: defined as the services and supports used by individuals of all ages with functional limitations and chronic illnesses who need assistance to perform routine daily activities such as bathing, dressing, preparing meals, and administering medications), that have been introduced to Medicare Advantage plans are going to help them. I’m just going to list the qualifications the person must meet, and then you judge.
- They must have one or more comorbid (the simultaneous presence of two chronic diseases or conditions), or
- Medically complex chronic conditions that are life-threatening, or significantly limit their overall health, or function to have a high risk of hospitalization or other adverse health outcomes, and
- Require intensive care coordination.
I would encourage you to remember that these are state-approved programs.
For the carriers, it’s based on objective criteria. They have quite a bit of broad discretion in developing the LTSS supplemental benefits. So, if a client changes their Medicare Advantage plan, or the carrier changes a plan, or it’s not stable yet, it doesn’t provide what we traditionally think as extended long-term care benefits.
Financially qualifying under medical Medicaid programs: historically, there have been no penalties for an applicant who divests himself or herself of assets before applying. The regulation has established a three-year look-back period, and for Extended Care Service, that may be subject to a copay. We really could do another whole series on just this topic.
And finally, there’s Crowdfunding. Over 10,000 people start a GoFundMe account. Significantly, one-in-three GoFundMe accounts are designated for medical costs.
Estimate Retiree Medicare Costs
If we’re concerned about the low rate of retirement savings, the estimated savings required for an individual or couple who turned 65 in 2019 to have a 90% chance of meeting expenses is $144,000 for a man, $163,000 for a woman, and $301,000 for a couple. These amounts cover Medicare Part B health insurance, Part D prescription drug coverage, Medigap Plan F, and out-of-pocket drug costs, assuming median prescription drug expenses. These estimates do not include services not covered by Medicare or Medigap.
These estimates tell us that even if a member or client is saving, given the costs associated with current Medicare coverage, their income might have a big bite taken out of it. I mentioned this because so many think that the government or these Medicare programs are the answer.
I think that most of us agree that this entire issue is more than a passing fancy on the part of us who are concerned about the impact of retirement on all generations.
What exactly can we do now that we have an overview of all these different options?
I remind myself that I have one mouth and two ears because the more we hear a person’s story, the more we can gauge their level of motivation, as well as their level of knowledge. It’s essential to personalize the conversation to keep the focus.
- Listen to client considerations. Sit and listen for essential information, such as who and what is important to them. We need to know about, for example, their financial picture.
- They tend to focus on assets for retirement, but with long-term care needs income is also a major consideration.
- Who’s there real significant advisory influence?
- What is their retirement plan? Do they even think about protecting it or what might drain it?
- Get to know their health history. You might want to know if they’ve had anybody in their family with Alzheimer’s or cognitive impairment.
- Tools and the questionnaires are out there. There are some very fun things you can do to uncover how they feel about the risks and whether they are willing to take the next step.
- I think it’s important for them to know whether what they know is hearsay or whether it’s true.
My advice is to change the conversation to one based on what it affects. In our industry, we have found that talking about these issues has moved clients to a more realistic view of what they need to do and what could happen to their cash flow. They may have to invade capital that could result in unplanned taxes. They get angst about market timing and liquidity. What if the markets down and I must do something? A lack of planning can result in a lack of personal determination.
By sharing the expanded list of options, clients will trust that you’re focused on them and not on a product.
If you don’t ask you don’t get. Simply ask about extended or LTC risk protection. That’s part of this business and best practices. You have a responsibility and dealing with the topic of retirement to also find out if they’re expecting you to protect that.
What does that mean? How can you move forward? Let’s look at some of these resources. There is the LECP center, which is NAIFA’s Limited and Extended Care Planning Center. Through thought leadership, events, educational resources, research, networking, and advocacy, the LECP Center will leverage technology to increase conversations, build trusted relationships, and expand distribution year-round while raising consumer awareness.
I think also it’s important to mention the Certification in Long-term Care, the CLTC. It is a top-rated designation program. The fact is, there is likely no other unexpected life event with the potential to cause serious, if not irreversible consequences to a family than a need for care over an extended period. Planning starts with a conversation.
About Carroll Golden, CLU, ChFC, CLTC, CASL, LECP, FLMI, the Executive Director, Limited and Extended Care Planning Center (LECP Center) for the National Association of Insurance and Financial Advisors
Carroll Golden is a forward-thinking organizational consultant and business strategist with a diverse international background holding senior leadership roles within the healthcare and insurance marketplace. Carroll is recognized by industry peers for her contributions in the extended and long-term care insurance (LTCI) field and is a frequent speaker and noted author across numerous professional benefits and financial services organizations.
Carroll has an extensive business background focused on business development, solutions selling, risk management and insurance distribution. As a Senior VP in charge of a leading carrier’s LTCI Sales and Marketing department, her nationwide responsibilities spanned formulation of strategic sales plans, product development, innovative and traditional marketing initiatives. She excels in developing relationships and adding value within both small, privately-owned companies and large global corporations.
Working with a Certified Public Account audience, Carroll did a local radio spot on LTCI, focusing on the Executive Carve-Out Business market and later specialized in Group/Worksite Long Term Care Insurance. For several years, she contributed a monthly feature to Benefits Selling Magazine. Carroll gained brokerage and field perspective working with East Coast, and later with West Coast, national LTCI distributors.
Carroll entered the professional world as an International translator, having spent several years as a student at the Sorbonne in Paris and continuing her studies in Reims, France. Traveling to more than 44 countries while working with a prestigious Manhattan, NY law firm, Carroll gained insight into how different customs and traditions influence governments and businesses.
As an active member of the Society of Financial Service Professionals (SFSP), Carroll served as Chapter President and taught continuing education (CE) classes. Additionally, she served as Chairperson for both the Society of Actuaries Fifth and Tenth Annual Intercompany LTCI Conferences. She currently participates on the Board of Directors of the Intercompany Long-Term Care Conference (ILTCI). Carroll is President of C. Golden Consulting, LLC and is currently working with the National Association of Insurance and Financial Advisors. NAIFA is creating the first of several Specialty Centers. Carroll is the Executive Director of the NAIFA Limited and Extended Care Planning Center (LECP Center). LECP is an easy to access hub-dealing with all aspects relating to or impacted by extended and long term care planning-or the absence of planning.
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©2020, Carroll Golden, CLU, ChFC, CLTC, CASL, LECP, FLMI, the Executive Director, Limited and Extended Care Planning Center (LECP Center) for the National Association of Insurance and Financial Advisor. All rights reserved. Used with permission.
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