Last month, I discussed the evolution of the long-term care insurance (LTCI) industry and why LTCI is so needed.
Recently, Fidelity Investments calculated that a 65-year-old couple needs more $250,000 after-tax savings to cover medical expenses in retirement. Note that the Fidelity figure does not include long-term care (LTC) expenses.
Private LTC insurance is one answer. Here are three LTC designs that insurance companies use to manage LTC risk:
- Traditional LTCI, or "pure" LTCI.
- Life-LTC hybrids (also known as asset-linked or asset-based LTC), generally funded with a single-premium policy–as an alternative to a CD–and built on a life insurance chassis.
- Life-LTC hybrids created with life insurance and an LTC rider associated with an accelerated death benefit (DB) feature.
Over the last 200 years, the life insurance industry has become a master at creating many types and uses of life insurance that go beyond income replacement.
The LTCI industry needs to adopt that kind of flexibility. Participants need to recognize that the new world of LTCI is based upon combo/hybrid products.
Well-educated agents can translate these new plan designs into applications based upon the minimal incremental cost of providing the LTC riders and benefits. Here are four applications:
1. Buy-sell funding tool. Life insurance can be used to fund a buy-sell agreement between business partners.
In this type of buy-sell arrangement, adding a LTC rider (accelerated death benefit feature based on the LTC triggers) is an inexpensive way to get LTC benefits.
This type of agreement addresses two risks to the business.
First, it protects the owners in their working years against the risk of a chronic disability. Then at retirement, this permanent hybrid life policy can be rolled out to both reinsure retirement income and support a business succession plan or estate planning wealth transfers.
2. Bonus 162 plans are a standard part of well-established executive comp programs.
The addition of the LTC-accelerated DB rider provides the same living benefits as shown above. If the corporation owns the policy, use the brands that incorporate the indemnity style of claiming benefits. If the executive owns the policy, then the reimbursement style is an option in the design.
