At the same time, advisors should recognize that is important for consumers to have a clear understanding of what they are purchasing when they buy a life insurance policy with a linked LTC rider:
- LTC riders don't come with a built-in inflation factor. Because of this, the funds available for LTC benefits cannot exceed the face amount of the contract. If the cost of care increases (as it has over time), then the funds will not last as long. If this is a client concern, then a life policy with a larger face amount can be considered, since this would increase the amount available for LTC benefits.
- When the LTC benefit is accessed, the death benefit shrinks dollar-for-dollar. In other words, as the LTC benefits are drawn down to pay for care, the life insurance policy's death benefit shrinks accordingly. Again, this may or may not be a client consideration, but it is important for the consumer to have a clear understanding of how the policy is structured.
- Rates are guaranteed and can't increase. If policyholders don't use the LTC benefit, they do not lose any money because 100 percent of the face amount is available for the death benefit. This overcomes the often-heard compliant about standalone LTC policies — if the policy owner doesn't use it, the money is gone.
Even though life insurance policies with linked LTC riders are generally quite straightforward, there are several issues that are particularly important so consumers can make informed decisions and avoid unpleasant surprises:
The difference between 101(g) and 7702B riders.
It's easy for consumers to think they are buying "long-term care" coverage, when, in fact, it turns out to be a "chronic illness" rider that only pays benefits if a physician certifies that the policyholder is "permanently disabled."
Indemnity payments are, in effect, accelerated death benefits. With little or no upfront cost and with fewer underwriting requirements than a 7702B, this type of rider, known as a 101(g), can be appealing. However, the words "long-term care" can't be used in marketing this type of rider.
In contrast, a 7702B is a true LTC rider, and requires a special license to sell the product. Benefits can be accessed when a physician certifies that for at least 90 days, the policyholder is unable to perform at least two Activities of Daily Living (ADLs) or suffers from a severe cognitive impairment.
7702B riders offer indemnity or reimbursement payments.
The difference goes beyond who receives benefit checks, a policy owner or a third party service provider. The reimbursement option offers the flexibility of making the payments to the policy owner or through a third-party service provider, based on submitting paid receipts to the insurance company. Indemnity payments are made directly to those who provide services.
With reimbursement, payments are limited to the actual charges for the services, even though the amount stated in the policy may be higher. Indemnity plans pay the maximum amount allowed by the policy, no matter what the actual charges happen to be.
Marketing the 7702B LTC rider
It's fair to say that anyone expressing an interest in true LTC coverage is thinking about the type of coverage provided by either a stand-alone LTC policy or a 7702B rider.
- If cost isn't a factor, a standalone LTC may the best choice. Otherwise, a 7702B rider can be appropriate for meeting the LTC need.
- An LTC rider assures clients that if they don't use the benefits, they have not lost their money, as they would under the same situation with a standalone LTC policy.
- At the same time, prospects must recognize that they must qualify and buy insurance before they can buy an LTC rider. Buying the life insurance with a rider when healthy should be a priority (and rates are lower, as well).
- Prospects should also understand that a rider's benefits are only available if the premiums are paid on time.
While there's never a perfect solution, some may come closer than others to meeting a client's need and expectations. Based on sales performance, it's fair to say that a LTC rider on a life insurance policy meets with an overwhelmingly positive response from consumers. While it may not be perfect, it's filling a huge need.
