Long Term Care Product Analysis Help protect your client s lifestyle and assets

Transcription

1 Long Term Care Product Analysis Help protect your client s lifestyle and assets DAVID B. HILLELSOHN Long Term Care Specialist Professional Affiliations: National Association of Insurance and Financial Advisors, Greater Washington Board of Directors, Society of Financial Service Professionals, National Capital Chapter Past Member Board of Directors NVAIFA Member - National Network Industry Presentations: Panelist, 10 th AAi National Producers Summit Selling Multi-Life : The Complete Success Sales Track Las Vegas, NV, April 5, 011 Panelist, 8 th AAi National Producers Summit Partnership Insurance Kansas City, MO, November 16, 009 Panelist, Employee Benefit Adviser Summit I- Successful Strategies for Production Integration Atlanta, GA, September 15, 009 Panelist, Workplace Benefits Renaissance Multi-Life -What s All the Excitement About? Atlantic City, NJ, March 10, 009 Presenter, AICPA Personal Financial Planning Conf : A Closer Look at an Advancing Marketplace San Diego, CA, January 19, 009 LIMRA, LOMA DI & Conference Multi-Life: Full House Win or Bust? Las Vegas, NV, September 008 AAI National i Producers Summit Partnership Plans: Opportunities For Producers Atlanta, GA, February 5, 008 SOA Intercompany i Conf, Building Work-Site Capabilities for Your Agency: Getting Started on the Successful Path Dallas, TX, March 007 Presenter, SHRM Meeting, Employer Sponsored Long Term Care Upper Marlboro, MD, Sept 007 Presenter, LIMRA: DI and Conference Impact of the Federal Program Denver, CO 003 Presenter, WorldWide Employee Benefits Network, McLean, VA, 003 Presenter, 001, 0, 03, 05, 06, 09, 11, 1, 13 H Beck Spring Mastermind Conference, Chantilly, VA Presenter for SMLUA; FLUA; SoMLUA; DCAIFA; NVAIFA; MAHU; SFSP Industry Advocacy/Research and Development: Advisor to delegation from Korean National Health Insurance Corporation in coordination with USDH, 01 Training for VICAP Counselors, Spring 006 Trainer for Long Term Care SHIP, Spring 005 and Fall 011 Participant, US Department of Health Advisory Council Preparing for the Baby Boom Generation, 003 Design team for implementation of training course for worksite marketing, 000 Development of VAHU training materials on I for health insurance professionals, 1999 Traditional Current Status Who is buying i and what are they buying New Funding Options to pay for care Trade Offs in Design for the High Net Worth Client Estate Planning and Tax Strategies with Implications Divorce Considerations with Long Term Care Consequences Significant premium increases on new and in-force policies 0 years of declining interest rates Unexpected low lapse rates about 1% 1 Claims expected to quadruple from 01 to 03 Gender based pricing - Females twice as likely to file a claim 3 Elimination of most Single pay and Short pay policies Decrease in carriers from 100 to less than 0 in 10 years 4 Source: LIMRA; U.S. Individual Insurance, Third Quarter Review Reuters, Mark Miller, Aug 15,013 Long Term Care Insurance Claim Payments to Quadruple - Jesse Slome, AAI- August 8, American Association of Long Term Care Insurance AAI Sourcebook LIMRA; U.S. Individual Insurance, Third Quarter Review Long Term Care Pricing Comparison (001 versus 013) Annual Premiums Based Upon Age 65 at Standard Premium Class Presented by Haslett - (703) Daily Benefit: $150 Initial Maximum: $164,50 Waiting Period: 0 days Inflation Rider: 5% Compound Year Maximum: $435,810 Benefit Period: 3 year 0 Other : Home Health Care Included at 100% of Nursing Home Daily Benefit Carrier John Hancock Metropolitan Life GENWORTH Prudential UNUM 001 Product Advantage Gold Select 1 Privilege Care Select II I Advantage 1 Annual Premium $,911 $,910 $,790 $,810 $,4 003 Product Custom Care Ideal Choice By Design -03 Indemnity Annual Premium $,79 $3,84 $3,135 $3,44 $3,701 Percent Change -4.09% 1.85% 1.37% 15.44% 65.08% 005 Product Custom Care II Ideal Privilege Choice Indemnity Annual Premium $3,398 $3,504 $4,140 $4,41 $3,701 Percent Change ('03 - '05) 1.70% 6.70% 3.06% 36.00% 0.00% 007 Product Custom Care II 007 Ideal Privilege Choice Indemnity Annual Premium $3,646 $3,504 $4,44 $4,41 $3,701 Percent Change ('05 - '07) 7.30% 0.00%.51% 0.00% 0.00% 009 Product Custom Care IIEnhanced Ideal (009) Privilege Choice Indemnity Annual Premium $3,807 $4,617 $4,44 $4,41 N/A Percent Change ('07 - '09) 4.4% 31.76% 0.00% 0.00% 0.00% 011 Product Custom Care III Ideal (009) Privilege Choice Flex Indemnity Annual Premium $5,868 $4,617 $4,385 $5,719 N/A Percent Change ('09 - '11) 54.14% 0.00% 3.3% 9.6% 0.00% Carrier 013 John Hancock Mutual Of Omaha GENWORTH MedAmerica Life-Secure 013 Product Custom Care III 013 Mutual Care Secure PC Flex Flex Care Individual Annual Premium $6,46 $5,333 $4,784 $5,58 $5,304 Percent Change ('11 - '13) 9.51% 0.00% 9.09% 0.00% 0.00% Total Percentage Change 10.75% 83.6% 71.46% 87.10% % Presented by LifePlans at 014 Inter Company Conference 5 Average Change 99.83% (Increase) For Illustration Purposes Only as of October 1, Generic Pricing 1

2 7 8 What are your options? There are many options to consider. Here are just a few. Option 1: Public Programs Generally, Medicare does not cover indefinite long term care, whether provided at home, in the community or in assisted living facilities. Nor was it designed to adequately cover custodial care ; eating, bathing, dressing or using the restroom. What Medicare doesn t cover is left for individuals to pay unless you have spent down to your states poverty level. Option : Self-Insure You might not realize it, but right now you re selfinsured, unless you re otherwise covered. Without coverage, you have assumed the primary financial risk for the costs of long term care. Have you discussed Long Term Care issues with your spouse and/or family? Spouse Yes No Family Yes No Option 3: Private/Family Support Of course, family and friends might care for you. Initially, this may seem like a good solution. However, ask yourself: Do I want to ask this of them? Will it change our relationship? Can I preserve family relationships? Option 4: Transfer the Risk Asset protection is essential to financial stability. No doubt you have already taken steps to ensure your financial well-being in the event of accidents. There are many approaches you can consider. Option 5: All of the above By integrating public programs with private help and resources, you can develop a comprehensive plan to meet your needs. 9 Your options in risk transfer How to put your savings to work for you!?! Transfer Risk Linked Benefits Products Reposition existing asset, exercise leverage and control Traditional Long Term Care Insurance A percentage of your portfolio can pay premium Business owners can deduct premiums 10 Profile Female Age 58 Single Preferred Health Life Linked Benefit (LB) Client $11,375 for 15 years Life- (4 year) Benefits $500,000 specified amount $500,000 ilifetime maximum $10,000 monthly maximum $50,000 residual death benefit Traditional I Client $170,65 available assets $4,10 annual I premium funded w/.47% after-tax earnings Principal still available at time of death $6,500 initial monthly maximum for 4 years Premium paid by policy while on claim Let s follow the cash, since all benefits are at the same level at Age 74! Event Die w/out claim Life- Death Benefit $500,000 Traditional I Principal Plus Interest $7,855 LB I Difference $7,145 Die w/ 1 yr. claim $350,000 $7,855 $77,145 Die w/ 4 yr. claim $50,000 $7,855 ($,855) Distinction between client objectives Client s Primary Objective Traditional Long Term Care Linked Benefit Products Chronic Illness DB Cross-Over point in favor of traditional plan is 1.89 years of benefits paid 11 1

3 Premium $105,00 ROP feature *Stated benefit amounts are based on hypothetical examples, actual benefit amounts received may vary. This example assumes a 60- year- old female, couple rate, nontobacco, 6- year benefit duration, and no inflation option. Residual DB differs by company. Linked Benefit (Asset Based) -year benefit Death Benefit and/or Benefits $150,000 4-year benefit Extension of Benefits Rider Benefits Only $300,000 Return of Premium Feature (to owner) More features similar to Stand Alone Total benefit is total of both pools DB as much as 0% of Specified DB Amt. Varies by company 6 years Total Long-term Care Benefit Period $450,000 Residual DB at least 10% $30,000 Traditional Long Term Care vs Linked Benefit Advantages Lowest cost of Long Term Care coverage available Policies offer inflation protection Most policies are very customizable to meet client s needs Lifetime level funding options provide for lower premiums than single and short pay products Many policies offer discounts or joint policies for married couples Disadvantages Use it or lose it Product does not provide a death benefit if long term care benefits are never used Policies are subject to future rate increases Lengthy Deductible Periods No, or Stripped Down Return of Premium No Cash Value/Liquidity Long Term Care vs Linked Benefit Hypothetical Case Study Advantages Generally provides a larger Death Benefit than Linked Benefit Solutions May provide significant cash accumulation potential Policies are more flexible with loans/withdrawals May pay out for benefits on a cash/indemnity basis vs. reimbursement Disadvantages Does not include ROP Value based on underlying policy CSV Base policy and rider require full underwriting Does not provide additional leverage on top of DB Inflation protection not available May not provide Residual Death Benefit A 53-year married non-smoking female is seeking protection in the event that she requires long-term care in the future. Her advisor proposes these options: Traditional Long Term Care Mutual of Omaha Mutual Care Solutions Linked Benefit Products Genworth Financial Total Living (Single Pay) Nationwide Care Matters (10 Pay) Chronic Illness DB Nationwide NLG with Rider Female Age 53 Funding Options Potential Scenarios Mutual of Omaha Secure Solution 1 Nationwide CareMatters 10 Pay Age 53 Age Year Premium $10,000 $10,000 Total Premium $10,000 $100,000 Nationwide UL G with Rider 1 Assumes no change in premium Age 53 Age 60 Age 70 Age 80 Annual Premium $4,340 $4,340 $4,340 $4,340 Total Premium $4,340 $34,70 $78,10 $11,50 Genworth Total Living Age 53 Age 63 Single Premium $50,000 $50,000 Total Premium $50,000 $50,000 Age 53 Age 60 Age 70 Age 80 Premium $4,3 $4,3 $4,3 $4,3 Total Premium $4,3 $33,784 $76,014 $118,44 Figures are for illustration purposes only and are assumed to be accurate as of October 1, Scenario 1: Insured never needs Long-Term Care and passes away at age 85 Scenario : Client needs long-term care for 1 months beginning at age 80, and then passes away Scenario 3: Client receives 4-years of covered service beginning at age 80 before passing away 18 3

4 Net Cash Flows MutualCare Secure Genworth Total Living Nationwide Solution CareMatters Nationwide NLG Total Outlay for policy; A80 $11,50 $50,000 $100,000 $118,44 Total Death Benefit; A80 N/A $131,364 $145,000 $350,000 Total Pool; A80 $666,386 $394,09 $579,35 $350,000 Benefit Duration 60 months 7 months 7 months 50 months Monthly Benefit; A80 $11,783 $5,474 $7,70 $7,000 Elimination Period 90 days 90 days facility only 90 days 90 days Cost of Elimination Period ($30,000) ($15,000) ($30,000) ($30,000) Potential Residual DB N/A $13,136 $0,817 $35,000 Surrender Value; A80 N/A $78,540 $100,000 $0 Scenario 1 (Net Benefit) ($143,0) $81,364 $45,000 $14,864 Scenario (Net Benefit) ($51,566) $66,364 $15,000 $01,756 Scenario 3 (Net Benefit) $406,048 $197,75 $70,737 $4,087 Scenario 1: Insured never needs and passes away at age 85 Scenario : Client needs for 1 months beginning at age 80, and then passes away Scenario 3: Client receives 4-years of covered service beginning at age 80 before passing away Distinction between client objectives Traditional Long Term Care Client Profile Seeking minimal cost with no concern for Death Benefit Linked Benefit Balance between coverage and Death Benefit Protection Client Profile Seeking coverage as primary need with DB coverage filling a secondary need Life + Rider Death Benefit Client Profile Seeking DB coverage as primary need with /Chronic Illness coverage filling a secondary need Figures shown are based upon the current values shown in the illustration see full proposal for details For illustration purposes only. Values reflected are assumed to be accurate based upon carrier illustrations as of September 8, Long term Care Rider (IRC 770 B) IRC 770B (or Model Regs) May be marketed verbally and in writing as long term care coverage Pays temporary and permanent claims State specific Long term Care CE may be required to sell these products as well as a health license varies by state. Has potential for residual death benefit in excess of original specified death benefit amount May pay benefits through indemnity or reimbursement since these are Long term Care products. Benefits generally paid as monthly benefits. rider is underwritten and has an additional cost of insurance charge for rider. benefits are always determined at time of policy issue. Chronic Illness Rider/ Accelerated Death Benefit IRC 101(g) only May not be marketed in any manner as long term care coverage Generally, only permanent conditions qualify for claim (condition must likely last rest of insured s life). While temporary claims now allowed, most companies choose to price on the basis of permanency. (See contract for details) No Long term Care CE is required as these products are not considered long term care. Health license may be required. No residual death benefit is paid in excess of original death benefit amount. Some companies require a portion of death benefit be held back and paid at death of insured All are acceleration and indemnity like. Claims reimbursement not possible since not a product. Monthly, quarterly, semi annual or annual payment, or one total lump sum, Some plans underwrite, charge for rider, and determine benefits at issue. Some companies do not underwrite, and determine benefits at time of claim, or remaining death benefit, if any, upon death of the insured. 1 What does self insuring mean to an affluent client? $1,000,000 1 New Jersey Coalition for Financial Education, What Older Adults Need to Know about Money, January, % chance of using some or all of asset for costs 1 Little or no amount from this asset would be estate taxed since it was liquidated to pay costs 50% chance of not needing this asset for costs The untouched $1 million would be estate taxed. At 015 rates, this could mean a tax rate of as much as 40% ($400,000) Need for Assistance is Universal Expanded health care delivery at time of crisis Round the clock home health care Aides who provide custodial care Assisted living /nursing facility use Continuing Care Retirement Communities Increased health care costs due to customized services Round the clock home health care cost range: $10,000 $300,000 per year High end facilities cost range: $100,000 $50,000 per year Long Term Care Strategies for High Net Worth Clients High End delivery expectations on services Largest policy sold in Virginia with $800/day of benefit Higher cost providers / more selective of types of providers Co Insuring Aspects of i Risk Longer Waiting Periods Inflation Component Lump Sum Asset Allocation Purchasing Long Term Care Insurance for family members Accident and Health Insurance is free from gift tax implications Linked Benefit or riders can be purchased using annual gift allowance 1035 Exchange of an appreciated asset into i Plans Establishing a fiduciary roadmap for the family Protecting the ability to meet future financial obligations 3 4 4

5 Estate Planning Implications riders can be used in ILIT if product pays an indemnity benefit Rider is paid to contract owner (the trustee) with no obligations to pay funds to grantor Taxable dollars outside of the trust can be used to pay for care To maximize the benefit, use of collateralized arms length loans removes money from trust without incidents of ownership Collateral Interest Rate Loan is repaid in full Interest taxable if repaid after death Reimbursement plans will not work Reimbursement is tied directly to grantor and creates incidents of ownership Trust Implications Incidental Ownership in Traditional policy Few Companies Allow It Carriers Allow Assignment of Benefit to a Provider Requires Specific Trust Language to include Obligation to Pay expenses Trust Ownership of Hybrid Plans Trust document must include wording permitting the trust to own life insurance The Trust must have an insurable interest in the individual insured under the life insurance policy The trust must have an insurable interest in the insured for purposes of health insurance The trust must be obligated to pay the insured s long term care expenses Insurable Interest For Life Insurance, the policy owner would suffer a financial loss if the insured died For Insurance, where the policy owner has an obligation to pay the insured s medical or long term care expenses Obligation to Pay Insured s Expenses The benefits under a hybrid Life/ plan must be paid either directly to the service provider or as a reimbursement to the owner for actual expenses incurred 1. If a trust owned a hybrid policy but the trustee was not permitted to pay the insured s expenses, the carrier would not be able to pay the claim without the trust violating its terms. To avoid such a result and ensure suitability of ownership, the carrier would require that the trustee have an obligation to pay the insured s expenses. 1 IRC 101(5)(1)(B) Not intended to be legal advice. Please consult a legal professional for details. 5 6 CASE STUDY Jane Needs Long term Care The Results At Client s Death Our client, Jane, has a $5 million tax liability Assume product can dial down rider Add a $1 million rider When no dial down possible, use two policies $4 million policy with no rider $1 million policy with a rider Assuming the following loan provisions Collateral is the vacation home Interest rate is 7% Loan paid back just days before death Insurer pays benefit to Trust ($10,000 per month) Jane borrows funds from trust to pay expenses Jane dies just as benefits are exhausted Estate Principal Debt is $1,000,000 Accrued Interest Debt is $ 35,000 Total Debt to Trust $1,35,000 Death claim filed remaining DB of $4,000,000 is paid to trust Estate repays Principal $1,000,000 Estate repays Accrued Loan $ 35,000 Total Amount Repaid $1,35,000 Estate has been drained of $1,35,000 This amount not subject to estate tax now Result: $4,000,000 + $1,35,000 Trust now has $5,35,000 7 Loan interest assumed to be 7%, HIPAA rate assumed to be at $10,000 per month, benefit paid 100 months 8 Buy sell agreements Business Succession Planning rider provides funds for installment sale Buy sell agreement should reflect this possible type of sale Purpose of rider is to protect the business rider used in traditional manner when partners buy each other s policies Key person insurance rider provides installment compensation for lost services Purpose of rider is to protect the business Business may offer key person their own plan (via Sec. 16 Plan, etc.) Business Succession Planning Business Value $900,000 50/50 Ownership Sam Dave $450,000 $450,000 Sam has ADLs Claim is filed Benefit check ($9,000) is sent monthly to Dave Dave sends $9,000 a month to Sam as part of buyout Dave buys out Sam in 4 yrs and months

6 Divorce and Pre Nuptial Implications Pre Nuptial Agreements Protection of existing assets and claims of maintenance should couple split Cannot waive a spouse s duty to provide support Includes food, shelter, and medical care Medicaid does not recognize prenuptial agreements Wealthy spouse should consider buying i for the spouse with little property Traditional i or Lump Sum Hybrid Note state variations do exist Divorce Immediate need for i protection Typically more of a negotiation component without plan implementation If not court decreed, an amount equal to the age based limit will not be considered a taxable gift Step Family relationships create an additional consideration when planning for Long Term Health Care needs Establishing a fiduciary roadmap for the family Charitable Giving Why does client usually want to add rider to a policy intended for charitable giving? Tax deduction Leave money to charity AND Have access to benefits! Can t have it all Gift should be given with full intent of charity receiving Why would an rider make sense? benefit paid earlier than mortality Provides cash with more spending power Indemnifying the key contributor Example Life expectancy 83, needed at 75 DB flows to charity 8 years early enhances spend ability 31 3 Funding Strategies for Repurposing an asset is often the most palatable solution Annuities not needed for retirement IRA Accounts Unneeded cash in savings, CD, mutual funds Annuitize to fund Hybrid 1035 to i Required Minimum Distributions Lump sum Annual pay Self insure vs. Linked Benefit Long term Care (Asset Based) Repurposing a Certificate of Deposit $100,000 Linked Benefit Today $47,877 for Age 88 $47,877 for (no tax on benefits) Potential residual DB $8,55 Current Assets Today $100,000 Age 88 $8,793 Takes 49 years $45,6 (applicable income tax was not deducted) Illustration based on female, 60 years old, non-tobacco couple rate with no inflation feature. Interest rate on certificate of deposit is assumed at an annual rate of return of 3% RMD Funding of Take level RMD distributions Use after tax dollars for funding 10 pay a Linked Benefit Policy 10 or 0 pay Life with Rider Annual Pay i 35 Re purposing an Annuity $100,000 annuity $68,000 cost basis Illustration based on female, 60 years old, non-tobacco preferred, using Guaranteed No Lapse Universal Life Insurance. Interest rate is a guaranteed 3% year Term Certain $10,86 per year Self insure vs. Life Insurance with Rider Female age 60 Fixed annuity current value $100,000 5 Annual Benefit $68,14 Monthly Benefit $5,677 Net annual income after taxes $9, Life Insurance Death Benefit $83,850 Long-term Care Benefit $83,850 Paid up in 10 years 36 Annuity income and Life Insurance premium are both paid on an annual basis. Death Benefit could be higher or lower depending on life insurance product used. 6

7 Long Term Care Insurance Under the PPA 1035 Rules Prior to PPA* New 1035 Exchange Rules Life Life 1035 New Tax Free Options: Annuity I Annuity Annuity Life I Life Annuity QI I Annuity to Life is not Allowed New, Tax Advantaged Opportunities For I Planning Using the Annual Gift Exclusion How much protection could $14,000/year for 10 years purchase? Traditional Long Term Care At Age 80, $900,436 of total benefits ($7,013/month) Linked Benefit Balance between coverage and Death Benefit Protection At Age 80, $1,534,17 of total benefits ($19,766/month) or $198,800 Death Benefit Non- Qualified Annuity With Gain Tax Free Exchange I** Tax Free I Benefits I Benefits Life + Rider Death Benefit At Age 80, $743,40 of total benefits ($14,865/month) *Endowment Contracts may also be exchanged for other endowment contracts, annuity contracts or QI, but are mostly legacy contracts. **Traditional I or Linked Benefit Products with a QI Rider Management Group, 37 Inc. Illustration based on female, 45 years old, non-tobacco preferred; product and state variations may apply 38 Where to find Clients? They are already in your book of business What would your clients do if their health suddenly changed? Single Female, ages Retiree RMD s and Appreciated Assets Concerned about taking care of herself Planning for Retirement May have provided care to a loved one This client wants solid coverage without overspending on coverage Pre Retirees, Married Couple Impact to Standard of Living for the Spouse Ability to meet ongoing financial obligations Reducing care-giving burden for the spouse This client has experience with a parent needing care, and wants to reduce dependence on the spouse Good cash flow to address current needs Concerned about extended health care for either spouse Interest in reducing taxable exposure This client is comfortable without the extra income and wants to protect principal Business Owner, late 40 s early 50 s Year End Tax Planning Creative forms of non-taxable compensation May receive an annual bonus This client wants to leverage the corporate checkbook to address personal planning needs Will cash flow change in retirement? How have you considered the cost of care in your planning? 39 Expanded risk evaluation tools for carriers Integration of technology into the process Future development of Claims departments Continued evolution of funding solutions Renewed commitment to engage in planning process with client-centric focus Increasing need to be prepared! Celebrating 5 years in Long Term Care Insurance David Hillelsohn, Brokerage Manager (888) [email protected] 4 7