But avoid inflation riders tied to the Consumer Price Index, cautions Gordon, since health-care costs grow at a faster pace than the CPI. “It’s probably a better protection for the insurance companies than for clients,” he says.
If clients reduce their inflation protection, they should consider simultaneously increasing their daily benefit. “You might do better to take a $250 daily rate instead of $200, for example, while cutting the inflation rider, and see what that does to the cost,” suggests Walker.
Look At The Total Picture
Yet in all these cases your client will likely come up short because of the meteoric rise of health-care costs. So Walker advises planning accordingly. “You have to make sure that some part of the client’s portfolio is positioned in an inflation hedge,” he says.
His client with the 76% rate increase wasn’t happy with any option that slashed her inflation protection. So Walker reassessed her entire situation and was able to reinvest her savings to generate enough extra income to pay the higher premium with no reduction in her coverage. “We repositioned her assets, using alternative investments to increase yield,” says Walker, who cites a combination of variable annuities, conservative real estate investment trusts and real estate development companies that, in effect, had “an inflation hedge built in,” he says. “You have to look at where this coverage fits within the overall picture.”
Paying For It
How clients pay for their LTC insurance is another important consideration. Traditionally, choices included open-ended annual contracts, 10-year amortizations called “10 Pays,” or large lifetime up-front lump-sum payments. But fewer and fewer carriers are offering the 10 Pay or single pay anymore, leading many clients to move to the nontraditional hybrid or “linked” products.
For example, many prefer an LTC rider on a life insurance policy. “The LTC rider can provide a death benefit or be used for LTC,” explains Steve Williams, a senior vice president and head of financial planning, U.S., at BMO Private Bank in Chicago. This option satisfies a long-standing complaint about traditional LTC plans—namely, if the client dies before needing care, the insurer keeps the premiums while the client gets nothing. The drawback of this linked product, however, is that it typically requires a large payment from the outset.
Other clients fund LTC policies through direct transfers from an annuity or life insurance plan. “Individuals can leverage assets in an annuity or permanent life insurance policy to pay premiums for LTC on a tax-favored basis,” says Steve Sperka, a vice president at Northwestern Mutual in Milwaukee and head of its LTC business, referring to what’s called a 1035 exchange. Such transfers are not considered taxable events.
Of course, choosing the right funding option for your client depends on many factors. “Which one turns out to be the best deal depends on how long you live and what happens with interest rates and returns that you might have achieved on other investments,” says Kisner. “I find that what drives the funding decision is the client’s personal situation more than an analysis of what is the most profitable.”
Still, most LTC customers are sticking with traditional plans. That might be changing, though, as premiums rise. “My prediction is that the nontraditional LTC products will grow in popularity,” says BMO’s Williams, who also anticipates that price movements will settle down as the political fog surrounding health care clears and providers become “better able to quantify the risk.” If these things happen, he adds, “Some insurance companies [may] decide to get back in the LTC market.”