On Jan. 1, 2010, the Pension Protection Act (PPA) went into effect, marking a pivotal turning point in the world of long-term care insurance.
That date also marks the 70th anniversary of the Wizard of Oz movie. So picture this in your mind:
• Dorothy steps from dull black and white into vivid Technicolor in Munchkin Land.
• She is given ruby red slippers to provide access to previously unavailable tax gain, and she is receiving tax-free benefits just because she is in Oz.
The translation into our insurance world: This is a classic opportunity to make a sale of a combo product!
Why the PPA is so important for LTC producers
The primary purpose of the PPA, which was passed in 2006, was to reform the funding rules for Single and Multiple Employer Defined Benefit Plans. It amended the 1974 ERISA by establishing minimum funding standards. This made it easier to implement Employee Pension Plans. In the world of long-term care insurance, it has enacted dramatic changes in terms of how we approach the LTCI risk. The PPA delivers many new strategies for leveraging LTCI financial exposure.
More specifically, for the LTCI market, it enacted two major changes:
1. 1035 exchanges: It will allow exchanges of a life insurance or annuity contact for a combo life/LTC annuity contact or for a stand-alone LTCI product.
2. Tax-free: Charges for LTCI against annuity or life insurance account values are not considered a taxable event, and benefits are paid out tax-free.
You may take LTC risk charges from life insurance, endowments and non-qualified annuities, and these charges will not be considered disbursements. This means, for the first time, previously unavailable deferred tax gain may be used to pay LTC expenses on a privileged basis. Basis dollars will be accessed first and then any gains.
This will affect producers by changing the sales conversation. In addition to offering clients the traditional LTCI products, you should add these combo products to your portfolio. If not, others will be selling against you. And even from a suitability perspective, it is important that these products be at least mentioned during the LTCI sales conversation.
These products are being called by several names — linked, hybrid or combo products. To be consistent, we will use the term combo products.
Before we discuss the details and the benefits, let’s take a step back and look at some basic definitions. The definition of a combo product is an insurance product that combines two or more insurance needs into one financial instrument. Combo products provide clients with additional flexibility and an opportunity to increase their ability to leverage risk.
Fundamentally, a combo product is a life or annuity policy with long-term care riders. Right now, we are seeing three types of combo products:
• Life Insurance Benefit Acceleration
• Deferred Annuity/LTCI Hybrid
• Immediate Annuity/LTCI Hybrid
Life/LTC combo
We’ll use the life product as an example of how it is structured. The life insurance contract is generally a whole life, universal life or variable universal life product. For a majority of the market, the whole life and universal life contracts are the most popular. This makes sense when you think in terms of the source of funding — generally fixed dollars set aside and sitting on the sidelines in case of an emergency. The tendency is to keep safe dollars safe and not move them into the market as you would with a variable life contract.
Through a single one-time premium or an ongoing premium stream, the contract builds up cash value which funds the life insurance benefits, the long-term care riders and other charges. The long-term care riders accomplish two things on most contracts:
1. An Accelerated Death Benefit Rider (ADBR) accelerates the death benefit in the event of a long-term care need.
2. An Extension of Benefits Rider extends the death benefit with an addition pool of long-term care dollars in the event the death benefit is fully depleted.
These riders generally provide comprehensive LTC coverage in the event a client fails two Activities of Daily Living (ADLs) or suffers from severe cognitive impairment and care is prescribed by a doctor. Some contracts may also include a popular consumer provision — a return of premium benefit. This benefit returns the full premium — keeping in mind these contracts are often paid on a single-premium basis, assuming the LTC benefits have not exceeded the premium.
From a taxation standpoint:
1. Disbursements for LTC charges would not create a taxable event even if it uses deferred tax gain.
2. The LTC benefits for both the acceleration of the death benefit (Section 101g) and the extension of benefits (Section 7702B) are tax-qualified LTC and therefore represent tax-exempt income.
3. The Return of Premium rider is taxable if there is any, and only on, gains.
4. The death benefit is a tax-free benefit to the heirs.
The growing sales popularity of the Return of Premium prevision is that clients will always at least get their money back. And, if there is a need for LTC, they can recognize a substantial gain in value while preserving existing assets.
Annuity/LTC combo
The PPA also provides a blueprint for annuity combo success, offering riders that may access the deferred account value to pay for the LTC rider. Again, dollars come from basis first, and then gain without creating a taxable event. It would then pay out LTC benefits without tax implication (under Section 7702B).
These new combo annuities will be available in a couple of forms. Account value plus an additional benefit “kicker” expressed as a multiple of the original balance — such as two or three times the account both original and increasing based on inflation protection options. For example, your original account balance is $100,000. When and if you need care, the total benefit payout would be $300,000.
Immediate annuities in combination with LTC benefits will also become a popular option. For example, surviving spouses will be able to leverage the payout on death proceeds with a Living Care Annuity. This pays a multiple of the payout when care is needed. So, if your annuitization was $1,500 a month, a combo immediate annuity might pay out $3,000 a month if you needed long-term care.
Combo sales are now on the rise. With sufficient or even abundant assets, paying your own bills is certainly possible. The question should become WHY would you not leverage this risk with inexpensive insurance as you have with all other potential known risks.
Play up the “bonus” feature
From an agency perspective, these combination products and the PPA present a huge opportunity, predicts Shawn Sigler, chairman of the AHIP LTCP Curriculum Committee on Combo Products and marketing director of Financial Independence Group in Charlotte, N.C. “We now have the products available to offer alternative solutions for clients who aren’t comfortable with traditional LTC insurance. Our agency deals primarily with annuity producers, and this is an ideal solution for encouraging them to mention and provide LTC protection to their clients,” Sigler says.
Combo products have been around for 20 years. The sales concept is not new. Several of the largest consumer objections are directly addressed by the PPA. First, the most familiar complaint has been, “I don’t want to spend all this premium for 25 years and then drop dead walking across the parking lot to visit my cardiologist.” In the consumers’ mind, that appears to be a really bad bet. Combo policies allow the primary purpose of the life insurance or annuity to remain in place, with the LTCI becoming a bonus feature.
Then there are those who believe they can insure this risk themselves. This leads logically to a conversation about leveraging existing risk instruments or other assets. In other words, simply taking what you have and making it better by the addition of a LTCI benefit.
It remains our belief that a stand-alone LTCI policy is the most direct and potentially cost-effective approach for handling LTC financial exposure. Life and annuity purchases serve specific needs for wealth accumulation and final expenses and may override the need to provide for LTC expenses. In other words, the primary responsibilities of these combo policies may be in direct conflict with the needs of LTC.
Perhaps most importantly, every life and health agent in America will now have the ability to immediately start a conversation about the LTC insurance risk. These agents will easily be able to transition to the LTCI sale by asking:
• Does your life insurance policy pay for LTC if you need it?
• Does your annuity pay for LTC if needed?
• Do you have any underperforming assets?
We are indeed “off to see the Wizard.” Like Dorothy and her fellow travelers on the yellow brick road, we have been given the heart to provide protection to many more Americans, the brains to be creative in our recommendations and the courage to help others to do what is needed to protect themselves and their families.
Well-known LTCI experts Margie Barrie and Ron Hagelman are the principals of Hagelman Barrie Sales Training Solutions. Their new course on the Pension Protection Act and Combo Products can be accessed on their Web site: www.HBLTCI.com.