COVID-19 has highlighted
the necessity of planning for care in old age, and advisers are increasingly
recommending 'hybrid' annuity or life insurance products
July 2, 2020 By
Emile Hallez
The
COVID-19 crisis has focused national attention on long-term care, and many
people who are starting to plan for their retirement are finding that insurance
for that care is not what it used to be.
Several
years ago, the insurance industry dramatically
changed its underwriting criteria, significantly increasing
rates for long-term care coverage for people who would be the most likely to
need it. Insurers had books of business that were becoming unsustainable, and
many exited the market. Those that remained bumped up their rates, as increased
longevity, higher health care costs and low interest rates made the products
expensive to provide.
With the
pandemic decimating assisted-living facilities, people are considering
alternatives, such as in-home care, as well as how they will eventually pay for
it.
This has
become an important discussion with financial advisers, many of whom are
addressing long-term care planning with annuities and other products.
“Due to
the difficulty with pricing these types of policies, many insurance companies
have gotten out of the long-term care business and many individuals have
serious trust issues with long-term care insurance,” Mackenzie Richards, a
financial planner at SK Wealth Management, said in an email.
Advisers
should be doing more than discussing the effect the market has had on clients’
portfolios, and that can mean having uncomfortable conversations about how to
pay for the care they may need as they get older, said Marguerita Cheng, CEO of
Blue Ocean Global Wealth.
“It’s a
very emotional topic … [but] you don’t want to scare them,” Cheng said.
Conversations should make people aware of the range of options they have, even
those that are not ideal, she said. “Clients appreciate that there are other
options, other than ignoring it or buying long-term care insurance.”
“Hybrid”
options in the form of life insurance or annuities are now common, Richards
said. Those products allow clients to recoup at least a portion of what they
pay into them, and “they guarantee that you don’t pay into a policy for years
and years and then never get anything out of it.”
Long-term
care planning is the top concern for clients nearing retirement, said David
Lau, CEO of DPL Financial Partners, which recently designed a fixed index
annuity with a “health-activated income multiplier” with Midland National. That
product, which does not include a long-term care rider, is an alternative,
according to the firms. The income rider it features will double the income
payments for as long as five years, and it’s triggered when contract holders
can no longer do at least two of the six basic “activities of daily living,”
similar to the requirements in long-term care policies. Those activities
include “bathing, continence, dressing, eating, toileting and transferring in
and out of beds and chairs.”
The
product is commission-free, and the rider has a 1% fee. The rate in the fixed
account is 2.75%, Lau said.
“Insurance
carriers haven’t been able to create good products around [long-term care],” he
said. “The underwiring has gotten so stringent — my joke is that if you’ve ever
met someone who’s got Alzheimer’s, you probably can’t get coverage.”
Midland’s
Capital Income annuity “is a good down-the-middle solution for most people,” he
said. “You’re always going to get a benefit from it, unlike insurance that you
can pay for and never use.”
The way
people view long-term care is changing, and there is more interest in in-home
services, Lau said. While that is often less expensive than moving to an
assisted-living facility, people still need to consider whether they will need
to retrofit their homes and how they will pay for caregivers, he said.
“A lot of
people feel more comfortable in their home,” he said. “This health crisis is
probably going to accelerate that trend.”
Costs of
long-term care vary widely. The national median annual cost of adult daycare
was $19,500 in 2019, while in-home service was more than $51,000, according
to data from Genworth Financial. Meanwhile, assisted living
costs ranged from about $49,000 to more than $102,000, depending on whether
residents get private rooms.
“More
people are claiming [in their long-term care policies, and] more people are
claiming longer. That’s why companies are filing for triple-digit rate
increases,” said Jesse Slome, executive director of the American Association
for Long-Term Care Insurance.
“Long-term
care insurance is an option, not a solution, for a relatively small and defined
segment of the population. That’s always been the case … The insurance
companies know which segment of the population they are willing to offer this
insurance to,” he said.
About
300,000 to 350,000 people buy
long-term care products every year, and lately those purchases
have shifted heavily toward hybrid and annuity products, Slome said.
There are
more options for clients now, Cheng said.
One of
her clients, who is 57, is considering swapping an out-of-surrender annuity for
one that includes a long-term care rider, Cheng said. While the total benefits
could end up being lower, it could be a better option than the alternative the
client is facing: cashing out of the annuity early and paying a 10% penalty, on
top of taxes, she said.
“This
allows her to be more efficient with her assets,” she said.
For
long-term care planning, “we’re answering a bit differently than 10 to 15 years
ago, when benefits were rich and premiums were (seemingly) reasonable,” Dennis
Nolte, financial adviser at Seacoast Investment Services, wrote in an email.
“For
those who are in their 40s or younger we’re using Roth funds as a future
benefit ‘pool’ of cash, in combination with HSA funds (if available),” Nolte
said. “For those in their 60s or older who have coverage, we’re helping assess
the options current carriers are offering as they either increase premiums or
reduce benefits. For those in between? Aye, there’s the rub.”
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