The Eight Elements of Extended Care Riders – Element 8 – Inflation

Presented by Brian Leising

Finding the right formula for each client

Not all extended care riders on life insurance policies are created equally. Do you know the differences? Different combinations will appeal to different clients more than others. Here are eight of the major distinguishing features among insurance companies offering extended care riders. All include some combination of the eight elements. This allows you to find the right formula for each client.

Premium Payments Benefit Qualification Benefit Amount
Pf Payment Frequency Pa Payment Amount
Lg Lapse Guarantee Tc Tax Code Pm Payment Method
Wp Waiver of Premium Ep Elimination Period If Inflation

Element 8 – Inflation

While inflation protection is common on traditional LTC policies, it is not commonly found on extended care riders. Some insurance companies do give clients the option to increase their monthly coverage at rates including 3% or 5% simple or compound interest, but this is rare. How else can we match the increasing benefit commonly found on LTC policies? One way to approximate the increase is to use an increasing death benefit option on a universal life policy. The death benefit (and corresponding extended care benefit) is the initial death benefit plus the accumulated cash value. The increase depends upon both the amount of money placed into the policy and the performance of the index account or the dividends declared by the company. An increase in death benefit equals an increase in extended care benefits. Another option to increase the benefit amount would be use the Federal per diem amount as the monthly payout. With the per diem option, the client’s monthly benefit is equal to the current Federal per diem benefit amount ($340/day in 2016). The amount has traditionally been increased by the Federal government an average of 4% per year. Although not guaranteed, this could mimic inflation protection. Keep in mind, the per diem monthly benefit does not increase the total amount of money available for extended care, just the monthly amount.

Is an Inflation Rider Critical to a Long Term Care Plan?

Presented by Leonard Berthelsen

I read with a smile on my face the news release by AALTCi regarding buyers purchasing less inflation protection on long term care plans in 2014.  The article stated that in 2014, the selection of the 5% inflation option on LTCi plans dropped from 51% to 14.5% in comparison to 2012 reported sales.

The 5% inflation option has steadily increased in price to the point of making LTCi unaffordable for many consumers.  As a fall back, many agents just started quoting the 3% option that most carriers offered.  It certainly was less expensive but still high enough to dissuade many consumers from purchasing LTCi.

Now I am not one to downplay the importance of benefit growth in a long term care plan, but there is another viable option that agents can consider.  It is simply called a “bulk benefit”.  We did an analysis of carrier rate increases about 3 years ago and looked at the plans that were subjected to rate increases and what benefits were included in those plans.  The commonality was long duration of benefit periods and the compounded inflation rider.  From that we looked to see what could be designed  into a long term care plan, have adequate benefits and still be affordable.  Hence, the “bulk benefit”.

For example, take a couple aged 57 and 60 buying a $5,000 a month benefit with 5% compound inflation for a 5 year benefit duration. The cost from one of the top three carriers would be approximately $8,800 in annual premium.  Yes, unaffordable for most or they just aren’t interested in paying that kind of annual premium.  If you went with the 3% option, that premium would be approximately $4,850.

Now look at the alternative foregoing inflation protection altogether.  Use a four year duration of benefits but design the plan at $10,000 per month.  You have doubled the benefit from the beginning and this is where your inflation protection is.  What’s the cost, approximately $4,900 annually.

The crossover where the two designed plans will be equal to one another would be ages 72 and 75 for 5% compounded inflation and 78 and 81 with 3% compounded.  If the claim happened in the early ownership of the LTCi plan, certainly bulk benefit would be more desirable.

Looking at life expectancy and the reality that most consumers don’t buy LTCi to cover 100% of the risk, this method starts to look attractive.

We have to be aware that using this method of plan design takes the LTCi  Partnership out of the equation.  That has to be part of the conversation with the client.  Significant assets many times make the Partnership a non-issue but the conversation needs to be conducted with the client.  The purpose of DRA Partnership was to get more consumers to purchase private LTCi coverage and this model makes it a bit more affordable.

When fully explained and a review of all the options and a premium comparison is completed, we see clients opt for the bulk benefit more often than not.   Having immediate large benefits versus the traditional and now more expensive long term care plan with that slow growth makes sense to a lot of consumers.  These are reimbursement policies, so if the entire benefit isn’t used in a given month, the remaining pool is available for future delivery.  It just makes sense to a lot of potential clients.

4 Risk Rules

Presented by Deb Strong

Risk 1 – Inflation

What is the #1 increase in expenses for a retiree?  Most people will say it is Health Care, which isn’t actually accurate.  The #1 increase in expenses in retirement is daily living. Every day is a Saturday.  What is inflation directly tied to?  The increase in the costs of good and services over time…daily living.  Not to mention, do you expect inflation to go up or down?  Similar to taxes, everyone expects inflation to go up over time.

So having at least a portion of the client’s money allocated to a policy that can help them combat inflation is just smart planning for your client.

Risk 2 – Market Volatility

In the last 14 years the market has corrected by 50% twice!  Over that 14 year period investors would have averaged a 2% annualized yield in the market.  We are at the top of a 6 year bull market, when the average bull market only lasts 4.  If client’s are heavily allocated to the market they may not have time to recover from another major correction. Hence, the reason I like the rule of 100.  Take the client’s age from 100 and that is the percentage of their assets that should be at risk (example 100-70=30).  This means my 70 year old client should not have more than 30% of their retirement assets at risk.

Not to mention, from the Future of Retirement Income Study, 60% of annuity owners and 61% of annuity considerers would be willing to pay ADDITIONAL fees to keep from losing any money in a bad year, while gaining SOME of the market in good years.  People are willing to pay for what an index annuity does contractually!

Risk 3 – Interest Rate Risk

Many clients use bond funds in their retirement income plan.  However, most of them do not understand the inverse relationship of bond fund rates to interest rates.  In 2013, 88% of bond fund rates lost money.  The other interest rate risk is for the $11.3 Trillion dollars on the sidelines earning less than 1% interest, not even keeping up in a low inflation market.

Risk 4 – Longevity

Longevity is the multiplier of all Risks.  One out of 4 people 65 years old today will live past 90.  One out of 10 will live past 95.  People are in retirement as long as they are in their professional careers.  You have to make sure that they have an income they can’t outlive.

Unfortunately, many advisors are still using the outdated method of the 4% rule.  Which says that if you have a 50/50 stock bond portfolio you can pull out 4% annually and it would be guaranteed to last 30 years.  We have a White Paper and tools called Rethinking Retirement Income, which is a study done that shows if you use that, you have less than a 50% chance of success.  The real number is more like 2.8%.  What I find as more of the real problem versus the percentages is what happens when you outlive the 30 years?


Annuity Risks Clients Should Consider

Presented by David Corwin

I read an email recently and thought it would be great to share some of the talking points and also share some videos supporting the ideas mentioned. It spoke about the different risks that are out there that clients should consider when purchasing an annuity. The first one is Interest rate risk. Typically traditional bond funds may lose value in an increasing interest rate environment so protecting your income becomes paramount and could be accomplished with an indexed annuity contract. Dealing with Inflation risk means that if you have a lot of cash on the sidelines, you would most certainly be exposed to inflation risk. An indexed annuity would help keep pace with inflation and protect your purchasing power. Market volatility risk is hedged with an annuity contract by locking in your recent market gains. Withstanding another correction will only prolong your retirement date. Longevity risk in a recent survey was the biggest fear of seniors. Outliving your assets is becoming a real possibility and creating a guaranteed income stream for life can be accomplished with an indexed annuity with the income riders that have been created in recent years.

Here are some great consumer videos to check out.
a. Interest Rate Risk
b. Inflation Risk:
c. Market Volatility Risk:
d. Longevity Risk:

Share some or all of these videos through your website and/or social media and keep your clients and prospects informed!