Explore the differences between life policies with the LTC or Chronic Illness riders vs the asset or linked benefit products and the differences that make each a powerful tool in your client's financial portfolio.
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Hello, everyone. This is Cooper Lewis with Highland Capital Brokerage. Welcome to Oops! Oops, Oops! Schools goes, goes podcast, where I helped you become a more complete financial planner or advisor with your clients using protection products to protect and enhance their family portfolio, lifestyle and retirement. Welcome to this episode of Coop Scoop. Let's take a deeper dive into these hybrid products. I'm going to caution you just like Kleenex or Coke. We tend to generically label the hybrid product portfolio, which leads to some confusion. Hybrid products have to separate product lines, and they both have a life. Policy is the chassis, but they're built very differently. Let's start with the traditional life insurance policy with a rider. I'm going to use the term life with an LTC rider but recognized that more products have a chronic illness rider than have a long term care writers. Now you may be asking, what's the difference? There can be a significant difference between the two, so let's take them apart. Ah, chronic illness. Ryder has been filed under the IRS code Section 101 g, originally a chronic illness rider filing had the language that it had to be a permanent condition before it would trigger the benefit. Ah, permanent condition that's important. Remember that today a lot of companies have moved away from that definition for policyholders to receive benefit. But we'll come back to this a long term care. Ryder, on the other hand, was filed under Section 77 0 to be and on Lee. Products filed under this code can use the language or the term LTC or long term care. From a benefit standpoint, claims on LTC do not need to be permanent. Claims can be temporary in nature, and the client can recover. Now it's easy to tell which rider is on the product you're considering if it is not called a long term care rider by the company, it has been filed as a chronic illness rider. Most folks will use the wording long term care very loosely, generically, if you will. So be real careful because the devil's in the details and you don't want to think you're buying a long term care Ryder just because that's the language somebody used. Always check the material from the company. Let's circle back to what difference it makes as to whether it's a long term care rider or a chronic illness rider, and that is contractual language companies using chronic illness. Riders have begun advancing benefit when conditions are not permanent, so that makes them appear to be the same as the LTC products. But what if things get tight years down the road and they need to slow the outflow of payments? They can always lean back into the contractual language of the contract and begin enforcing that the condition needs to be deemed permanent before benefits will be paid out. So pay attention to what you're recommending to your client's. What's being done today may not always be that way. Another difference between a chronic illness rider and a long term care rider is your licensing. To sell the LTC Rider products, you need a long term care license, which in most states has an initial eight hour education component. Plus, you'll also need to be up to date on your annual or biannual training, or C E. If you do not have your long term care license, you are limited to selling the chronic illness writer products that don't require So, in essence, there's a mechanical difference between the two as to which one you are able to sell. The triggering conditions on both riders is the same as a traditional LTC claim, and that is a loss of two out of six activities of daily living or a D l's as certified by a physician. Now, most rider products have a 90 day waiting period, but there are few that are shorter benefit payout. Most are like traditional long term care policies and that they are reimbursement for skilled or license service's, while others are indemnity benefit, which is a cash benefit paid to the client and can be used in whatever manner the client so desires. This is where product knowledge is critically important, so you can match your client to the benefit type they want. Life with Ryder options are on Lee on individually insured policies. Except for Nationwide, they have a survivorship product that allows both insures to be covered with a long term care rider. The LTC benefit for each can be upto half the total death benefit which leads us into another piece of this puzzle. You'll need to decide the type of policy you want the rider on I'II, whether it's a guaranteed UL chassis, an accumulation, well chassis and index ul chassis, Variable ul or even whole life. You'll need to decide which chassis is the best or most appropriate fit for your client. I'm gonna give you a little bit of a warning here regarding the whole life. It's expensive, and that's because the whole life chassis is expensive. Most advisers leaned towards a Gol chassis with the rider as they want a fully guaranteed policy for their client. But less expensive or more flexible options are available using one of the other types. Let's spend a few minutes on the advancement options these riders offer most. Writer advancements use a percentage of the death benefit ranging from 1% tau 4%. But if you offer an iris per diem advancement option now, this choice dictates the length of the benefit. These products were built using a default of 2% for a 50 month benefit. So when we deviate from that, such as a 1% advancement, that's going to double the length to 100 month benefit. 3% 33 months, 4% advancement cuts it in half and provides a 25 month benefit. Now the IRS per diem is a variable or unknown length because that really will depend on the per diem amount at the time of claim and how big the starting death benefit WAAS. So it's a little harder to tell how long that's going to last you right now. Because of those factors. Now, no product has all options available to him. Usually it's just a couple choices. I tend to add the highest benefit available when I'm building a solution for your client. For this reason, the biggest limitation to using the hybrid rider is that there's no inflation option and what may be a good benefit number today may fall short in future years. Now you can raise the death benefit to take into account ah, hire need later. But obviously that comes with a significantly higher premium costs due to the added death benefit. Or you can use a higher advancement number. So with the default being 2% for 50 months, if you increase it to 4% for only 25 months, you've doubled the monthly benefit available. Now, at the time of claim, your client can decide if it's more important to have a higher monthly amount paid or a longer benefit period when you advanced less funds than what you have built the illustration for. It extends the benefit period, But at least the client has the option at that point because, unfortunately, the rider percentage is a choice that must be done at the time of purchase because the higher the advancement percentage, there's a slightly higher cost to it. So it's easier or better toe opt for the highest option today and maybe pay a slightly higher cost for it over the lifetime of the contract, rather than getting to when the need is there and there's no additional option for you. If you purchased a 2% benefit and you need more dollars than that, you're not gonna have them available. You're going to be limited to the 2%. Now. The IRS per diem should provide the most advancement funds available at the time of claim, but possibly for a very short period. It would depend on how big of a death benefit you started with as to how long it's going to last. You can see why this could be a little daunting or confusing when looking for a solution for your client. It's a little bit like building a hamburger. You have to decide a base product, that be it. A G u L O u l or an eye you. Well, then you have to add on top the rider type, which we haven't even discussed yet. But they come in a reimbursement or indemnity style and the rider advancement. Whether it's like 2% 4% or iris per diem, not every product has all these. So this is where it's important to have conversations with your wholesaler so that we can find the product that fits our checks, all the boxes for your client. So that's the traditional life with Ryder hybrids. Now let's talk about the second type of hybrid product and these air referred to as an asset based or linked benefit product. Generically speaking, I'm talking about the Lincoln money guard type of products. There are a few other players in the space at this point, but the Lincoln Money Guard product has been out there The longest Highland has seven companies that we represent in this space. Lincoln Nationwide, One America pack life insecure Ian. Those are our top five and We have two others MassMutual and New York Life, but they only have a single pay option, so they're not as flexible as competitive as the other five. And we'll talk about that coming up in just a minute. Out of these seven companies. Four Our reimbursement. And that's Lincoln MassMutual New York Life and One America to our indemnity that's nationwide and secure Ian an impact Life offers both, and that's done at the time of claim. The client can choose the reimbursement or indemnity, but the indemnity is a discounted amount from the reimbursement payment. So you want to be sure to check the original illustration for the disclosed discount percentage, as it varies from 20 to 30% of a discounted benefit amount. And that's disclosed on the original illustration. So you know, going in what is going to happen now. Pay options have changed on these products. Originally, they were single pay on Lee, hence how they became known as an asset product. The typical funding was moving money from one asset class, typically a CD into another asset class, a life product that provided a death benefit and a much bigger long term care benefit. and that's still the majority of payments today. But flex pay options are part of the product design now to allow those people who don't have a large sum to still add this product to their financial plan. And these options run from a single pay to a 10 pay by everyone. And then some companies offer a 15 28 65 8 95 and a lifetime pay by a few. Now, age does factor in on how long someone can pay the rule of thumb. Is the older the client, the shorter the pay period required. Now, while I'm talking about pay periods, let's look at the strength of this product line. It typically leverages funds between 2 to 4 times for the LTC benefit, while also providing a life death benefit. You're older clients are on the lower side of this leveraging, while younger clients are on the higher side. What this means is that for the $100,000 single pay on older client could expect 2 to $300,000 as a pool of money for the long term care. Ah, younger client could expect 3 to $400,000 in this pool of money for long term care benefit, and I have seen this go up into a five times advancement. The death benefit is minimized in both cases, but it's usually more than 100,000 that was put in. But in certain builds, it can be less so for the money put into a link benefit product. Either the client or their beneficiary will receive the use of the funds. It's not a use it or lose it any more. That's the huge advantage that this product offers over a traditional long term care product. Two of the features that set these hybrid products apart from the life was riders is that you get to pick from a more customized benefit period and inflation protection. The benefit period available for most products is between two and seven years, But I do have one company that offers a lifetime benefit. It's important to know that there are two components in the build of these products. There's the base benefit period, and there's an extension benefit period. Some of these products break them apart, while others you simply choose the benefit period length like six years, and it's important to keep these base and extension components in mind as they come into play when the client dies while advancing benefits or if they move or reside outside of the U. S. The other feature is the inflation options. Most companies offer between 1 to 4% per year simple or compound. I do have one very unique medical inflation indexing product. It has a 2% floor and a 6% cap. Now the design reasoning behind this is that historically, medical inflation has averaged 3.64%. So buying a 3% compound, Ryder won't keep your benefit up with inflation, and 5% is overpaying. So at least with an indexing component, you have a better chance of staying current with inflation, especially when we have years that are higher than, say, 5%. You can at least get to 6% on this Now. These products also offer the client the ability to get their money back if they desire most offer to variations ah, 100% or something less, and I'm going to phrase it that way because some are better than others. For the something less version, the LTC benefit is increased. Hence why they've offered that variation. Company statistics say that 98% of these contracts air never surrendered. So most choose the higher LTC benefit, with less than 100% refund. Now, cup of these products have a residual death benefit. After all, the benefit has been paid out. One of these products has a 10% residual, which is Lincoln money guard, and one has a 20% residual, which is nationwide Care matters. So even after the client has exhausted all the benefit, the beneficiary still have a few dollars left for final expense expenses or whatever they choose to do with it. All but one of these products are individually insured on Lee Won. America has a joint coverage product. Now let me answer a couple questions that I'm frequently asked regarding these can we pay for these linked benefit products using qualified money? And the answer is yes. It can be done now nationwide, and when America have simplified the process with some turnkey internal mechanics, your client's still going to receive a 10 99 annually for the 10 years that the transition from qualified to nonqualified is occurring. But all the moving parts are behind the scenes, and you can even use an H S a account to pay the taxes. So you truly have a completely tax free benefit with the linked based products. Another question I get asked frequently is, Can you put a life with LTC Rider product in a trust? And the answer is absolutely. But you better be using a product that pays an indemnity benefit rather than a reimbursement. Otherwise, the trustee and the client's accountant are gonna have trouble. Let's spend a few minutes talking about the reimbursement versus indemnity differences. Reimbursement is Justus. The name implies you will submit receipts for the licensed skilled care that's been provided. Notice, I said. Licensed, skilled care. That's what's going to get reimbursed. Anything that's not licensed skilled care will not be reimbursed. Indemnity, on the other hand, is a cash payout, so you do not have to have license skilled care to receive your benefit. Both require two out of 6 80 l's certified by a physician to be triggered, and that's when the benefits will start. Most have a waiting period. Now, I'm gonna tell you nationwide has a unique position in that. Yes, they have a 90 day waiting period. But on the 91st day, they will retroactively payout the benefit for the 1st 90 days. So in the 91st day, your client could be receiving a fairly significant pay out. Because of that, reimbursement might be a little more work for your client than anticipated. Indemnity has been referred to as hassle free. Now most of us can't relate to this yet because we still are cognitive and we're not in this stage of life. But think about this. How many of us love doing our taxes around April 15th? Not too many of us. We hate having to go get the receipts compiled in numbers, fill out the forms and send it in Well, guess what? If you're on a reimbursement plan, that's what you're going to be doing every month. And if your clients need the money today, they're in trouble because they're gonna submit expenses today for the previous 30 days. And then there's going to be another 30 days that pass, typically before they get their reimbursement. So there's a possibility it could be 60 plus days from the date of service before their payment is made back to them, so providing a hassle free benefit might be important to them. Let me also share this with you. A lot of retirement communities these days are changing their model. They're not like they used to be when it was purely a nursing home. A lot of these communities these days have a different payment structure. You pay a fee to get in, or you or you buy into the community. For independent living, you pay a monthly fee. That monthly fee is going to cover you, whether you're an independent living, assisted living or nursing or medical. And you can transition from one unit to the next seamlessly, and your monthly fee doesn't change. If you're on a reimbursement model, you will not be able to collect your benefit on this because there is not a differentiator between the different levels of service. If you're on an indemnity contract, you will receive your benefit loss of two out of 6 80 l certified. So if you have somebody that has a traditional long term care policy and they choose to go into one of these communities, structured as I just described, they've wasted all their money. Same would go for one of these linked benefit plans or one of the riders with benefits. Most of our clients are in our sixth in their sixties. Right now. They're 20 years away from claim for most of them. We do not know what 20 years is going to look like on this horizon. If you want to keep them flexible with most options, I would seriously be looking at indemnity based products. Now. The company's recognize this difference, and that's why reimbursement products typically have a higher benefit number for the same dollars invested. So they're blinding you with the shiny object. When you're talking about this with your clients, help them too mentally put themselves in that place at that point in time so that they make an accurate decision today for themselves down the road. If we had a crystal ball, we wouldn't have to. It'd be a lot clearer picture as to what the best decision today is. So anyway, there you go. Hybrid products to separate builds, each having a different position for your client. Let me share with you a little something that I tend to get my advisers to consider, and that's this comes back to statistics. Most men die before going on claim for long term care or assistance. They have a built in assistant that's their spouse, so that assistant is going to help them as long as they can before they file a claim. Most of the time, the claim is never filed, and a life with Ryder product would have been the best choice for the mail. I tend to call these life with brighter products the oh, by the way, because the death benefit is most important on what would be considered the first person to die. And that's usually the male because there is bigger leverage for the dollars on the death benefit. The remaining spouse, the female, on the other hand, typically has lost her support network. When he dies, he's not there to take care of her. So when she has a health event, she's going to need help pretty quickly and in a lot of cases, fairly lengthy, too. So that's where the linked benefit products come into play. So in a perfect world, if everything came together statistically, you're gonna put a life with Ryder product on him, and you're gonna put a link benefit product on her that maximizes typically what happens in life for the funds needed. Just a little food for thought. Well, that wraps up this edition. Thanks for spending a few minutes with me today. Hopefully, these concepts expanded your thought process as to how to help your clients and your existing practice and those that you're looking for as always. I'm here for help if you need it. 19 0 to 333419 This is primarily designed for Ladenburg advisers if you're already working with a highland rep, more than happy to get you connected to them so that they can continue this conversation with you regarding today's information. But if you're a consumer who has found my podcast, thank you for listening. If you are currently working with somebody, maybe you will share this with them. If you're not working with somebody, I work with the number advisors around the country more than happy to make an introduction. If that's something you would like otherwise, we could just have a conversation and see where it goes. Thank you and everybody have a great day