Advisers tread lightly when talking with clients about LTC

Financial pressures weighing down the long-term-care insurance industry are forcing advisers to broach the touchy subject of higher premiums and less comprehensive benefits with clients.

Companies that sell LTCI coverage are feeling the stress of longer-than-expected life expectancies and fewer-than-anticipated policy lapses among owners as years of low interest rates are hurting the bond returns insurers use to pay down claims.

Add to that the flight of well-known carriers such as MetLife Inc., Prudential Financial Inc. and Unum Group — as well as companies' pursuit of rate increases — and suddenly, financial advisers are becoming gun-shy when talking to clients about LTCI.

“Advisers are afraid to talk about LTCI because of the changes they're seeing,” said Susan Kobara, LTC product manager at Commonwealth Financial Network.

As a result, firms and advisers are fine-tuning how they approach LTCI coverage with clients, planning for backstops in the event that they need to adjust their policy features or pay down more premiums in the future.

Others address higher coverage costs by getting clients into the product earlier and choose inflation riders to keep up with rising costs of care. Some advisers plan to drop the inflation feature later if it makes premiums too expensive.

“A GREAT RESERVE’

“The best thing we can do for clients in terms of taking care of costs is that we choose a 5% inflation rider, knowing that when they're older, we might knock it down to 3% or not have it,” said Sacha Millstone, senior vice president for investments at The Millstone Evans Group. “But they will have built up a great reserve by then — if we can get them [to buy coverage] in their 50s.”

Despite the upheaval among providers, LTCI coverage continues attracting dollars, though not as many as before the recession.

Individual LTCI policies had an influx of $547 million last year, compared with $645 million in 2007, according to LIMRA. Combination products that pair life insurance and long-term-care features are booming, with $2.2 billion in sales last year, up from $580 million in 2007.

These days, it's a fact of life that rates on in-force traditional LTC policies will rise. Attractive features such as unlimited benefit periods are also becoming a thing of the past, even for the most established insurers.

Top seller Genworth Financial Inc., for instance, expects to raise premiums on some of its older policies “in excess of 50% over the next five years,” executive vice president Patrick B. Kelleher said during a second-quarter conference call Aug. 1.

As of July 30, the company also adjusted its Privileged Choice Flex product, suspending sales of policies with unlimited benefits and those with limited pay contracts.

Knowing that companies have to raise rates on their unprofitable LTCI books puts insurance regulators in a bind when considering proposed increases.

“I think there are regulators who have a difficult time passing rate increases of significant proportions to consumers who, in many cases, are now on a fixed income,” said Nevada Insurance Commissioner Scott J. Kipper.

At broker-dealers, LTC specialists walk advisers through why the rate hikes are essential. “These are painful changes, but I try to communicate them as strong commitments to this industry and to policyholders,” Ms. Kobara said. “I'm educating advisers to anticipate several rate increases over [the client's] lifetime.”

Because long-term care is intrinsic to comprehensive retirement planning, advisers are finding different ways to deal with rate hikes.

Clients and advisers, for instance, are crafting contingency plans in the event that changes need to be made to LTCI coverage, said Jim Swink, a vice president at Raymond James Insurance Group. They might cover some of their risk with a long-term-care policy but cover the remainder with a hybrid life insurance policy or annuity that offers some LTC protection. They may also plan ahead of time to sell some assets to make up any shortfalls, he added.

Molly Thomas, an insurance strategist with Abacus Planning Group, has come up with what she calls “the APG special,” or “the long and skinny policy.” Clients opt for a policy with an unlimited benefit period and a lower daily benefit amount, with the intention of covering lengthy catastrophic events.

“These benefits are never meant to cover all of the costs of each day, but we're shifting catastrophic risk to the insurance company,” Ms. Thomas said.

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