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LTCI 2004 - Success in the Executive Market

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LTCI 2004 - Success in the Executive Market

  1. 1. SOA 2004 Intercompany LTCI Conference Success in the Executive Market Ralph Leisle, LTCI Decisions Systems Dan Heffernan, Target Insurance Jason Goetze, Northwestern Mutual SOA 2004 Intercompany LTCI Conference LTC Financial Analysis High Net Worth & Executive Markets Long Term Care Section Society of Actuaries Fourth Annual Intercompany LTCI Conference Marketing Session February 9, 2004 Ralph Leisle, CLU,ChFC, President LTCi Decision Systems, Inc. LTC Economic Impact Planning Model ™ http://www.ltcia.com 1 800 360-9853 rleisle @ltcia.com •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved
  2. 2. SOA 2004 Intercompany LTCI Conference LTC Financial Analysis Overview – High Net and Executive Markets • Asset Erosion – Significant and Avoidable • Executive and Estate Tax Opportunities • Product Innovations & Expanded Carrier Choices • Advanced Planning Concepts and Systems •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved SOA 2004 Intercompany LTCI Conference LTC Financial Analysis High Net Worth Client • Potential Multi Million Dollar Estate Impact • Demand High Quality Products & Services • 24 Hour Home Care or Superior Facility • Multiple Advisors … Conflicting Advice • Average Care Costs Not Relevant •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved
  3. 3. SOA 2004 Intercompany LTCI Conference LTC Financial Analysis Care Cost Scenarios Lifetime Economic Impact ….Without Insurance? …. With Insurance? •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved SOA 2004 Intercompany LTCI Conference Client Specific “What If” Planning Scenarios Impact of Care With and Without Insurance… What financial impact if…. • care needed..in 30 yrs..17 yrs..or next year? • care needed for 2 years..for 6 or 9 or more? • taxes on liquidated assets to pay care costs? • survivor assets and investment income ... gone? • premium tax deductible to the corporation? …other “what if” client scenarios? •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved
  4. 4. SOA 2004 Intercompany LTCI Conference Holistic LTC Planning Level One – Care and Insurance Variables Level Two – Loss of Investment Opportunity (Time Value of Money) Level Three – Asset Liquidation Costs – Tax Factors – Premium Rate Changes – Estate and Executive Benefits •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved SOA 2004 Intercompany LTCI Conference Scenario A TOTAL ECONOMIC IMPACT Plan Years 30 Year Financial Plan Years 1-15 No Paid LTC 16-21 $ 1,892,361 Cost of 6 Years Care 22-30 $ 1,304,743 Survivor Years __________ Cash Flow Erosion $3,197,104 Total Economic Impact •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved
  5. 5. SOA 2004 Intercompany LTCI Conference Scenario A LTC 30 Year Economic Impact * 6 Years Care Beginning Year 16 Current Cost $300 Daily Inflation 5% Compound 6% After Tax Rate of Return $3,500,000 6 Ye ar Care $3,000,000 Cos ts $2,500,000 $2,000,000 6 Ye ar Cos t Plus Los t $1,500,000 Inve s tm e nt $1,000,000 30 Ye ar Es tate $500,000 Im pact * $0 $1.5 $1.9 $3.2 *30 Year Estate Plan Million One Spouse Needs Care Years 16 thru 21 30 Year Life Expectancy Surviving Spouse •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved SOA 2004 Intercompany LTCI Conference Scenario Comparison LTC 30 Year Economic Impact Without and With Insurance Scenario A $3,500,000 Sce nario $3,000,000 Es tate Eros ion $2,500,000 No Ins urance $2,000,000 $1,500,000 Sce nario A $1,000,000 De s ign $500,000 $300DB/30EP/ $0 5%C/Unlim ite d No Insurance $3.2 Million With Insurance $300,000 •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved
  6. 6. SOA 2004 Intercompany LTCI Conference Scenario A Level 1 and Level 2 Planning Assumptions – Healthy Ages 55/53 Mr. Client : At age 71 Mr. Client needs 24/7 care. Deceased after six years of paid care. Mrs. Client : Mrs. Client dies age 83 Never requires long-term care •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved SOA 2004 Intercompany LTCI Conference Scenario A Care Cost + Loss of Investment Assumption Mr. Client 6 Years Care Begins Year 16 of 30 Year Estate Plan Cost of Care Today Daily $300 Annual $109,500 Inflation 5% Investment Opportunity Cost 6% •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved
  7. 7. SOA 2004 Intercompany LTCI Conference Scenario A Annual Total Cost of Care Plan Year 16 Cost of Care (109,500 x 5% inflation) $ 227,642 Investment opportunity Cost @ 6% 13,659 1stt. Year of Care .. Total Cost 241,301 2nd. Year 267,843 3rd. Year 296,582 4th. Year 327,679 5th. Year 361,306 6th Year 397,650 Total Cost Six Years Care $1,892,361* *$1,548,400 Care + $343,961 IOC •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved SOA 2004 Intercompany LTCI Conference Scenario A SURVIVOR CASH FLOW EROSION Plan Years 16 –21 6 Care Years Asset Erosion $ 1,892,361 Plan Year 22 Survivor Year 1 113,542 Plan Year 23 Survivor Year 2 120,354 Plan Year 24 Survivor Year 3 127,575 Plan Year 25 Survivor Year 4 135,230 Plan Year 26 Survivor Year 5 143,344 Plan Year 27 Survivor Year 6 151,944 Plan Year 28 Survivor Year 7 161,061 Plan Year 29 Survivor Year 8 170,725 Plan Year 30 Survivor Year 9 180,968 Survivor Years Cash Flow Erosion $ 1,304,743 Total Estate Erosion $ 3,197,104 •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved
  8. 8. SOA 2004 Intercompany LTCI Conference Scenario A Analysis With LTC Insurance Policy Benefits: • Unlimited, lifetime dollars • Daily benefit 1st. year $300 • 5% Compound Inflation • 30 Day Elimination Period • Waiver of Premium • 100% of the dollars available for home care, assisted living or nursing home facility •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved SOA 2004 Intercompany LTCI Conference Insurance Claims Payments Policy Benefit Payments: (Start after 30 day elimination period) 16th policy year 335 days x $624 = $ 208,932 17th policy year 365 days x $655 = $ 239,024 18th policy year 365 days x $688 = $ 250,975 19th policy year 365 days x $722 = $ 263,524 20th policy year 365 days x $758 = $ 276,700 21th policy year 365 days x $796 = $ 290,535 Total Payments from Insurance Company = $ 1,529690 Investment Opportunity Retained w/Insurance = $ 1,622,574 Total Economic Value of Insurance Benefits = $ 3,152,264 •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved
  9. 9. SOA 2004 Intercompany LTCI Conference Scenario A Insurance Costs Annual Premium $3528 / $3226 = $ 6,754 Plan Years 1-15 - (2) insured for 15 years x $6754 = $ 101,310 *Plan Years 16-30 (1) insured for 15 years x $3226 = $ 48,390 (30Day EP= $290 Premium) Total Premium $ 149,990 Loss of Investment Opportunity on Premium** $ 75,537 Total Economic Impact of 30 Years Premium $ 225,527 Premium Breakeven Claim Days = 289 Days * Premium waived when Mr. Client receives benefits ** Loss of investment ends when premium plus loss of investment to that point paid in claims. •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved SOA 2004 Intercompany LTCI Conference Scenario A Economic Impact With Insurance Self Funding Expense (30 Day EP) $ 44,840 Premium (30 Years) $ 149,990 Loss of Investment Opportunity on Premium $ 75,537 Total Impact With Insurance $ 270,367 •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved
  10. 10. SOA 2004 Intercompany LTCI Conference Scenario A ….can I do better investing the premium? Annual Premium ($3528/$3226) $6800 Internal Rate of Return (IRR) ) 24.6% Net Present Value (NPV) $438,990 Investment Return (Discount Rate) 6.0% Premium Break-Even (PBE) Claim Days 289 Days Care Days 319 Days •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved SOA 2004 Intercompany LTCI Conference Scenario Comparisons Benefit Decisions Dominate Client Value Scenario A = Comprehensive Coverage $300 Daily Benefit/30 Day EP/5%Compound/Unlimited BP Scenario B = Reduced Benefits $200 Daily Benefit/180 Day EP/5%Compound/5Year BP Scenario C = Same As Scenario A Except: No Inflation Benefit ___________________________________________________ ….when care needed…it’s not about premium… it’s; ”Is there insurance..how much..when start.. how long..what does it cover?” •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved
  11. 11. SOA 2004 Intercompany LTCI Conference Decision Price Tag 6 Yr Care Event No Insurance $3,200,000 Cost of Care With Insurance Scenario A Comprehensive Benefits $ 270,000 B Reduced Benefits $ 1,500,000 C Scenario A...no inflation $ 2,000,000 •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved SOA 2004 Intercompany LTCI Conference Scenario Comparison LTC 30 Year Economic Impact With and Without Insurance Scenario A, B and C Sce nario Es tate Eros ion $3,500,000 No Ins urance $3,000,000 Sce nario A $2,500,000 $300DB/30EP/ $2,000,000 5%C/Unlim ite d $1,500,000 Sce nario B $1,000,000 $200DB/180EP/ $500,000 5%C/5Yrs . $0 Sce nario C De s ign Sam e $3.2 Million No Insurance as A w ith 0 Inf. With Insurance: Scenario (Millions) A $.3 B $1.5 C $2.0 •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved
  12. 12. SOA 2004 Intercompany LTCI Conference ….can I do better investing the premium? Scenario A B C Annual Premium $6800 $3000 $3500 Internal Rate of Return (IRR) ) 24.6% 26.7% 22.9% Net Present Value (NPV) $438,990 $256,286 $180,311 Discount Rate 6.0% 6.0% 6.0% Premium Break-Even (PBE) Claim Days 289 199 312 Care Days 319 379 342 •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved SOA 2004 Intercompany LTCI Conference LTC Scenario Compare …quick accurate responses to common inaccurate assumptions… • Best age to buy LTCi? • Best elimination period..inflation..etc? • Limited vs. lifetime premium mode? • Return of premium … a good deal for the client? • Etc…Etc… …most financial variables re care or insurance •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved
  13. 13. SOA 2004 Intercompany LTCI Conference LTC Financial Analysis Summary “holistic”focused planning… • simplifies analysis • anticipates and answers client concerns •provides accurate information based on specific planning assumptions • simplifies client decision process •For Advisor Training Only •Copyright 2000-2003 LTCi Decision Systems, Inc. All Rights Reserved SOA 2004 Intercompany LTCI Conference “Key Person” Corporate Fringe Benefit Utilizing Long Term Care Dan Heffernan Target Insurance
  14. 14. SOA 2004 Intercompany LTCI Conference Model Purchase during high income years DEDUCTIBLE as a business expense, including spouse coverage No imputed income (C-Corp) Benefit paid TAX FREE Discriminatory participation Paid up in 10 years CRUCIAL ELEMENT SOA 2004 Intercompany LTCI Conference Genesis HIPAA (Jan.’97 Federal legislation) Cost is DEDUCTIBLE, including spouse, with no imputed income Discriminatory participation TAX FREE benefit Brought to you by the following IRS Codes: Sec. 106 Sec. 162 Sec. 213
  15. 15. SOA 2004 Intercompany LTCI Conference Why? Cost of Long Term Care may be the biggest social crisis we will face in the next 25 years Tsunami of baby boomers FICA/Retirement age SOA 2004 Intercompany LTCI Conference Affluent Medicaid Never Current Funding 100% Dollars 401(k) Savings/Investments Largest Silo to fund
  16. 16. SOA 2004 Intercompany LTCI Conference Long-Term Care Insurance Plan Provides long-term care insurance for officers and their spouses, if applicable, to cover the costs of an extended stay in a nursing home or similar facility. Highlights of the Plan Overview Participants Income Taxation of the Plan SOA 2004 Intercompany LTCI Conference Long-Term Care Insurance Plan Minutes and Resolution Minutes: A special meeting of the Board of Directors of (Corporation) was held on the _day of __,_ for the purpose of considering the adoption of a long-term care insurance plan for all officers of the corporation and their spouses, if they qualify. A quorum of officers and Boards Members … Resolved: That the Board of Directors has determined that such a company- provided, long-term care insurance plan… In Witness Whereof, the Corporate Secretary’s name has been affixed hereto this _ day of ___,__. ________________________________ (Secretary)
  17. 17. SOA 2004 Intercompany LTCI Conference Specifications $100/day NHC & HCBC Compound benefit 5% 30-day elimination period Lifetime benefits Indemnity benefits – NHC/HCBC Waiver of Premium NHC – Optional HCBC 10 pay option SOA 2004 Intercompany LTCI Conference Joint Rates* Annual Cum. Prem. Benefits/Day Age Premium 10 yr. Age 75 Age 85 40 $4,623.32 $46,233.20 $552.00 $899.00 45 $4,683.34 $46,833.40 $432.00 $704.00 50 $5,054.69 $50,546.90 $339.00 $552.00 55 $5,588.61 $55,886.10 $265.00 $432.00 60 $5,944.26 $59,442.60 $208.00 $339.00 65 $6,854.13 $68,541.30 $163.00 $265.00 70 $9,174.92 $91,749.20 $128.00 $208.00 *Preferred Non Smoker *Endorsed Group Discount LTC “Walk away fringe benefit”
  18. 18. SOA 2004 Intercompany LTCI Conference Accounting *S-Corp, LLC, Sole Prop. Age Eligible Premium 2004 40 or less $260 41-50 $490 51-60 $980 61-70 $2,600 70+ $3,250 Example Salary $100,000 LTC Prem $5,000 Insured age 55 Spouse age 52 Age Eligible Premium Deduction $980 x 2 = $1,960 *Owners greater than 2% SOA 2004 Intercompany LTCI Conference How to Choose a Long Term Care Company Financials Comdex 90 or Higher Highest industry ratings Engineering 10 Pay – YES (Lifetime Pay or Single Pay??) Indemnity or Reimbursement Consumer Value Premium Features
  19. 19. SOA 2004 Intercompany LTCI Conference Approval Process Short Form application (Unique) Telephone Call Medical Records from Primary Physician 30-45 day decision process NO Blood, Urine or Tax Returns! SOA 2004 Intercompany LTCI Conference Success Focus high net worth individuals to understand that self-insuring is probably not in their best interests Focus executives on the tax advantages of using business funds to pay for long-term care insurance

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