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AG 49, Part Deux | The New LTC Solution

AG 49, Part Deux

Six years ago, Actuarial Guideline 49 went into effect to curb the abuse of indexed universal life illustrations.  It did not take long for carriers to creatively design their products to generate a better-looking ledger.  They implemented specialty index accounts with a better looking historical allowing them to reflect a higher projected interest crediting rate. Then they created multipliers which add substantial additional expense to the product with the potential to multiply your positive returns in good years.   This has necessitated additional revisions to AG 49 guidelines which go into effect November 25, 2020.

The original laws limited the loan arbitrage and set some fairer basis for the way you could measure your historical index returns.  My original article Deja Spew: History Repeats Itself!  also focused on how the industry’s favorite policy flavor has changed depending on the economic environment. 

The new law is aimed at bringing further consistency across IUL illustrations and prohibits the following:

  • Cash value growth in an illustration to reflect interest credits associated with bonus multipliers, buy-up accounts and other index-linked bonuses.
  • The loan crediting rate to be no more than 50 basis points higher than the loan interest rate.

While many want you to focus on the engine, I can’t stress enough how important it is to understand the vehicle too.  There are three primary risks with a policy: performance, premium payment, and mortality.  Guaranteed coverage can be purchased which takes most or all the performance and mortality risk off the client, leaving them with only payment risk.  You can minimize or eliminate payment risk by using automatic payment methods or paying your policy off sooner.  The first question to ask when designing a permanent plan is: do you want “projections” or “guarantees”.  The new AG 49-A regs help the industry use more conservative projections. 

What to Expect with AG 49-A.

There’s a NEW LTC Solution – LTC leverage or legacy?

When we look at the current options for long-term care protection, many decide to remain exposed.  Now there is a product for married couples which should have more appeal.  When you break down clients by net worth, you find the lower net worth can’t afford long-term care insurance and some would emphasize they don’t have a lot to protect.  Your HNW clients don’t need to have it and many choose to self-insure.  Those in the middle are most susceptible to the exposure of long-term care costs.

We may have our difference of opinion on the actual wealth levels, but I tend to think those with a net worth of $600,000 or less are rarely going to purchase long-term care insurance.  At $3 million and up, I start to agree they could self-insure, but it could be a good idea to insure.  So, what do we do for those middle net-worth clients?

Prudential has a new offering.  It is a second-to-die policy which you can guarantee to any age or lifetime.  It has a chronic illness rider that only pays if both insureds are on claim or for the surviving partner.  There are second-to-die plans that pay for care on either or both insureds with no restriction.
Because the Prudential policy is most likely to be paying a claim perhaps much later than those other designs, it is considerably less expensive and priced closer to a pure second-to-die policy.  If neither spouse needs care the death benefit is paid to their heirs.  Depending on when they die the internal rate of return can be quite attractive compared to bond investing. 

Not only is the value apparent the need is too.  It is these middle net worth family situations that could turn out the worst.  The husband gets sick, needs care, and drains down the assets to pay for it.  When he passes his wife is left with less income from social security (and in some cases less pension) and she has less assets.  Now if she needs care it could be more of a risk of spending down the estate.  If neither of them needs care; then you know you are leaving a legacy which is a permission slip to annuitize and not disinherit if you need extra income later in life.  By having the insurance which provides income tax-free care benefits, you minimize the risk of having to access taxable qualified money or investments in a down market.  Launch the below links to learn more.

The New LTC Solution Policy Preview

Full Illustration & Product Brochure

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