There are several things that we may not want to import from the United States, but the system for selling long-term care would not be one of them, according to Vincent Bodnar.
Mr Bodnar, director of Pennsylvania-based Towers Watson and in charge of long-term care at the firm, believes the UK has a lot to learn from the US.
Where the UK struggles to get any kind of industry off the ground for long-term care insurance, and the government has largely shirked responsibility for funding it, the US has seemingly performed a miracle and sells nearly 300,000 policies a year.
Mr Bodnar said: “A few companies found that if they could train 200 agents to sell only long-term care, it seemed to change things in the US. Just training a very few number of agents to sell only long-term care produced incredible volumes. They found that it’s an education-based sale: it took a lot of patience and education to make that sale.”
The commissions were so great on the products, that an adviser would only need to sell one product a week to make a good living. It became apparent that once the client realised the importance of buying some kind of later life insurance policy, they were convinced of their need and showed very little signs of policy lapse.
The results of this early stage of long-term care distribution were so successful that eventually thousands of agents, trained by independent marketing organisations and regulated by the local state insurance commissioner, set up shop. They were dedicated to selling long-term care and could advise across a range of companies. The industry exploded — at one time there were 177 providers, although this has now shrunk to less than 50.
The change certainly begs the question of translating the same situation to the UK. Here we just have Friends Life, Partnership and Just Retirement, with leading supplier Partnership selling less than 1,000 care annuities a year. Perhaps as a consequence, Mr Bodnar has been speaking to the department of health on whether the US model would work in the UK.
He said: “The department of health is very keen to get insurers into the market. It doesn’t know why the insurers aren’t rushing in.
“A lot of agents make a lot of money selling long-term care; sell one a week over a year and you’re on a six-figure salary. You can build commission into the price.
“These products, they’re very persistent, [agents] get a lot of commission off renewals.”
The earliest products appeared in the 1990s and were a pre-funded form of long-term care. They were an insurance policy that paid out a maximum amount each day and the policyholder bought them to last for, say, two, three or four years. The policies could not be renewed if they lapsed. So if a policyholder wanted to renew it he would be forced to sell his assets or rely on some other source, potentially Medicaid, which people generally do not want to do.
Mr Bodnar said: “Some policies had an inflation-protection feature, where the maximum benefit goes up 5 per cent of the maximum benefit.” Understandably this cost more, but they were popular.
However, pre-funded products stopped being provided because they became too risky — interest rates and mortality rates fell to levels that were well below what was anticipated in the original pricing.
Mr Bodnar said: “What we found was that prior to that point, the pension in the target market would be of a World War two generation. They had some concern about asset protection.”
The new generation of products allows for a certain degree of flexibility and is designed for the more risk-friendly, baby-boomer generation, which is keen to use its existing policies.
Mr Bodnar said: “Now we have a combined product of life insurance with a long-term care feature. It’s a product that allows you to access your death benefits in case you need them for long-term care; you can get a one or two times kicker for long-term care.
“For example, if you have a half a million amount of a death benefit and need long-term care, you can access your death benefit; a rider will offer another $0.5m for long-term care.”
He thinks this type of combination product would be suitable to the UK market, but with a focus on annuities rather than life insurance, and the liberation of one’s pension at retirement following the Budget is certainly a factor that should be considered.
So why do we barely have any provision of long-term care products in the UK? Mr Bodnar, who has been in long-term care since the early 1990s, said: “The primary issue is the stigma of the failure of the 1990s. They tried a pre-funded product and it didn’t take off. They didn’t have the same distribution as the US.”
Mr Bodnar, who found his way into long-term care through consultancy and for five years ran his own firm, said that in some areas the UK is more innovative than the US.
However, he said that getting long-term care products in the UK is far easier than the industry would have us believe.
“If something like that model could be developed in the UK, it could change the story.”
Melanie Tringham is features editor of Financial Adviser
