Understanding the Different Types of LTC/Chronic Illness ABRs

Presented by …

Policies issued by American General Life Insurance Company, a member company of AIG FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION

Agenda

Defining the Chronic Care/LTC Landscape Today Life Insurance Solutions Long Term Care vs. Chronic Care The 3 Types of Chronic Illness Riders The Power of Waiver of Monthly Deductions Care Coordination Program

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What is a Chronic Illness?

 Chronic illness care, which is also called long-term care, is needed for two reasons: – Inability to perform the activities of daily living (ADLs) bathing, continence, dressing, eating, toileting, and transferring in or out of a bed or a chair; – Needing supervision because of a cognitive impairment, such as Alzheimer’s disease or other causes of dementia.

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Type of Care?

 The vast majority of chronic illness care is provided at home by family caregivers, including relatives, partners, friends, and neighbors.

1  According to AARP, “The ‘average’ caregiver is a 49-year-old woman who works outside the home and spends nearly 20 hours per week (which is equivalent to a half-time job) providing unpaid care to her mother for nearly five years.” 1 1 Feinberg L. Testimony before the Commission On Long Term Care. “Populations in need of LTSS and service delivery issues.” AARP Public Policy Institute July 17, 2013.

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Short Term fractures, joint replacement, broken leg, heart attack, heart failure, minor stroke, diabetes, and complications of cancer treatment.

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Short Term Conditions – Short-term care is needed for only a few days, weeks, or months.

– Medicare Part A pays a significant portion of the costs via a post-acute care benefit that covers skilled nursing care.

1 – Average length of post-acute care ranges from a high of 36 days for home health care, to a low of 13 days for inpatient rehabilitation factilities.

2 – Family and friends can usually provide short-term care until recovery occurs for most conditions.

– A lot of clients that are purchasing a life insurance policy have enough savings to pay for expenses not covered by Medicare or Medicare Supplement Insurance (Medigap).

1 Medicare post-acute care reforms. Statement of Mark E. Miller. Executive Director, Medicare Payment Advisory Commission. Before the Subcommittee on Health. Committee on Ways and Means. U.S. House of Representatives. June 14, 2013.

2 Medicare Payment Policy. Medpac, Medicare Payment Advisory Commission. March 2013.

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Long Term Alzheimer’s disease, serious stroke, frailty at older ages, crippling arthritis, cancer, Parkinson’s disease, brain and spinal cord injury, and degenerative neurologic diseases.

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Long Term Condititions – Chronic illness care is usually needed for many months or years, and often for the remainder of life.

– Chronic illness care is usually custodial, which means non-skilled personal care, such as assistance with the activities of daily living. Neither Medicare nor Medicare Supplement Insurance pay for custodial care.

1 – Family and friends are potentially faced with much greater demands on their time.

– Many people do not have enough savings to pay for custodial care or would be more apt to insure this risk.

1 Medicare and You 2014. The official U.S. Government Medicare Handbook. U.S. Department Of Health And Human Services Centers for Medicare & Medicaid Services.

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No one wants to think about being disabled during retirement. We imagine it will happen to “other people”. But the reality is much different. Seven in ten people who are age 65 will need chronic illness care later in life.

1 1 http://longtermcare.gov/the-basics/who-needs-care/ 11/14/2014 FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION

The vast majority of people – four in five (80%) – live in private homes where about 80 percent of the care is provided by family and friends.

1

This is true even for Alzheimer’s disease. Seven in ten (70%) of people with Alzheimer’s disease and other dementias live at home.

2 1 Congressional Budget Office “Rising Demand for Long-Term Services and Supports for Elderly People” June 2013 2 http://longtermcare.gove/the-basics/who-will-provide-your-care/ 11/14/2014 3 http://www.alz.org/kyin/in_my_community_donate_use.asp 11/14/2014 FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION

So What Can We Do?

Some of the best advice is provided by the Administration on Aging, an agency of the United States Department of Health and Human Services that is charged with maximizing the independence and health of older adults and their families and caregivers.

1 “For many, a blended approach to long-term care works best. Most consumers want to remain in their homes for as long as possible and delay facility care until they need it. Plan early and look for flexible options that give you more say.” 2 1 http://acl.gov/About_ACL/Index.aspx 11/14/2014 2 http://longtermcare.gov/the-basics/where-can-you-receive-care/ 11/14/2014 FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION 11

Typical Long-Term Care Product  With the typical long-term care product, clients pay a premium and receive benefits if qualified expenses occur.

 LTC contracts utilize the 2 of 6 ADLs or Severe Cognitive Impairment as a benefit trigger.

 One requirement is that the condition is expected to last at least 90 days.

 LTC contracts do require the producer to have both an A&H license as well as meet the LTC education and certification requirements in their state.

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Factors Impacting LTC Markets Use it or lose it nature Consumers are more hesitant about paying for a product they may not use especially with a budget limit.

Rising life expectancy and health care cost Consumers are living longer and are more likely to use long term care.

Long-term care costs are rising along with medical care. Average annualized increase of US nursing home costs from 1994 to 2011 is 3.95%.* Prolonged low interest rate environment Insurers need a 10-15% increase in premiums to offset every 1% decline in long-term interest rates. Some insurers drop benefits to keep the same premiums.

*LIMRA, U.S. Individual LTC Insurance, 2Q 2013 FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION 13

Life Insurance Solutions

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Life Combination Products Life products with chronic/LTC benefits Linked Benefit Life Insurance Life Insurance with LTC Rider Life Insurance with Chronic Illness Rider UL-LTC products, structured as a real LTC; usually have a low death benefit and a high LTC benefit Life Insurance with Accelerated Death Benefit for Long Term Care

Governed under IRS Code 7702(b), require health insurance license to sell

Life Insurance with Accelerated Death Benefit for Chronic Illness

Most Governed under IRS 101(g) code

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Reimbursement vs. Indemnity Reimbursement Indemnity  Reimbursement products provide a benefit if the client meets the requirements of the policy and spends money on a qualified service.

 Indemnity products are those that provide clients with a benefit once they meet the requirements of their policy.

– The benefit of a reimbursement product is that clients receive a benefit equal to their total cost, up to a predetermined maximum.

– The benefit of an indemnity product is that it does not require clients to receive services in a care facility. Therefore, the client can use the benefit to pay medical or non-medical expenses, or to enhance their savings.

– The downside is the rider usually requires confinement in a facility and does not cover home care or family care.

– Also issues with ILIT owned contracts 16 FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION

Long Term Care vs. Chronic Care

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Chronic Illness vs. Long Term Care Riders Benefit comparisons

Feature

Diagnosis

Chronic Illness

Severe cognitive impairment or unable to perform 2+ ADLs Usually permanent

LTC

Severe Cognitive impairment or unable to perform 2+ ADLs At least 90 days Duration Payment types Requirements Benefit types Benefit payments Other features Distribution Indemnity Indemnity Face amount acceleration Tax favored if meet per diem requirements (Current $330 per day) May waive policy monthly deductions while on claim Life Agents can sell Reimbursement or Indemnity Reimbursement requires facility confinement Face amount acceleration & Extension Tax favored if meet per diem requirements (Current $330 per day) Can have inflation adjustment Requires A&H License & LTC certification FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION 18

Chronic Care vs. Long-Term Care

Chronic Care

Use Section 101(g) only Pays only after permanent diagnosis for most riders Amount above IRS limits are taxable

Long-Term Care

Use Section 101(g) & 7702(b) Pays for both temporary or permanent diagnosis Amount above IRS limits are not taxable if reimbursement Possible waiver of ALL policy deductions while on claim LIMITED to NO waiver of deductions available while on claim

For both Chronic Care and LTC the Licensed Health Care Practitioner determines qualification it is not the insurance carrier

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Life Combination Products Life products with chronic/LTC benefits Discounted Death Linked Benefit Life Insurance Benefit Life Insurance with Life Insurance with Chronic Illness Rider UL-LTC products, Lien Method Life Insurance with structured as a real LTC; usually have a low death benefit and a high LTC benefit Benefit for Long Term Care Dollar for Dollar

license to sell

Life Insurance with Accelerated Death Benefit for Chronic Illness

Governed under IRS 101(g) code

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Let’s begin with these three questions –

Do I have to pay upfront?

Do I know the monthly benefit I can get when I’m on claim?

How much of my death benefit can I receive?

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Discounted Death Benefit (No Upfront Cost)

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Discounted Death Benefit Basics

 Clients can accelerate all or part of their death benefit in the event of a Critical, Chronic or Terminal Illness depending on the carrier  No-cost accelerated benefit payout and what the client receives is based on change in life expectancy after diagnosis of a covered illness or some other discount calculation (varies by carrier)  No additional underwriting  Significantly shorter life expectancy = larger payout  Moderately impacted life expectancy = smaller payout  Depending on the carrier clients may accelerate up to 100% of the policy death benefit up to a lifetime maximum 23 FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION

Discounted Death Benefit ABR –

 Henry purchases a

$250,000

…Insurance product at age 40  Ten years later, at age 50, he suffers a stroke and is unable to perform 2 of 6 ADL’s his prognosis for recovery is not good.

 The medical costs associated with this event are substantial. To help cover these expenses, Henry decides to accelerate

$50,000

of his

$250,000

policy.

Not an actual case, and is a hypothetical representation for illustrative purposes only. 24 FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION

Henry’s Accelerated Benefit

 When Henry files the claim, the company determines his benefit and makes an offer based on the severity of his condition and how it will affect his life expectancy.

– Henry receives an offer from the company for

$22,444

. – He could elect to take all, part or none of the accelerated benefit amount. – If Henry’s stroke had been more severe, the offer would have been higher. – Henry accepts the offer, and his death benefit is reduced by the full amount he accelerated -

$50,000

. – His remaining death benefit of

$200,000

remains intact. – Henry can accelerate this money if he has a future event, or it will pass to his beneficiaries when he dies.

Not an actual case, and is a hypothetical representation for illustrative purposes only. 25 FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION

Lien Method (No Upfront Cost)

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Lien Method 

No charge until used



No additional underwriting



Less than 100% of the death benefit



Benefits accrue with interest



Only charged interest if you use it

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Lien approach ABR Hypothetical Case Study  Mr. Able at age 50 purchases a $500,000 life insurance policy with a lien method chronic illness acceleration rider, paying $4,666 for lifetime coverage  Twenty years later, at age 70, he suffers a stroke and is unable to perform two of six ADL’s…prognosis for recovery is not good.

 The medical costs associated with this event are substantial. To help cover these expenses, he decides to accelerate $250,000 of his $500,000 policy.

 At the time, the cash value = $52,755, and the acceleration factor is 50%, and lien interest rate is 5.5%  The eligible amount to accelerate = – 50% * (500,000 – 52,755) + 52,755= $276,000  He’s eligible to accelerate the requested $250,000 in the form of a lien Not an actual case, and is a hypothetical representation for illustrative purposes only. FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION 28

Lien Approach ABR Hypothetical Case Study continued  Upon claim, the net death benefit available upon death = $500,000 – lien of $250,000 = $250,000  The net cash value available is zero since the lien exceeds the cash value, $250,000 > $52,755  In 10 years, the Lien has grown to $427,036, the net death benefit available upon death = $500,000 - $427,036 = $72,964  The premium of $4,666 must continue to be paid to keep the policy in force  In 3 more years (policy year 33), the policy will lapse because the lien will exceed the original face amount of $500,000 Not an actual case, and is a hypothetical representation for illustrative purposes only. FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION 29

Dollar for Dollar Death Benefit (Upfront Cost)

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Accelerated Access Solution

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Accelerated Access Solution

A chronic illness 1 rider for select American General permanent products The funds can be used to help pay for – Virtually any expense, even those unrelated to the illness

1 Insured must be certified as chronically ill by a licensed physician and meet all eligibility requirements. FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION 32

Benefits of Accelerated Access Solution

   

101(g)

– No LTC license necessary: only Life / A&H – 2-out-of-6 ADLs or severe cognitive impairment – Deemed to be permanent

Indemnity

– No receipts, spend benefits on anything

Choose your total AAS Benefit Base

– Minimum = greater of 50% of DB or $50,000 – Maximum = lesser of 100% of DB or $1,500,000

Maximum Monthly Benefit = IRS Monthly Per Diem, with choice of 3 caps:

– 2% of AAS Benefit Base; – 4% of AAS Benefit Base; or – Per Diem FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION 33

Benefits of Accelerated Access Solution

Inflation hedge against future costs 

Purchase more than today’s Per Diem limit!

– Some products won’t allow it!

– Provides inflation protection with a maximum monthly benefit cap 

4% Cap – example:

– 4% of $300,000 = $12,000 per month – Go on-claim in 2014: Collect $9,900 per month – Go on-claim in the future when Per Diem = $15,000 per month: Collect $12,000 per month 

Per Diem – example:

– $300,000 AAS benefit – Maximum monthly benefit: $300,000 = $15,000 per month FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION 34

Accelerated Access Solution



Built-in Waiver of Monthly Deduction

– »

Waiver of costs for the entire policy AAS rider charges

»

Base policy charges

–

If less than 100% is accelerated, 100% of policy costs are still waived while on claim

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Did you know that 9 in 10 people who go on long-term care claims do not recover?

This means that only 10% of the market would have what turns out to be a non-permanent condition.

1

While 10% might have a concern if the condition is chronic, but not permanent – far more people will be concerned about continuing to have to pay premiums once on claim.

It is important to note that while on an AAS claim, AGL waives all charges for the entire base policy and riders.

There is no other chronic illness life insurance rider that allows for coverage of non-permanent conditions and waives charges for the entire base policy on the market currently.

1 Society of Actuaries: “Long-Term Care Risk Management: Re-Pricing In-Force Policies”, 2014 FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION 36

The downside of using a rider that does not waive charges for a non permanent condition is that unless policyholder continues to pay policy premiums while on claim, they may owe all the missed charges during claim period to keep the policy from lapsing once they come off claim. Therefore, they could be faced with a very large catch up premium to keep the policy in force - particularly in a GUL, where the timing of premium payments can have a significant effect on the overall cost.

Unlike long-term-care riders or other chronic illness riders, AGL does NOT continue charging ANY policy expenses while on claim. Even if a policyholder did recover from a condition that was expected to be permanent, they would not have to pay back missed charges to keep the policy from lapsing.

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It may be that only a small portion of people would not be covered for a non-permanent chronic condition, but 100% of people would need to be concerned about the catch-up premiums required when they did come off claim.

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Care Coordination Program

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Care Coordination Program AGL offers services to help the insured locate and choose a provider through its “Care Coordination Program”.

American General Life has partnered with the nation’s largest administrator of long-term care insurance (Long-Term Care Group, Inc.

or LTCG™), to arrange the long-term care services at no cost to policyholders.

This free benefit, called the “Care Coordination Program”, is completely optional and available on all policies with the Accelerated Access Solution chronic illness rider.

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Care Coordination Program This program offers access to Care Management professionals that can provide information to support a search for a caregiver or facility that is right for each family’s situation as well as assistance to:  locate a qualified caregiver, long term care facility or home-delivered meals provider  develop a plan of care to ensure all your needs are met  direct you to organizations with expertise in your disabling condition  set up your first home care visit  understand the steps involved in moving into a long term care facility  help you understand the cost of long term care and how you will be billed for the services you receive 41 FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION

Also be on the lookout for new White Paper from American General that discusses the differences between Long Term Care and Chronic Illness life insurance riders!

Talk to your American General Representative today for more information.

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Important Information

Policies issued by:

American General Life Insurance Company (AGL), Policy Form Number 13460, ICC13-13460, Rider Form Number 13972, 13600, ICC13-13600. Issuing company AGL is responsible for financial obligations of insurance products and is a member of American International Group, Inc. (AIG). AGL does not solicit business in the state of New York. Products may not be available in all states and product features may vary by state. These product specifications are not intended to be all-inclusive of product information. State variations may apply. Please refer to the policy for complete details. There may be a charge for each rider selected. See the rider for details regarding the benefit descriptions, limitations and exclusions.

Guarantees are backed by the claims-paying ability of the issuing insurance company.

AGLC108204 ©2014. All rights reserved. FOR FINANCIAL PROFESSIONAL USE ONLY-NOT FOR PUBLIC DISTRIBUTION 43

American International Group, Inc. (AIG) is a leading international insurance organization serving customers in more than 130 countries.. AIG companies serve commercial, institutional, and individual customers through one of the most extensive worldwide property-casualty networks of any insurer.

In addition, AIG companies are leading providers of life insurance and United States. AIG common stock is listed on the New York Stock Exchange and the Tokyo Stock Exchange.

retirement services in the Additional information about AIG can be found at www.aig.com | YouTube: www.youtube.com/aig | Twitter: @AIG_LatestNews | LinkedIn: http://www.linkedin.com/company/aig AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. For additional information, please visit our website at www.aig.com. All products and services are written or provided by subsidiaries or affiliates of American International Group, Inc. Products or services may not be available in all countries, and coverage is subject to actual policy language. Non-insurance products and services may be provided by independent third parties. Certain property-casualty coverages may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds, and insureds are therefore not protected by such funds.

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