Are There Other Options?

Yes, There Are Still Other Options!

If you need additional life insurance, but are also concerned about the possibility of long-term care expenses, you should consider a hybrid or  asset-based policy.

These products provide answers to the two most common objections to stand-alone or traditional long term care policies . . . the risk of future increases in premiums, and the "use it or lose it" complaint (pay premiums over the years and pass away without needing long term care.)  Hybrid policy premiums are fixed, and the provision for a death benefit means that someone will be paid . . . the insured on a long term care claim, or the insured's beneficiary in the event of death.

A "hybrid" policy typically refers to a universal life or a whole life product with a long term care rider that allows the insured to accelerate a percentage of the death benefit to pay for long term care needs.  For example, a $250,000 death benefit with a 2% withdrawal rate for long term care can provide a $5,000 monthly LTC benefit for 50 months.

Be sure that a hybrid universal life policy under your consideration includes a no-lapse premium guarantee for a substantial or lifetime period.  Such a guarantee is not available in stand-alone traditional LTC policies. 

An asset-based product usually refers to a single premium life policy with an LTC benefit, or to a non-qualified tax deferred single premium annuity with an LTC rider.  Such policies may also provide for premium payments over a limited number of years.  At least one carrier does currently offer a hybrid policy with a lifetime premium payment option. 

If you are at least 59 1/2 at the time of purchase, you may, depending on the carrier and product, be able to utilize retirement funds without an IRS 10% penalty tax.

The additional cost of an LTC benefit in such contracts is typically much less than would be the average premium for a separate LTC policy.  However, there are trade-offs.  A hybrid or asset-based policy may not offer many of the optional benefits available with stand-alone LTC products such as shared care, inflation riders, restoration of benefits, or waiver of the elimination period for home health care.

Cash value from an existing universal life or whole life policy may be used in a tax free Section 1035 Exchange to fully or partially fund a single premium hybrid policy. 

If you have a non-qualified annuity (one that isn’t part of your IRA or pension plan) with a lot of cash build up beyond what you have paid into the annuity, you might consider a single premium LTC policy using the value of the annuity on a tax-free exchange basis.  That’s a new option available since 2010.  It’s worth looking into if you need LTCI and don’t foresee a need for the annuity in retirement.  You’ll avoid federal income tax on the value of the annuity that’s in excess of the cash you put into it.

 

As always, it comes down to carefully considering your needs, resources, and future concerns.  And we recommend that you do so in conjunction with your accountant and attorney.  Creative solutions to long term care planning  involve insurance, financial, and legal considerations.  Be sure to touch all the bases!

Self Insuring

Wealthy individuals can absorb an error in projecting the future cost of care, how long the need for care might last, or the need for long-term care arising sooner rather than later.

However, consider how much money you’d need to have to pay out just $60,000 annually (our $5,000 a month example x 12) for 3 years on claim without reducing your principal.  That number’s $4,500,000 assuming a 4% after tax withdrawal rate ($180,000/4%).

The cost of a 3 year benefit period policy (a $180,000 pool of money)  could be about $2,500 a year (we assume you’re 60, in good health, have a 3% compound inflation rider, shared care, a 90 day deductible, and spousal waiver of premium.)

And remember that, with shared care, your benefit pool could be $360,000 over 6 years on claim.  To self-insure for that amount, you would need $9,000,000 earning 4% net per year.

To pay out a premium of $2,500 annually, assuming that you earn 4% net on the invested sum, you would need to set aside $62,500. 

Which is the better use of your money?