Asset Based Long Term Care Insurance Planning
The LTC Insurance industry continues to evolve. Carriers are more responsive to the way consumers want to purchase LTC Insurance. Stand-alone LTC carriers have consolidated further. Mass Mutual and TransAmerica are the most recent to bid adieu and retreat from the traditional stand-alone marketplace. While there are still excellent stand-alone LTC carriers who are committed to the marketplace, these vary state by state. Traditional long term care plan designs remain relevant and appropriate for many consumers. In contrast, the ecosystem is spry with Life Insurance carriers offering asset-based solutions combing Life Insurance and LTC Insurance. The landscape of options for those who plan while in good health are abundant.
Let’s take a deeper dive and differentiate the asset-based solutions.
Hybrids vs. Life Insurance with Riders. While both solve for long term care, the leverage, the contract language, IRC codes, tax incentives, cost structure and premiums differ.
Let’s dive right in. All LTC benefits are tax free*. If you never need long-term care services, your beneficiaries will receive a death benefit tax free.
Hybrids and Life with LTC Riders both use life insurance as a chassis to solve for long term care benefits. The fundamentals: premiums are guaranteed and can be annual pay, single pay or limited pay, with 1-20 payments. Limited pay options result in having a fully paid-up policy. The contracts are structured to provide for a death benefit OR LTC benefits.
Hybrids. Available for ages 30-84**. These contracts are built to solve for a BIG long term care benefit and have a base death benefit. The first 24 months of the contract will come from an acceleration of the death benefit pool. The continuation of benefits for long term care are then paid from the LTC extension rider on the policy.
Distinguishing the first 24 months is significant for New York State contracts as New York State does not allow inflation protection on the death benefit. Therefore, the monthly LTC benefits at claim time will not have the inflation protected benefit for the first two years. On month 25, the benefits come from the LTC extension rider, where retroactive inflation protection will provide the higher LTC monthly benefit. For clients outside New York or those who have a dual residency, comparing policy contracts to maximize plan design is beneficial.
Using life insurance with an extension of benefits rider results in highly leveraged LTC benefits. The secondary benefit is the death benefit – which mentally and financially justifies the repositioning of your money.
Additionally, a return of premium option is included in these designs.
These range by state and carrier and will let you surrender the policy and return 80-100% of your premium.
Life Insurance with LTC Riders are generally available for ages 21-80. This is a solution that adds an acceleration of benefits rider to your life insurance policy. Depending on the carrier, 90-100% of the base policy is available to be accelerated for long term care services. The acceleration of the life Insurance death benefit is available on permanent life insurance policies. These contracts can be whole life, second to die whole, or universal life and may also provide cash value and dividends.
Calculating the Monthly LTC Insurance benefit
At claim time, 2-4% of the death benefit is available to be accelerated per month as an LTC benefit. As an acceleration of death benefit, the rider payout will reduce both the death benefit and the cash surrender value.
As an example, a death benefit of $500,000 with a 2% acceleration will provide a monthly LTC benefit of $10,000. Benefits will continue until the total amount paid equals the base. There is no Inflation protection or tax incentives with these plans.
Diving into Life Insurance with LTC Riders means that we will find varied definitions and contract language. These contracts can be either 7702b long term care insurance or 101g terminal or chronic illness policies. 7702b gives us standard broad federal language with Federal and State tax incentives. 101g are terminal or chronic illness contracts where language differs by state and by carrier. In many cases, the condition must be permanent. For life insurance products it is imperative to consider the death benefit guarantees, ratios for acceleration and contract specific language. For impaired risk, opportunities are more abundant using annuities with LTC to provide highly leveraged benefits.
When refining options and looking at varied ways to solve, your priorities take center stage. What do you most want to achieve? Do you want to solve for biggest death benefit? Highly leveraged long term care benefits? Or do you want a balance of cash value, death benefit and long-term care insurance? Solving in priority order for long term care, death benefit, and cash value will dictate the policy design and maximize your contract. Tax incentives and 1035 opportunities will further enhance the design and direction.
Consumers and advisors who want to reposition assets have a breadth of optionality when it comes to planning for long term care using a life insurance chassis. Securing coverage is the ability to leverage age and health. More choices and more nuances mean more complexity. Transparency matters for confident decisions and at time of execution.
The LTC Insurance design solutions are numerous and vary in leverage and intentionality. Using an LTC Insurance specialist in charting your course will result in more confident decisions, successful placement and the ability to dive into clearer waters.
Karp Loshak LTC Insurance is a trusted resource for consumers and their advisors.
National and independent brokers, representing all carriers and plan designs. The duo are fiercely client focused and affiliate with the leading LTC Insurance carriers and myriad of options in today’s marketplace.
Rona Loshak and Natalie Karp, Founding Partners