by Bruce Moon, ChFC, CLU, CASL
Bruce Moon, ChFC, CLU, CASL, is vice president of The State Life Insurance Company, a OneAmerica company, and has focused on asset-based LTC solutions for more than 20 years.
The past several years have brought unique challenges to planners and advisers who are interested in using protection instruments to provide dollars for the costs associated with long-term care expenses. One product structure, health-based LTC insurance, has had rocky times-significant rate increases, dramatic product restructuring, even companies departing the business line altogether.
Meanwhile, another LTC protection element, known as hybrid or combination products, has made significant inroads. These solutions, using the structure of life insurance and annuities, have become more attractive for the following reasons:
- Because most clients are self-funding for long-term care risk, hybrid LTC annuities or life insurance provide a true assigned asset for that purpose.
- Hybrid annuity or life insurance is funded via asset reallocation versus a reduction of monthly income, as happens with health-based LTC insurance.
- Recent federal tax law now benefits the use of annuity-based LTC insurance.0
Let's look at each of these elements separately.
Assigning Assets for Long-Term Care Expenses
Many planners have talked to their clients about having assets available for long-term care purposes, but that can be forgotten when the client has something fun on their mind-perhaps a family trip to Florida theme parks for the grandkids or an exciting Mediterranean cruise, and all of a sudden that assigned asset has been diminished.
On the other hand, using a single-premium life insurance or annuity policy with coverage for long-term care purposes specifically identifies an asset for funding, then year after year, the annual statement of values reminds the clients why the money exists in this place.
Funding Via Reallocation, Not Monthly Expense
One of the downsides of the health-based product from the outset was its pay-as-you-go structure that forced clients to reduce their monthly income in retirement. In addition, the rate increases that many companies have taken means that clients are spending larger amounts of their fixed income than they ever foresaw.
It is a much easier conversation with your clients when you can discuss how to take an existing asset-one that doesn't have any part in generating monthly income-and reallocate it to a single-premium hybrid/combo LTC product.
Perhaps the asset today is in a low-yielding investment such as a CD, savings, or money market account, or in a short-term or municipal bond fund. Regardless, clients need to understand the advantages and disadvantages of this reallocation, and decide whether it makes sense for them.
The Annuity/LTC Opportunity
With tax advantages available since January 2010, clients can use the annuity/LTC combination products for qualifying expenses without paying any federal income tax. This creates a unique opportunity for clients who have existing annuities.
Statistics (2009 LIMRA data) that show only 0.5 percent of deferred annuity assets are ever annuitized (taking the income option). In most cases, you will find that the client who bought an annuity in their 50s or early 60s has now reached retirement and realizes that the annuity will not be needed for income.
These clients can sit tight with what they have, and that may be a good choice, but another choice to consider is to do a tax-free exchange under Internal Revenue Code Section 1035 into the annuity/LTC package. These products work as any other annuity when it comes to non-LTC elements-they can be used for annuitization, for emergency withdrawals, and pass along unused cash balances to heirs at death.
But they add the element of providing an enhanced value that is available for qualifying LTC expenses, and as mentioned earlier, federal tax law allows these distributions to be done on a tax-free basis.
Summary
This year, a real evolution in protection products for long-term care expenses is taking place. Health-based long-term care insurance, whose shortcomings have been exposed, are losing traction and innovative, life insurance or annuity-based LTC solutions are moving to the forefront.
These new products allow protection because they provide coverage if it is needed, or death benefits to pass along to the family, charity, or church of the clients if the LTC coverage isn't needed.
Clients have the benefit of real choices, and current options have guaranteed premiums and fixed, guaranteed interest rates. which take away the negative surprise elements. If you have not yet researched these hybrid LTC options, 2011 is the perfect year to get started.
