Protect more with less
An advantage to a plan that combines life insurance or annuities with LTC benefits is that it's an asset versus an expense, and it will ultimately pay off
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There are three types of asset-based long-term care insurance programs:
- Accelerated-benefit plans
- Linked-benefit, or combination plans
- LTC annuities
An accelerated-benefit plan generally consists of a life insurance policy – in most cases, guaranteed universal life – with a rider that directs the carrier to pre-pay your death benefit while you are alive if you need covered chronic care.
Linked-benefit plans combine a life insurance policy – usually a universal life or whole life contract – with provisions to pre-pay both the death benefit and an additional pool of funds to help pay covered long-term care.
LTC annuities consist of an annuity – fixed, indexed or variable – with a rider that adds long-term care coverage.
While the general concept behind these three asset-based plans is similar, the mechanics and prospective buyer for each are quite different. Let’s review them.
For an easy-to-read, side-by-side comparison of the two asset-based plans with a life insurance component – accelerated-benefit and linked-benefit plans – please click here.
What is it? An accelerated-benefit plan is usually a life insurance policy – either whole life, universal life, or variable universal life – with an added rider, or option, for additional premium. The rider – which typically ups your life insurance premium by 5% to 15% depending on your age, gender and health – directs the insurer to accelerate, or pre-pay your death benefit if you need long-term care.
How does it work? If you need long-term care (also referred to as chronic care), your policy pays a percentage of your death benefit per month to help you cover these expenses. If you never need chronic care, the total death benefit is paid to your heirs upon your death. If you need some long-term care and then die, your beneficiaries receive the balance.
How are premiums paid? With most accelerated-benefit plans, owners pay their premiums each year for as long as you own the policy. This keeps the cost down and allows people to budget their insurance costs over time versus paying for it all upfront. Most carriers that offer these plans, though, will accept single, lump-sum payments or shortened ones (i.e., five, seven or 10 year payment plans). Note that you must continue to pay your premiums while receiving the accelerated benefits.
Can you fund it with a tax-free exchange of an existing policy? Yes, accelerated-benefit plans permit tax-free ‘1035 exchanges.’ A 1035 exchange – which refers to Section 1035 of the Internal Revenue Code – allows for the tax free exchange of an existing life insurance policy or annuity for a similar policy. Accelerated-benefit plans, which offer the added benefit of coverage for a chronic illness, count as a similar plan. Tip: Be certain there are no remaining surrender charges before you make the switch. For additional information, please click here.
For example, if your death benefit is $200,000 and the monthly pay-out percentage is two percent, you’d receive $4000 per month ($200,000 x 2%) for chronic long-term care. The policy would continue to pay this $4000 amount for as long as you need care. In our example, payments would last 50 months, or just over four years ($200,000/$4000).
During this acceleration, or pay-out process, your death benefit is reduced dollar for dollar.
For example, if your death benefit is $200,000 and the payout percentage is two percent per month, you’d receive $4000 per month regardless of what you actually spent. You can spend the cash as you see fit. You can even pay a family member or friend to provide your care. There is never a need to submit receipts. This is a plus.
Is there a deductible? With most plans, there is a deductible, or elimination period. Typically, it’s a waiting period of 90 days and only has to be satisfied only once. Tip: Be certain to inquire whether the policy requires the number of days in your deductible to be days that simply require you to wait until your benefits kick in versus days where you have to actually pay out-of-pocket for long-term care services. Also, look for a policy that only requires your deductible, or waiting period, to be satisfied only once during the life of the policy. One leading carrier has eliminated their deductible altogether, which means you'd receive paid care from day one.
What are the benefit triggers? They are virtually the same as with traditional stand-alone long-term care insurance policies. Either you need assistance with at least two of six activities of daily living due to a loss of functional capacity or you require supervision to protect yourself from threats to health and safety due to severe cognitive impairment. Your doctor must submit a written plan of care and, with some plans, certify that he/she expects your chronic illness to last the rest of your life.
Is there a guaranteed return of premium? No. There is typically a free look period of 30 days. However, after that, there is no guaranteed return of premium.
What is the health-screening process? With most accelerated-benefit plans, you have to go through ‘full health underwriting.’ This means you have to complete an application and go through a medical exam by a paramedic. The carrier will also request and review a copy of your medical records. It typically takes 30 to 45 days to issue a policy. If you are interested in applying but have a pre-existing medical condition, please call us to discuss your eligibility at 800-341-0297.
Is there a guaranteed residual death benefit? No.
Since the 1990s, a handful of companies have offered another type of asset-based insurance policies called linked-benefit plans. Recently, there has been a spike in competition in linked-benefit plans and the result is significant improvements made to the products.
What is it? Linked-benefit plans combine life insurance policy with long-term care coverage under one contract. Unlike its sister product described above, linked-benefit plans offer you the ability to extend your long-term care coverage above-and-beyond the death benefit amount.
How does it work? A linked-benefit plan is usually a life insurance policy – either whole life, universal life, or variable universal life – with two added long-term care coverage riders for additional premium. The first rider – which is available for a nominal cost– directs the insurer to accelerate, or advance your death benefit if you need long-term care. The second rider – also available for a minimal cost– directs the carrier to pay a completely separate, and usually much larger, amount of benefits to extend and expand your long-term care coverage.
As a result of this extension rider, linked-benefit plans generally offer more long-term care coverage than their counterpart.
If you need long-term care, this policy pays a percentage of your death benefit per month to help you cover those expenses. If you continue to need care and deplete all your death benefits, the secondary pool of insurance kicks in and continues to pay your long-term care costs. For example, if you had a death benefit of $170,000 and an extension benefit of $330,000, you’d have a total of $500,000 in long-term care benefits.
Of course, if you never need long-term care, the total death benefit ($170,000 in our example) is paid to your heirs upon your death. If you need some long-term care and then die, your beneficiaries receive the balance.
How are premiums paid? Most linked-benefit plans are typically funded with a single, lump-sum payment. As such, these policies are primarily designed for persons in or near retirement age who have significant ‘safe money’ assets set aside for an emergency. A portion of these safe monies is simply repositioned, or moved, from where it resides today to a highly-rated insurance carrier offering a quality linked plan. Note that some linked plans allow for shortened payments of five, seven or 10 years.
Can you fund it with a tax-free exchange of an existing policy? Yes, linked-benefit plans permit tax-free ‘1035 exchanges.’ A 1035 exchange – which refers to Section 1035 of the Internal Revenue Code – allows for the tax free exchange of an existing life insurance policy for a similar policy. Linked-benefit plans, which offer the added benefit of coverage for long-term care if you need it, count as a similar plan. Tip: Be certain there are no remaining surrender charges before you make the switch. For additional information, please click here.
How does the carrier determine the amount it pays for long-term care? Typically, the first rider stipulates a set amount of time, stated in months, that determines the amount you will receive. This is referred to as a benefit period and is usually 24 or 36 months. To determine how much is available to you per month, you simply divide your death benefit by the months in your benefit period. For example, if you have a death benefit of $170,000 and a 24-month benefit period, you’d have just over $7000 per month ($170,000/24).
The second rider extends your long-term care benefits. You select an additional benefit period – from 24 months to 48 months – and the company determines the total pool that corresponds with that period. For example, if you elect the first rider with a 24 month benefit period and the second rider with a 48-month benefit period, you’d have a total benefit period of 72 months. If your total LTC insurance amount came to $500,000 ($170,000 death benefit plus $330,000 of extension benefits.), your monthly long-term care benefits would amount to $7000 per month for six years, or 72 months ($500,000/72 months).
During this acceleration, or pay-out process for long-term care, your death benefit is reduced dollar for dollar (as well as a portion of your cash value). Once it’s depleted, the extension coverage kicks in. If you exhaust that amount too, most linked plans will pay your heirs a guaranteed residual death benefit of between five and 10% of your starting life insurance amount.
How are your long-term care benefits paid? Most linked-benefit plans use the reimbursement approach when paying your benefits. Once you qualify for care, the policy pays your actual expenses up to your monthly maximum amount. If your expenses are less than the monthly maximum, the balance remains in your account to be used later if needed.
For example, if your monthly maximum is $7000 and your actual expenses for the month are $6000, the $1000 balance remains in your policy for future claims. With reimbursement plans, you usually have to submit receipts.
Is there a deductible? With most linked plans, there is a deductible. Typically, it’s 90 days of paid care – but has to be satisfied only once. One leading carrier offers first-day coverage for covered home care while another says one day of paid home care knocks off seven days of your 90 day deductible.
How are the benefits treated from a tax standpoint? Under current law (which was just recently updated), both the life and long-term care benefits (base and extension insurance proceeds) are paid income tax free.
What are the benefit triggers? They are the same as with traditional stand-alone long-term care insurance policies. Either you need assistance with at least two of six activities of daily living due to a loss of functional capacity or you require supervision to protect yourself from threats to health and safety due to severe cognitive impairment. Your doctor must submit a written plan of care and certify that he/she expects your care to last 90 days.
Is there a guaranteed return of premium? Yes, with most plans. Linked-benefit plans typically offer you the very consumer-friendly provision of a guaranteed return of premium. This means you can get back 100% of your deposit amount in the future if you change your mind for any reason. One leading carrier offers that for as long as you own your policy, while another offers it for 15 years.
What is the health-screening process? With most leading linked-benefit plans, you do NOT have to go through ‘full health underwriting.’ They offer what is called ‘streamlined underwriting.’ This simplified process consists of answering a short set of pre-qualifying questions and then participating in a 30 to 45-minute telephone interview. There are no exams, labs or doctor’s statements and policies are generally issued in two weeks or less.
If you are interested in applying but have a pre-existing medical condition, please call us to discuss your eligibility at 800-341-0297.
Is there a guaranteed residual death benefit? Yes, in most cases. The residual death benefit is payable to your beneficiary income tax free when your total death benefit (or ‘specified amount’) and total long-term care benefits have both been. This benefit is usually equal to five to 10% of your initial death benefit.
How Do Annuities With Long-Term Care Work?
How does an annuity with long term care work? While each one is a little different, the basic premise is the same for all.
You start by purchasing a long-term care annuity. (We’ll focus on fixed-rated annuities for this discussion, even though the concept works with variable-rate plans as well.) You buy the annuity with either a single payment of your choosing (usually $50,000 or more) or you can exchange an existing annuity if you own one. The annuity portion functions just like a regular annuity: you earn a fixed rate-of-return, your money grows tax-deferred and can elect to cash it out later for a guaranteed stream of income.
However, LTC annuities differ in that they offer a rider that creates an additional pool of money to cover long-term care if you need it. The cost of the rider is paid for from a portion of your earnings, so you never have to write a check. The premiums within the LTC annuity are usually lower than those for a comparable standalone LTC policy because there is a greater amount of self insurance (more on this in a minute).
With stand-alone LTC insurance, you select the total amount of coverage and the total amount of time you’d like benefits to be paid. This determines the amount per month you’d receive in the event of a claim. Example: Say you chose $200,000 in coverage paid out over 48 months. Your monthly amount would be about $4200. LTC annuities work pretty much the same. Typically you select a total amount of coverage (usually two or three times your deposit) and then you select the amount of time (typically four years, or 48 months). A few caveats: Most LTC annuities require you to use your deposit amount first to pay for long-term care (this is the self insurance we mentioned earlier) – and they state that the insurance amount will not kick in for at least one to two years after claim. Also, since this has an insurance component, you usually have to go through health underwriting.
Now let’s look at a simple example. Say you deposited $100,000 and purchased a rider that created a $200,000 pool of LTC insurance. If you went on claim, you would use the $100,000 of your deposit first. Once that is exhausted, the LTC insurance you purchased would start to pay out. The insurance amount you’d receive would be $4167 per month – and it would pay that amount to you for a total of 48 months, or four years ($200,000/48).
One of the reasons that LTC annuities are gaining in popularity has to do with the tax advantages they offer. Thanks to the Pension Protection Act that became law last year, the cost of the LTC insurance rider – which is simply deducted from your interest rate returns – is tax free and every dollar paid out for long-term care – both your initial deposit and the insurance – is tax free.
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