By Tom Riekse Jr.
Effective in January of this year, tax rules for various types of Life/Long-Term Care and Annuity/Long-Term Care plans will change and allow more favorable treatment for payment of riders and benefits. You can expect many carriers to offer new products, which are sometimes called combination, linked or asset-based products. Here are six questions and answers to help navigate the new long-term care planning options:
Why are these products called "asset-based" and sold successfully through the bank channel?
One reason is that the vast majority of Life/LTC and Annuity/LTC plans are financed by a single premium deposit. The client will purchase the plan using either cash or a maturing CD, with a typical premium between $50,000 and $100,000. The client's money is invested in a safe, low yielding life or annuity policy that is leveraged in case long-term care is needed in the future. Each year, the long-term care rider premium is deducted from the account value. Prior to 2010, the client would receive a 1099 for the premium cost as a distribution. Going forward, the annual premium reduces the cost-basis in the policy. There are still annual insurance premiums, but for the client the charges are far less visible than writing an annual check.
Who might consider a Life/LTC combination product?
The Life/LTC combination is an option for someone who might typically self-insure for long-term care needs, but would like the leverage that a combination plan offers. For example, a $100,000 initial benefit can be leveraged by a factor of three to six times for long-term care needs. If long-term care is needed, an accelerated benefit rider can be used to access the initial premium deposit. If that is exhausted, an extension of benefits rider can pay for addition long-term care needs. If long-term care is not needed, then the death benefit can be used for wealth transfer and related strategies. Also, the Pension Protection Act allows for a 1035 exchange from an existing life policy that has outlived its purpose into a combination Life/LTC plan.
What is the market for Annuity/LTC plans?
The combination Annuity/LTC plans allow annuity holders to get money out of their annuity on a tax-free basis to help pay for long-term care needs. These hybrid Annuity/LTC plans are only available on non-qualified annuities (qualified plans can't have a rider). The potential market consists of annuity holders who typically are outside of their surrender period and have a need for long-term care planning. 1035 exchanges are available from life and annuity contracts.
What do these combination products have in common with traditional Long-Term Care insurance?
First, the long-term care rider will have the same "tax-qualified" triggers to accessing benefits, either failing two of six activities of daily living or demonstrated cognitive impairment. Benefits paid out will be received tax free. Second, the better policies will be medically underwritten so that meaningful benefits are available. Third, advisors in most states will need additional continuing education courses on long-term care to sell these products. Finally, both the Life/LTC and Annuity/LTC plans are purchased primarily for long-term care planning needs - not as investment products.
When should traditional coverage be considered?
Anyone who can deduct traditional LTC premiums through a business or who might be eligible for federal or state tax deductions may want to look at traditional coverage first. In addition, those living in states with partnership long-term plans may also want to consider traditional plans since partnership provisions are currently not part of combination products on the market.
What other considerations are there?
Keep all solutions in mind when considering long-term care planning. In many cases, the best fit for a client might be a combination of a traditional long-term care plan (such as one purchased through an employer) supplemented by an Asset-based plan. Also, although the tax benefits are important, it is important not to lose sight of the benefit of leveraging money in case an extended long-term care need (such as Alzheimer's) arises. Finally, make long-term care planning part of an annual financial review, looking at all key information, including the cost of care, long-term care inflation trends, and current policy features.
Tom Riekse Jr., CEBS, ChFC is managing principal at LTCI Partners, a brokerage general agency specializing in Long-Term Care insurance. Email him at email@example.com.