When producers identify a client’s need for permanent life insurance and the possibility for additional tax-preferred income in retirement, the concept of an insurance-based retirement plan (IBRP) becomes logical to consider. However, when producers want to use an IBRP to provide supplemental retirement income, they seldom think of long term care needs in conjunction with this type of plan. Why?
In my opinion, because:
o The producer is suggesting an IBRP to a young professional looking for life insurance protection and additional ways to invest tax-preferred dollars. The producer may assume the typical IBRP prospect is in an age bracket not interested in discussing LTC needs;
o The producer may understand the value of an LTC rider, an option available at an additional cost, but might assume the cost of insurance on the rider could greatly impact the cash value (therefore the income) of the IBRP. The producer also may believe the LTC rider is not worth adding, with the possibility of paying for something the client may never use; and
o The producer may not realize how an LTC rider works with employee-owned plans. And he or she may not understand the value such a rider could add to an executive bonus 162 plan, a collateral split-dollar plan or a simple IBRP.
It may help to begin with some information about the need for LTC. Some sources estimate at least 50% of Americans will need LTC during their lifetime. Of this group, about 15% will end up in a nursing home. The remaining 85% will need some variety of home health care, assisted living or adult day care.
While the costs of these services seem less expensive than nursing home care, keep in mind the following facts:
o The average stay in a nursing home is 2.5 years, with the average annual cost of nursing home care in 2005 being $62,532 for a semi-private room;
o The need for care outside of a nursing home averages 4.5 years, but a significant segment of the population will need care for five years or longer;
o The average annual cost for an assisted living facility is $32,294;
o The average home health care costs are running more than $22 per hour; and
o LTC costs are expected to quadruple by 2030.
While the typical IBRP prospect is not thinking about LTC needs, the statistics above show that some thought into these needs should be addressed and planned for. It has been suggested that people with assets between $100,000 and $1.5 million need some form of LTC protection. The addition of an LTC rider to an IBRP makes sense for several reasons.
The LTC rider makes a great beginning to LTC planning, in that “something” is in place that allows a tax-free collection of a death benefit should an unforeseen tragedy occur while the insured is still young, or becomes uninsurable in later years before LTC needs are more formally addressed.
A more compelling reason is the opportunity to enhance the income value of the IBRP. The LTC rider is less expensive to add to an overfunded life insurance policy due to a smaller net amount at risk; the rider, therefore, has an insignificant effect on the income stream available in retirement years.