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Fill The Estate Planning Gap By Linking The Benefits

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Even as industry players wait expectantly for the Pension Protection Act to kick in at year-end 2009, many are already enjoying a brisk and growing business selling so-called “combination,” “linked-benefit” or “asset-based” solutions the legislation is intended to benefit: life insurance that also features a long term care rider. And high net worth boomers looking to protect their estate assets are fueling much of the demand.

“What we see repeatedly is a protection gap among affluent clients,” says Gary Fanning, a second vice president and national sales manager for MoneyGuard Intermediary Sales at Lincoln Financial Group, Hartford. “They have great retirement and estate plans, but that protection gap can wreak havoc with all of the prior planning because they haven’t insured for long term care.”

Adds Peter Cross, president of Delta Financial Associates, an Eaton, Conn.-based wholesaler: “The first step in estate planning is planning to preserve the estate. When the client says ‘no’ to a traditional LTC product, the natural next step is to propose linked-benefit insurance.”

Many clients are taking up the offer. Bill Upson, a chartered financial consultant and principal of Strategic Asset Management Group, Walnut Creek, Calif., reports “dramatic growth” in recent years for sales of his combo products, which constitute 75%-plus of his long-term care sales. Cross adds that combo products now garner 80% of his distribution business, or more than $50 million in sales.

Why the growing interest among clients? Sources credit the rise in large measure to the solution’s attractiveness relative to stand-alone LTC products, which have historically been a difficult sell for advisors. That’s because policyholders of traditional LTC offerings stand to “lose” premiums paid into the contract in the event they never require LTC or die before they use up the benefit.

Premiums paid into permanent life insurance contracts carrying a long term care rider, by contrast, add to the policy’s cash value. The moneys deposited may thus be reserved for long term care, retirement or estate planning or other liquidity needs.

Observers say that a combo product also lends itself well to trust planning. An independent trustee can draw against a linked-benefit policy held inside an irrevocable life insurance trust to reimburse a beneficiary (such as an adult child) who is paying LTC expenses on behalf of the trust grantor (such as an aging parent). When the grantor dies, the beneficiary can receive the remaining portion of the death benefit income and estate tax-free. But to pass muster with the IRS, the transactions have to be executed separately.

“The right kind of policy could provide a benefit, subject to an LTC event, independent of the beneficiary paying for long term care expenses,” says Upson. “So the son of a long term care recipient might pay for LTC costs; and, independently, the trustee would pay the son ‘x’ dollars at a different time. So long as there is no direct link to the LTC payment, the disbursement from the trust is legitimate.”

Advisors point out, too, that the amounts and types of LTC benefits offered through combo products are comparable to those of traditional LTC solutions.

Advisors note, however, that combo products generally require a substantially greater up-front investment than do stand-alone LTC solutions because most linked-benefit products rest on a single-premium universal life chassis. And, they say, combo products are not for everyone.

John Enright, a private wealth advisor at Sagemark Consulting, Syracuse, N.Y., says that clients who don’t require a death benefit are better off placing their premium dollars into a traditional LTC offering. The price of a combo solution for prospects with less than $200,000 investable assets, he adds, could also be cost-prohibitive. Cross puts the figure at closer to $700,000, a sum that might be better invested in alternative vehicles that could also fund LTC.

“The single biggest objection [to buying a combo product], which is valid, is the opportunity cost,” says Cross. “If I put $800,000 into a diversified portfolio of stocks and bonds, as opposed to a linked-benefit product, then I can create greater future wealth.”

Cross and others stress, however, that advisors must question clients about how they intend to fund potential LTC needs and, where appropriate, recommend a combo product. Failing that, advisors could be setting themselves up for a lawsuit.

“When I meet with clients, I say, ‘These are the [LTC] choices,’” says Upson. “If they choose nothing, then I give them a form that summarizes LTC issues and benefits and ask them to sign and date the form. That’s my get-out-of-jail card in case I’m sued by their children for failing to sell a policy.”


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