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LTC Or Life Insurance For The Wealthy?

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In healthy societies, there are conflicting ideas on the best course of action regarding any issue. This is certainly the case in long term care planning.

Some advisors ignore the issue as inconsequential to high net worth clients. Others point out that if the client is concerned about potential care costs, the same premium would be better in a life policy. Yet others argue that traditional stand-alone LTC insurance provides optimum leverage. Life/LTC insurance combo products are still another important option.

What follows will illustrate that care costs are significant in high net worth households; that self-funding by investing premium will cover only a few months of care; and that, for the same premium, stand-alone LTC insurance provides substantially greater potential value than a guaranteed no-lapse life policy.

Regarding life/LTC combo products, they are a valuable alternative to having idle savings and no LTC coverage at all. Clients who buy these contracts should confirm that they understand this key point: What will be consumed first, under the life/LTC combo contracts, is most of the life policy’s account value/death benefit. This happens before LTC insurance benefits begin.

Now, here is a cost/benefit comparison of LTC insurance versus a guaranteed no-lapse life insurance policy. Advocates of life insurance as the preferred method of insuring LTC risk could argue that a $5,000 premium applied to life policy provides about a $425,000 death benefit for an age 54 male. They would argue that this adequately covers losses experienced due to a care event.

Assuming no care occurs, that is a great plan. When care is required, however, LTC insurance offers a far greater financial benefit than the life policy.

Here is the basis for the above statements. A current $5,000 annual premium quote for an age 54 couple from a leading LTC insurance carrier provides each person a 4-year $300 daily benefit growing at 5% compounded annually. If one of the insureds files claim at age 80, the premium break-even for both policies will occur at 127 claim days for one insured. So, at policy year 26, the daily benefit will have grown to $1,016 (due to the 5% compound inflation provision), making for a first-year claim payment of $370,000.

If each needs 3 years of care, one beginning at age 80 and other beginning at age 83, claims paid will be $2.5 million dollars versus the $425,000 life insurance death benefit for the male insured.

The impact on the estate is even greater when the scenario includes the additional financial impact of self-funded care. For example, if assuming tax or other asset liquidation and investment opportunity cost occurs if self-funding, then the numbers show an even greater LTC insurance financial advantage versus life insurance.

In this estate planning approach to analyzing the financial impact of care events, assume that the age 54 couple would incur an 8% capital gains or other income tax hit when liquidating the $2.5 million dollars to fund their 6 years of care. Also, assume a 4% after tax rate of return on funds that would have remained in the investment portfolio if LTC insurance had funded the care event.

Including tax and investment opportunity cost, the 6 years of care using only a portion of the policy benefits grows to a $3.2 million estate value versus the $425,000 life policy death benefit. Adding the 4% investment opportunity cost to premiums, break-even on premium grows to 226 claim days. If only one 3-year care event occurs, the internal rate of return on claim payments is 13.8%. This means that, if investing premium on both policies, the investment would need to yield a 13.8% average annual after tax rate of return in order to fund the one 3-year care event.

At a 4% investment rate of return (discount rate), the net present value (NPV) is $324,000 on the first care event and $417,000 on the second care event. NPV is profit in today’s dollars greater than investing premium at a 4% after tax rate of return.

As we have seen, using only 75% of policy value, LTC insurance in this case preserved $3 million dollars of client’s estate assets. Premium break-even is a few months of claims.

For this reason, the financial leverage of LTC insurance should be of interest to all advisors and clients, particularly high net worth clients.