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Retirement Planning > Retirement Investing

Providing For LTC, Retirement Needs And Legacy Planning With Guarantees

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In these unsettling times, clients are looking for guaranteed ways to meet retirement and legacy planning needs more than ever. Fortunately, products exist that can be used to customize a strategy to meet client goals as well as their desire for safety. Issues facing retirees–the need for long-term care, the fear of inflation and living too long–could severely affect their way of living in their final years and deplete what may be left for heirs to inherit.

First, let’s take a look at the dilemma retirees are facing:

? Sources estimate 50% of Americans will need long-term care during their lifetimes.

? For couples over age 65, there is a 70% chance one partner will need LTC.

? According to the Social Security Administration, 50% of all Americans sign up for Social Security benefits at age 62.

Studies also show that if both spouses are still alive at age 65, one of them has a 50% chance of living to age 92.

Put these statistics together and it may mean a retiring couple will face the prospect of at least one spouse needing LTC and enough income to last through 30 years of retirement.

What products are available?

Today, both life insurance and annuity contracts offer living benefits with guarantees, based on the claims-paying ability of the company. For clients who desire to leave a legacy to heirs, a combination of these products may fit the bill.

Life insurance contracts, including guaranteed no-lapse universal life insurance policies, can be offered with a LTC rider– usually at an additional cost–that will allow the contract owner to access a death benefit, income-tax free, to pay for qualifying LTC needs. Any benefit not used by the insured would then pass to the beneficiary as an income tax-free death benefit (although estate taxes may apply). And, if all the funds are used for LTC needs, many contracts offer a minimum death benefit guarantee that will pay the beneficiary 10% of the original specified amount. Note that this feature may not be available on all products or in all states.

Annuities are also available today that offer riders that can guarantee growth of an income benefit base (not growth of cash value), and provide a guaranteed minimum income benefit. It’s important to remember that riders are optional and cost extra, in addition to the variable annuity cost.

For example, a client purchases an annuity for $100,000. There are two “accounts.” One is the actual contract value that can go up or down with the market and are the funds the contract owner would receive if surrendering the contract.

The other account is the “income benefit base.” The insurance company will usually offer a guaranteed growth rate of this account, for example 10% simple interest for 10 years. This guaranteed rate usually lasts for the lesser of 10 years or until the first time money is taken from the contract. The income benefit base will always be the greater of actual contract value or the guaranteed income base value and resets at least on an annual basis. At the end of 10 years, the income benefit base will rise if the contract value exceeds the benefit base, and will reset at least annually. While the contract value can go down, the income benefit base cannot.

Using our example of $100,000, the client is guaranteed that at the end of 10 years the income benefit base will be worth $200,000. If the market goes up, the benefit base could potentially be higher, but it’s guaranteed to reach $200,000 at the end of 10 years as long as no money is withdrawn from the contract. Income is usually paid as a percentage of the income benefit base. With some contracts, the older you are, the higher the payout percentage.

Case Study

Consider a client who has the following goals:

? Provide a future legacy for heirs.

? Keep funds in an investment vehicle that may allow for guaranteed lifetime income should the client need money due to inflation or living longer than expected.

? Position money that could be used for LTC options.

When evaluating the purchase of a variable annuity, clients should be aware that variable products are long-term investment vehicles designed for retirement purposes and may fluctuate in value. Annuities also have limitations; and investing involves market risk, including possible loss of principal.

Our hypothetical client is Mary, a 65-year-old widow with $200,000 to invest. She had assumed she would use this money to pay for LTC needs, leaving unused funds to her children at her death. But since she is blessed by good health, she also wonders if her assets, which are currently more than enough to live on, will survive inflation and keep her in the style she is accustomed to if she lives into her 90s.

Her financial professional, after determining Mary’s suitability, suggested the following course of action:

First, Mary will purchase a non-qualified deferred variable annuity contract with $100,000 and add a guaranteed lifetime income rider (at a charge in addition to the base contract charges). We’ll assume her contract allows the income benefit base to grow at a guaranteed rate of 10% simple interest.

Because she has other assets to live on, at the end of 10 years her income benefit base will be worth at least $200,000. If she ever feels inflation is affecting her lifestyle, she will be able to receive an income, based on a minimum base of $200,000, guaranteed for life. And, if she never needs extra funds to live on, the contract death benefit will be paid to the beneficiary, who will owe income tax on any gain above the $100,000 cost basis.

Second, she will purchase a guaranteed no-lapse universal life insurance policy with the remaining $100,000 of her funds and add a LTC rider, at an additional charge. Mary, assumed to be non-tobacco preferred, will be able to purchase approximately $287,000 of death benefit and an LTC rider (at an additional charge) that allows all $287,000 of death benefit to be accessed for LTC needs. Since she purchased the contract with a single premium, the policy will be modified endowment contract (MEC). However, the LTC rider benefit will be paid tax-free, even with a MEC. Because the contract was not intended for income purposes, which would be taxable on a MEC, and is being purchased to pass a death benefit to beneficiaries or provide funds to pay for LTC needs, the only tax ramification will be to declare the cost of insurance on the LTC rider portion of the contract as ordinary income if there is any gain in the contract.

Should Mary need long-term care, she will be able to access a certain percentage per month of her death benefit (often 2% per month with many contracts) tax-free to pay for LTC needs. Some contracts may pay indemnity style and cap the percentage at the HIPAA rate, which for 2009 is $280 per day, or $8,400 per a 30-day month.

This money would be accessed first to pay for LTC, which would allow Mary’s other investments, including the annuity, to continue to grow and accumulate. Any death benefit not used for LTC would be left to Mary’s heirs. And if Mary uses all the funds for LTC, depending on the contract purchased, there still may be a minimum death benefit of approximately $28,700.


Mary was able to turn her $200,000 asset into a $287,000 death benefit that could also be used for LTC needs with any remaining funds paid out as a tax-free death benefit. In addition, she was able to invest in an annuity that would provide an income benefit base of at least $200,000 at the end of 10 years. If income was needed, she would be guaranteed a lifetime income; and if not, her beneficiaries would inherit the annuity death benefit.

A guaranteed life insurance policy with a LTC rider plus an annuity that offers guaranteed growth of the income benefit base with guaranteed minimum income benefits is a combination that may offer your clients a strategy that meets their needs and provides a level of safety.

Shawn Britt, CLU, is director of advanced sales with Nationwide Financial in Columbus, Ohio. She may be reached at [email protected]


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