Clients who have accumulated retirement savings may be concerned about higher income tax rates in the future when they begin taking distributions from their taxable retirement accounts. At the same time, planning for funding unpredictable long-term care expenses can appear daunting with the average annual cost of nursing home care now reaching $75,000. What to plan for can be confusing when there are so many unknown and unpredictable factors.
Future of Tax Rates
To deal with the uncertainty of future tax rates, new IRA conversion rules should be considered. According to the new rules provided for under the Tax Increase Prevention and Reconciliation Act (TIPRA 2005), a taxable IRA can be converted to a non-taxable ROTH IRA beginning in 2010.
The price? The IRA owner needs to include the entire IRA proceeds in taxable income in the year of conversion. However, for conversions done in 2010, the IRS will allow an IRA owner to spread the payment of taxes due over 2011 and 2012–but only if the conversion is done in 2010.
Long Term Care Needs
Long-term care costs, like taxes, can deplete retirement savings. A single insurance solution that covers both life insurance and long term care may thus help to mitigate the negative financial effects of long term care on personal savings–an issue that statistically will affect 70% of people over the age of 65.
Many folks may recognize the importance of life insurance to protect assets for the benefit of family members after death. But what may be overlooked is the need to protect one’s independence and retirement savings during one’s lifetime, in sickness and in health, and during the lifetime of the healthy spouse. If there is no savings to tax, then fretting over uncertain income tax rates may be moot.
What To Do?
The single insurance solution is a combination whole life insurance policy that provides a guaranteed death benefit and LTC benefits funded thru a single premium. This is, of course, a more agreeable topic to discuss with clients than the opportunity to advance a lump sum tax payment to the IRS though a ROTH conversion. So, you may want to start a planning discussion with this topic at the top of the list.
Certainly, the combination policy can go a long way to hedge against LTC expenses depleting savings that could benefit the non-ill spouse as well. If the LTC benefit is not used, the life insurance remaining will pay out in full to heirs. To boot, guaranteed cash values are strong on some policies, underpinned by a guaranteed return of a single contribution to the policy within the first few years; and the long-term possibility of cash values being substantially higher than the investment in the contract.
With the single insurance solution, clients can maintain guaranteed life insurance while protecting savings from LTC expenses.
Consider this example: John Doe, male age 65 and preferred nonsmoker risk class, has an estate valued at $1.3 million that includes a $300,000 taxable IRA account. The estate grows at 3% net annually while the IRA grows at 5% net.
Assuming a 35% income tax rate, Joe can convert his IRA today and incur $105,000 in taxable income. Note that since John’s youngest son is entering college this year, the IRA proceeds will artificially inflate John’s income for financial aid purposes and may make it difficult to qualify for aid–something John should think about in his planning.
An additional planning consideration is for John to manage his survivor’s protection needs. He may want to purchase a guaranteed single premium whole life policy that includes a guaranteed death benefit and guaranteed coverage for LTC expenses if and when needed during his lifetime.
The design of the whole life/LTC policy includes a guaranteed death benefit of $157,746 and guaranteed LTC benefit of $473,238 to help pay the costs of qualified services, such as home health, nursing home, assisted living or adult daycare for a minimum of a 6-year benefit period.
And finally, consider that the opportunity cost of that $105,000 at 6% growth doesn’t go as far as the combo policy does in helping to cover long term care expenses:
In sum, a combination whole life/LTC policy with a guaranteed single premium and guaranteed death benefit and LTC coverage is a simple solution that can address both life insurance and retirement savings protection needs. The combo solution can also provide a source of funds to help pay long term care expenses if and when needed.
Lina Storm, CLU, ChFC, is a marketing manager in the Advanced Markets Group at John Hancock Financial Services, Boston, Mass. You can e-mail her at [email protected]