Life insurance as long-term care: Doing double duty

But what if your clients could protect their estate from a long-term care event without all the heartburn of traditional long-term care insurance? More and more Americans are doing so by employing a financial tool known as a Life Insurance Retirement Plan (LIRP).

First, what is a LIRP? A LIRP is a tax-free bucket of money that gets treated under its very own section of the IRS tax code (7702). This section of the tax code allows for the following:

• Death benefit passes to heirs tax-free
• Dollars can be distributed pre-59 ½ with no penalty
• There are no Required Minimum Distributions (RMDs) at 70 ½
• Contributions grow tax-deferred (no 1099s)
• Distributions can be tax-free and cost-free through a combination of withdrawals to basis and 0 percent loans on growth
• Distributions do not count as provisional income (do not cause Social Security taxation)
• There are no contribution limits
• There are no income limitations
• It may enjoy protection from future changes to tax law – when tax laws have changed in the past, existing contracts have been grandfathered

Sounds like the perfect tax-free bucket of money, right? Well, the IRS says that if they’re going to give you the benefit of an unlimited bucket of tax-free dollars, they’re going to require that there be a cost of admission. They’re going to require that there be a spigot attached to the side of that bucket through which flows, on a monthly basis, the cost of term insurance. 

Here’s the problem: If your clients’ house is paid off, and their kids have moved out, term insurance probably isn’t all that high on their wish list. Well, the companies that sponsor LIRPs recognize that, so they’ve done something to sweeten the pot. They simply say that, in the event that somewhere down the road your clients should need long-term care, they will give them their death benefit while they’re alive for the purpose of paying for it.

Here’s an example: Let’s say that Mr. Jones has a $400,000 death benefit and he wakes up one day and can no longer feed himself, bathe himself, transfer himself, etc. (any two of six activities of daily living), and he can find one doctor to write one letter to that effect. At this point some life insurance companies will begin sending him 2 percent of his death benefit (DB) every month for 4 years, or until 96 percent of his DB is consumed. This may be discounted slightly, depending on the age the benefit is received, but the point is this: Some life insurance companies are willing to give policyholders their death benefit while they’re alive for the purpose of paying for long-term care. 

Furthermore, should your client die peacefully in their sleep 30 years from now, never having needed long-term care, someone’s still getting a death benefit. So there isn’t this sensation of having paid for something they hope they never have to use. Either the death benefit gets used during their lifetime for long-term care, or it gets passed along tax-free to the beneficiaries when they die.

What’s more, it may be easier to qualify for the LIRP than traditional long-term care insurance. Because life insurance policy approval is based on mortality, not morbidity, your clients are less likely to be rejected for the back or joint issues that plague many long-term care insurance applicants. 

In conclusion, the LIRP can be an effective, angst-free way to accomplish many of your clients’ most pressing retirement objectives. It allows your clients to accumulate tax-free wealth while protecting them from the financially devastating effects of a long-term care event without the heartburn associated with traditional long-term care insurance.