How Familiar are You with Asset-Based Hybrid LTC Products?

Enjoying Retirement

These forms of Long-Term Care policies have extended care benefits that are linked to an underlying asset. That asset can be either an annuity or life insurance product. These products have received recent popularity as more and more people worry about future rate increases on traditional/stand-alone LTC contracts. Because most of these “hybrid” contracts are life insurance or annuity based, and have guaranteed level premium elements, clients feel safer that they will not have those potential increases.

Here are some basic elements you will find in each type of contract:

Linked Life Insurance (Whole Life or Universal Life chassis)

  • Usually, either a universal or whole life policy with a tax-qualified long-term care insurance policy that generates its funding from the death benefit.
  • The insured has the option of purchasing an extension of LTC benefits for additional premium. However, the client will first draw down the death benefit to access that additional coverage which is pure LTC.
  • Benefits are often paid on a reimbursement basis (an indemnity benefit is available with a few carriers), usually monthly benefits are payable at 2–4% of the overall death benefit, with durations ranging from 2-8 years of coverage.
  • Some carriers will have an 80- 100% “return-of-premi­um provision” which may have surrender charges for a limited number of years or none at all, but may create a taxable event for the insured for that year if the capital gains in the policy are not handled internally in the contract (be on the lookout for the latter).
  • Some carriers offer a minimum “residual” death benefit, which is paid if the death benefit is exhausted or the extended care.
  • If no care is needed, the beneficiary receives the death benefit.
  • Underwriting is either full (usually a 4-6 week process) or simplified (as little as a few days). It is a misconception that these types of policies are for those who would not pass standard standalone underwriting. Keep in mind that a life policy with LTC is being underwritten through the use of both “mortality tables” (life), and “morbidity tables” (long-term care). So in some circumstances the underwriting can be even stricter depending on one’s specific health condition.
  • Attractive Features: leverages liquid funds; leverages death benefit for added extended care benefits.

Accelerated Life Insurance with a Long-Term Care rider

  • Life insurance (mainly universal life)
  • Benefit is usually 100% of the death benefit which is accelerated for compensable ex­penses.
  • Payment period is set by carrier, but is generally 50+ months.
  • Benefits are received tax-free, unless it exceeds the HIPPA per diem for that year.
  • Attractive Feature: these riders cost very little and allow dual use of the death benefit.

Linked Annuity

  • A single-premium non-tax-qualified annuity contract with a tax-quali­fied long-term care insurance rider that generates its funding from the annuity.
  • If claim is filed, the insured must first use accumulated balance, which would be non-taxable.
  • Offered with current or guaranteed interest rates, similarly to a single-premium tax-deferred annuity (SPDA).
  • The Surrender Period is generally seven years.
  • The long-term care insurance rider leverages the contract through interest generated in the contract.
  • Attractive Feature: drawing-down of annuity for services is a non-taxable event; leveraging of annuity free of taxes when paid for services.

Asset-Based Hybrid LTC products are excellent, especially for those looking for guarantees. They could also be a great fit for people who have lump sums from a CD or money market available, or that have the ability to 1035 exchange existing funds from another contact that will now provide a much needed long-term care insurance benefit that the insured would not have normally had.

About the author: Kyle McDonald holds FIC, FICF, FSCP® & CLTC designations. His viewpoint on life insurance is simple, “Anyone with a family must have life insurance. In the end, life insurance is for others you care about, not you.” He is ready to help you and your family get the best option available. Contact Kyle today at 1-800-651-1953 or KMcDonald@Pivot.com.