Have you noticed that your long-term care insurance (LTCI) sales have declined over the last 12 months? Take heart, you are not alone.
The two objections most often cited by your fellow advisors are the high cost of LTCI policies and client procrastination. In a booming economy, these are difficult factors to overcome, so it is no surprise that current economic conditions have bolstered both reasons not to go ahead with the purchase of LTCI coverage. According to the October issue of Agent’s Sales Journal, 27% of advisors surveyed nationwide reported that their LTCI sales decreased in 2009.
Changes in taxation resulting from the passage of the Pension Protection Act of 2006 (PPA) will allow you to work with your clients to acquire their own hedge against the possibility of future costs. The act allows a 1035 tax-free transfer of gain from an existing life or annuity contract to another life or annuity contract that includes a federally qualified LTCI benefit rider. On Jan. 1, 2010, the LTCI benefits received from one of these multi-purpose contracts will be tax-free. Life and annuity products can be designed to meet your clients’ desired levels of LTC protection that incorporate a clause for long-term care that is part of the total benefit.
What if your clients don’t believe they need LTCI?
Everyone who has seen the statistics (or has an elderly relative) recognizes the need for long-term care coverage. However, few of us want to confront the possibility that we could ever need it. The need for long-term care is not inevitable — highly likely perhaps, but not guaranteed.
Most traditional long-term care policies have a return of premium feature to counter the “what if I never need it?” objection, which adds to the already perceived high cost. During the planning process, perhaps your client points out that he or she already has assets set aside to cover long-term care, “just in case” it’s needed. A wise decision, but if the individual actually has to tap that asset, the gain will be taxable.
If the asset is a “just in case” annuity, you can show them how to transform it into a tax-free long-term benefit by using a 1035 exchange to a multi-purpose annuity. The transferred amount can generate two to three times its own value as LTCI coverage.
The carrier uses actuarial calculations to determine how much long-term care benefit can be provided for the single premium. The main factors used to determine the total long-term care benefit are the age, sex and health of the insured. The client can both choose the duration and add an inflation protection factor to the benefit structure. The internal cost of the inflation factor will depend on if it provides simple or compound increases.
If the benefit is never used, the multi-purpose annuity retains all of the tax advantages and features of a regular annuity. A valuable asset now has a value-added advantage, especially where there is substantial gain.
How can you use cash value in a life insurance policy to provide tax-free long-term care?
The same applies to the accrued cash value in a life insurance policy. An individual can also use a 1035 exchange to transfer the cash value to a life contract with a long-term care rider. The rider can provide a long-term care benefit double or triple that of the face value of the policy.
In addition, the newer products allow him or her to request the maximum amount of long-term care benefit and a minimum amount of death benefit, or a higher death benefit and a smaller long-term care portion. If the long-term care benefit is never activated, the advantages of the life insurance contract are preserved. A multi-purpose policy has the withdrawal and loan features your client has come to expect and any death benefit will be passed to the beneficiary tax-free.
If the client holds an annuity that he or she wants to pass to an heir without tax, a traditional strategy is to exchange it for a life policy with a modified endowment status (MEC). This annuity-to-MEC exchange works exactly the same way new multi-purpose life policies work. The modified endowment rules will apply to the cash value and death benefit, but if long-term care benefits are used, the resulting payments will not be taxable.
What about a single-premium LTCI solution?
There is also an alternative strategy for the client who wants to acquire a traditional LTCI policy using the cash value from a life policy. Although we have discussed the use of multi-purpose life and annuity products, currently there is a third option available. Your clients can also use a 1035 exchange from a life or annuity contract into the single-premium long-term care policy. An older life policy with an unattractive internal cost structure, or annuity with a low fixed interest rate, may offer a good source to fund future needs for long-term care services. The exchange is tax-free as in our other examples and the benefits received are also income tax-free.
A pure LTCI policy offers the opportunity for unlimited benefits and the addition of an inflation rider (both simple and compound are available) results in greatly increased LTC benefits for the insured over time. Unlike dual-purpose contracts, there is no death benefit or annuity remainder. If the client objects that money will be wasted if the benefits are never used, all long-term care policies offer a non-forfeiture benefit. Upon death, this feature returns the total premium less any benefits paid.
Your clients have several distinct choices using the tax-free 1035 exchange of existing life and annuity policies to ensure that future long-term care benefit distributions will be income-tax free. And, in fact, there is a long-term care solution which returns benefits in cash — up to $280 a day (the 2009 federal limit, indexed each year) — which enables the insured to control and choose how the money is used to best meet his or her needs.
Regina Brunton, FLMI, CLU, is the Life Products Specialist for Advanced Equities Insurance Services. She works with the AE family of advisors to find the life product that will suit their clients’ specific needs, be it for estate, business, or financial planning. She coordinates her efforts with her fellow product specialists and with the Advanced Equities Wealth Management team.
A. Lawrence Banks is the LTC Advisor to First Allied Securities, Inc. As partner at Advanced LTC Insurance Services, LLC and a distinguished LTC specialist with more than three decades of experience Banks is responsible for developing and implementing distinctive long-term care strategies and plans at Advanced LTC Insurance Services. He works closely with brokers to help them understand and provide the best products to their clients, while working with underwriters at numerous companies to obtain the most favorable offers.