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Long-Term Care Product Designs

Three long-term care insurance (LTCI) products provide options for those who want to safeguard income and assets from the risk of long-term care expense.

Standalone pool-of-funds products are appropriate for young, healthy applicants.


Standalone “Pay As You Go” Products

About 20% of long-term care insurance (LTCI) policies sold are of this design. Most standalone or pool-of-funds products are tax-qualified which means benefits paid are not taxable and premiums may be deductible depending on how policyholders file taxes.

These are integrated plans which cover services in all long-term care venues: home care, adult day care, assisted living, nursing home and hospice.

Numerous top-rated carriers offer these highly customizable products. Contract provisions include many benefits. A wide range of riders is also available to fit the likes and needs of clients, couples, small business owners, professional organizations and large employers.

It is this product design that offers partnership policies that provide additional safeguards from Medicaid resource reduction requirements.

These products are available from age 18 through 79 and are more appropriate than asset-based products for those under age 65. They have the strictest underwriting requirements. However, some carriers will issue policies to less healthy applicants at higher than standard premiums or with limited coverage.

These products are often referred to as the “pay as you go” model. Think about auto or homeowner’s insurance when you think about this product design. You figure out how much coverage you need, what you want your deductible to be and pay premiums hoping that you’ll never use the policy.

Most policyholders pay premiums annually for lifetime or until they become eligible for benefits.

These policies are guaranteed renewable which means that rates can increase during the life of the policy if an increase in a specific state is approved by that state’s insurance commissioner.

If clients need care, these policies are generally the least costly insurance solution.


Life Insurance or Linked Benefits Products

Designed for an older market, life insurance based long-term care solutions are referred to as asset-based or hybrid products. They ride on a whole life or universal life chassis and most require a substantial single premium to fund a meaningful long-term care benefit.

The premium creates cash value and also earns interest which explains the asset-based design of this product.

These, too, are integrated plans and cover services in all venues. Few options are available to customize these products. Some carriers offer these products to those 20 through age 80. Others target an older audience of 35 through 80.

These products are appropriate for people 65 and older for two reasons: 1) inflation protection becomes less critical when purchased at older ages, and 2) most carriers’ underwriting guidelines are more lenient.

When describing these insurance options, we like to say, “Live, die or quit, there is a benefit.”

Many clients who are insurance averse like this product design because it eliminates the “use it or lose it” proposition of the standalone pool-of-funds products. However, many of these products require a significant single premium to create a meaningful long-term care benefit and may be out of reach for many clients.

The life insurance based solution has several designs. One simply uses the death benefit to pay for long-term care expenses. For example, a death benefit of $100K could be accelerated at 2% creating a long-term care benefit of $2000 per month until the death benefit is exhausted. If the death benefit is not exhausted, any remaining amount would be paid to the insured’s beneficiaries.

Another design accelerates the death benefit and also extends benefits when the death benefit is exhausted. With this design there are two funding resources for long-term care expenses: 1) the death benefit and 2) the continuation or extension of benefits rider.

Product designs differ here. Some continuation riders are purchased as separate policies and bound to the life insurance policy. Others are integral to the product design and leverage the single premium to enhance the long-term care benefit pool.

Benefits paid from the death benefit and the extension riders are both tax-free.

These products can be funded with a 1035 exchange from an existing permanent life insurance policy. This makes it convenient for clients to fund a policy by exchanging one life insurance policy without long-term care benefits for another with benefits. This can be done without creating a taxable event.

If clients need care, these policies are generally a more costly insurance solution than the pay-as-you-go designs.


Annuity or Linked Benefits

Annuity based long-term care solutions must be Pension Protection Act (PPA) compliant. These annuities are medically underwritten and carriers offering these products must have claims departments and be in the business of paying long-term care benefits. There are only a few of these products in the market today.

These, too, are integrated plans and cover services in all venues. As with other asset-based products, options are limited. These products are designed for an older client between ages 40 to 85 and have the most lenient underwriting requirements.

Provisions of the PPA allow a 1035 exchange from a non-qualified deferred annuity to a compliant annuity. Funds used to pay for long-term care are no longer viewed as taxable income but considered a reduction of cost basis.

“A reduction of cost basis” means that distributions from the policy are non-taxable and reduce the owner’s cost basis in the contract. Even gain in the old annuity is considered non-taxable if the withdrawal is made to pay for covered long-term care expenses. Withdrawals for other purposes are taxable.

Similar to life insurance solutions, PPA annuities have two designs. One uses the annuity cash value to pay for long-term care expenses and credits withdrawals for covered expenses at a higher interest rate.

Funds can be withdrawn for other purposes but the crediting interest rate is lower and these transactions are taxable. An extension of benefits rider can be added to this design to continue benefits once the annuity is exhausted.

In the second design the extension of benefits is integral to the product design and allows greater leverage of the premium to create a more robust long-term care benefit.

The advantage of these annuities is that they may be funded from existing non-qualified deferred annuities with a 1035 exchange and provide clients significant tax savings. This makes it very easy for clients to exchange one policy for another that will provide both long-term care and tax benefits.

If clients need care, this is generally the most costly insurance solution but is often the best solution for older clients with health challenges.