recent Financial Planning
Magazine article discusses new tax laws that may increase the
popularity of combining life insurance and annuities with long-term care
insurance. Long-term care ("LTC") insurance sales have been in a decline over
the past several years. Many believe that consumers may be put off by the idea
of "wasting" their money paying the premiums on LTC insurance policies for years
or even decades and never filing a claim. With average annual premiums around
$2160 for individuals and $4000 for married couples, many feel that they have
other alternatives (selling their house, relying on a relative, tapping into
their investments) to spending so much money to protect against a financial
drain that may never occur.
article presents the case of a widow, age 70, who had most of her liquid assets
in CD's. When she inquired into LTC coverage, her tax advisor recommended that
she use her savings to pay for long-term care if she needed it. She then
consulted her investment advisor who recommended that she move $100,000 from her
CDs to a life insurance policy that also offered LTC benefits of over $230,000.
The policy will pay a modest death benefit even if all the LTC benefits have
been paid. This individual ended up with a product that is a combination of
life insurance and LTC insurance.
so called combo LTC products are appealing to clients because if they need
coverage for LTC, they'll have it. Alternatively, if the client needs only
modest custodial care or no care at all, then the money they spent on life
insurance or annuity premiums will provide a payoff for the client and their
beneficiaries. These combo policies do not necessarily have to be single
premium; they can be 10-pay and lifetime-pay products. For clients who have
existing life insurance policies or deferred annuities, such holdings could be
exchanged for a LTC policy or a LTC hybrid, using the existing product's value
as the single premium.
these combo LTC products, which include annuity/LTC as well as insurance LTC
blends, have been around for a while, they are likely to increase in popularity
as deferred tax breaks take effect and pricing benefits become clearer.
Effective in January 2010, provisions of the Pension Protection Act of 2006
include changes in tax laws that affect LTC insurance. These changes
"qualified" or "tax-qualified" LTC insurance will get the above benefits. This
is generally not an issue because most LTC insurance contains the features
necessary to be considered tax qualified. However, the new tax breaks do not
extend to "qualified" annuities that are purchased and held within a retirement
plan such as a 401(k) or an IRA.
LTC products will work best for those whose financial plans call for life
insurance or an annuity in addition to LTC coverage. The question becomes
whether clients are better off buying a standalone LTC policy plus the life
insurance or annuity, rather than a LTC hybrid. The answer largely depends on
how the costs compare.
surprisingly the tax issues related to the Pension Protection Act of 2006 and
combo LTC insurance products remain unsettled. The IRS has issued a private
letter ruling that could affect some product designs. Those individuals or
couples interested in purchasing combo LTC products should consult with an elder
law attorney and a Certified Financial Planner® before purchasing these
attorneys at Oast & Hook can assist clients with developing a comprehensive
plan for their long-term care needs ranging from public benefits to financial
services. Oast & Hook attorney Andrew Hook is a Certified Financial
Planner®; he and the other attorneys at Oast & Hook can discuss these
products with clients.
Johnson is an elder law attorney with Oast & Hook. She concentrates her
practice in the area of