Long-term care insurance policies are highly customizable and can be used to pay for long-term care costs that are not covered by traditional health care plans or Medicare. Naturally, the high levels of customization can come at a cost, but, over the years, the long-term care insurance industry has evolved, and some substantial options have developed with regards to the types of policies offered.
Hybrid policies have been on the scene for around 10 years, and they combine long-term care benefits with either a base life insurance policy or annuity product to create a pool of tax-favored money that is accessible when a long-term care event occurs. Like traditional long-term care insurance, hybrid policies provide liquid funds for care so investors do not have to tap retirement funds or investment portfolios; however, because they are hybrids of other insurance products, these policies have mostly eliminated the “use it or lose it” status that are typically part of traditional long-term care policies.
Generally, we recommend buying an insurance product for a specific purpose. There is no “universal” product that will help any investor achieve all their financial goals. With most insurance policies, you pay premiums for that peace of mind, knowing there is a cushion should the policy be needed, and often claims are never made. However, hybrid policies have expanded investors’ options in many situations.
In our experience, we have found that annuity hybrid policies work well when there is an existing annuity product in place. For example, a variable annuity product may have been purchased 10 or more years ago for $100,000. Today the annuity is worth $175,000, but creates a large taxable gain inside their annuity. Furthermore, because the money is tied up in an annuity product, it has not been factored into the financial plan. Retirement funds and liquidity needs have been provided by the investment portfolio, so the annuity is left to languish outside the plan. Hybrid policies offer opportunities to reposition these funds.
Internal Revenue Code Section 1035 allows you to exchange an existing variable annuity contract for a new fixed annuity contract with an added long-term care feature without paying tax on the income or the investment gains in your current variable annuity account. Because of the tax-free nature of long-term care benefits, a 1035 exchange into this product could effectively make the taxable gain disappear upon a triggering long-term care event. It is important to ensure that the long-term-term care feature meets the criteria defined as a “tax qualified” policy, which a vast majority of policies already meet these criteria today. The annuity should be non-qualified, or originally purchased with after-tax funds. As a result, you gain a more preferable tax treatment for funding your long-term care coverage, if needed, because the benefits of the long-term care policy are received tax-free, and you still retain the core benefit of a fixed annuity if long-term care benefits are never used.
On the other hand, rising life insurance rates have pushed policy holders to look at other options. Hybrid life/long-term care policies are permanent life insurance with a long-term care rider, where your beneficiaries receive a death benefit when you die. However, if you need long-term care coverage, your death benefit is advanced to you as a predetermined monthly benefit, regardless of your actual costs. The money used reduces the balance in your life insurance plan. Should you die, any amount leftover is paid as life insurance to your beneficiaries.
The type of policy that will work for your situation will depend on your overall financial plan, how much you are willing to self-insure, and of course, how much you are willing to spend for coverage. If you have questions on whether your situation would benefit from a hybrid insurance policy, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
