Long-Term Care Funding Options

3 Long term funding options
A recent study by Lincoln Financial Group showed that, while Americans are concerned about the risk of long-term care, they are still not enlightened about the best ways to fund this need.

When asked how they would most likely fund a long-term care situation:

• 75 percent said they would use savings.
• 56 percent said they would be willing to sell their homes.
• 41 percent said they would be willing to refinance their homes.
• 21 percent said they would be willing to go into debt.
• 18 percent said they would be willing to declare bankruptcy to qualify for government aid.

Stand-alone long-term care insurance ranked seventh as a likely source of funding!

That’s like saying you’re going to jump out of a plane, but you’d rather use an umbrella than a parachute to slow your fall.

For a long time, the only option consumers had to protect themselves from the potential financial pitfalls of a long-term care situation was long-term care insurance (LTCi). While LTCi is still the best option for covering long-term care needs, there are now several options for funding long-term care that are preferable to the alternatives above. This article will review some of the choices you and your clients now have for funding their long-term care needs and pros and cons of each.

1. Long-Term Care

2010 saw a lot of changes in the long-term care market: the introduction of hybrid or linked-benefit products (shown below), carriers pulling out of the market, the creation of a government-run long-term care program through the CLASS Act.

Some people might point to these changes as negatives for stand-alone LTCi. But there have also been a lot of positive changes. Plan designs have become simpler and more efficient. Some carriers have released extremely flexible worksite plans that can be implemented for groups as small as three employees. And one very important factor has not changed: the need for long-term care protection is greater than ever.

Stand-alone LTCi is still the best option for the money, provided your clients are healthy enough to qualify. Your younger clients can get a substantial amount of coverage, with inflation protection, for a little over $100 a month. Who says LTCi is expensive?

Pros:

• Premiums can be tax-deductible
• Inflation protection
• Don’t need a large lump sum
• Partnership policies offer added level of asset protection
• Pay for qualified care in any setting from home health care to nursing homes
• Simpler and more flexible policy designs than in the past

Cons:

• Underwriting, especially for older clients
• Could pay substantial premiums for many years and never use the policy (return of premium options expensive)

To run an illustration for stand-alone LTCi, call our LTCi department at 1-888-456-8884.

2. Linked-benefit UL

As we stated above, the cost for LTCi gets more expensive as the applicant gets older. And, as they get older, they are often not healthy enough to qualify even if they could afford it. In recent years, several insurers have introduced new hybrid or linked-benefit products designed to allow consumers to leverage their existing assets in a flexible and efficient manner to cover their long-term care costs.

These new products go by several names: linked-benefit products, hybrids, combo products. Some take the form of a universal life policy with a linked long-term care benefit rider. The idea is the policy creates a pool of dollars that can be used to insure against two separate risks. If the policyholder dies, his beneficiaries would receive a death benefit. If he enters a long-term care situation, he could leverage those dollars to pay for long-term care expenses.

One example of a Linked-benefit UL is Genworth’s Total Living Coverage (TLC). Benefits are based on the policy’s Specified Amount, which is calculated according to the initial premium amount, the insured’s age, sex, health status and benefits chosen.

Clients can choose 24, 36, or 48-month LTC payout, plus they can opt for an Extension of Benefits rider that extends LTC benefits beyond the specified amount.

Hypothetical Example: 65-year-old female, non-smoker, good health, preferred rating:

$100,000 initial premium ⇒ $200,000 specified amount

24-month payout = $8,333 per month in LTC benefits

Optional: 48-month Extension of Benefits ⇒ 48X $8,333 = $400,000

Total LTC Benefit = $600,000

These products tend to appeal to people who have sizeable investable assets and like the fact that they can protect themselves with a pool of money that serves dual purposes.

Pros:

• Funds can be utilized for long-term care or as a lump sum death benefit
• Generate tax-deferred gains
• Inflation protection
• Underwriting less restrictive
• Covers 10 different levels of care, including home health care, homemaker services, personal care, respite care, adult day care, alternative care services and traditional nursing home care

Cons:

• Do not qualify for Partnership asset protection
• Need a large lump sum to begin with
• Surrender charges

To learn more about hybrid/combo products, download our white paper: Linking LTCi – The Disappearing Line Between Annuities, Life and Long-Term Care.

3. Linked-benefit Annuity

Similar to the linked-benefit UL above, the linked-benefit annuity combines a deferred annuity with a long-term care rider to leverage the same dollars for two different purposes. The policyholder can allow the dollars to build cash value tax-deferred just like a traditional annuity, while funding a rider that provides LTCi.

Mutual of Omaha’s Living Care Annuity is a nonqualified annuity that allows the buyer to receive $3 in long-term care benefit for every $1 they put into the annuity.

These products are ideal for someone who has already built up tax-deferred gain in a non-qualified annuity. That gain is ordinarily taxable either to the owner at the time of withdrawal, or to the beneficiary at withdrawal after the policyholder has died. However, if the policyholder rolls the cash value over to a linked-benefit annuity and accesses the gain for the purpose of paying LTC expenses, they pay no income tax on those payments.

Pros:

• Can access annuity gains tax-deferred if used for long-term care
• Funds can be utilized for long-term care or for retirement income
• Generate tax-deferred gains
• Streamlined Underwriting
• Covers 10 different levels of care, including home health care, homemaker services, personal care, respite care, adult day care, alternative care services and traditional nursing home care

Cons:

• LTC benefits not as rich as the UL product
• Do not qualify for Partnership asset protection
• Need a large lump sum to begin with
• Surrender charges
• Policy has to be in force for two years before LTC benefits kick in

While stand-alone LTCi remains the best option for those clients who qualify, it is no longer the only option. For those who don’t qualify or simply don’t want to pay for a product they don’t think they’ll ever use, find out if they have any liquid assets that could be repurposed for a linked-benefit product. You’ll find they offer some great LTC benefits while answering a lot of the objections that sometimes derail stand-alone sales.

For more information, download our white paper: Linking LTCi – The Disappearing Line Between Annuities, Life and Long-Term Care.