Hybrid Life + Long-term Care insurance (LTCI)
Talking about our future health care needs can be scary. It’s hard to think about a time when you might not be able to care for yourself, to determine how long you need to work and how much you’ll need to save to be able to afford care. Today more than ever, we know how things can change quickly. LTCI is an indispensable tool in addressing these emotional and financial fears. As life insurance provides that our loved ones will be taken care of after we’re gone, LTCI provides assurance that we will be taken care of in the event of a medical crisis or change in cognitive ability.
70% of people reaching age 65 will require LTC …1 out of 7 will need LTC for more than five years … Savings can be depleted, markets can dive, and our most valuable asset — our health — can put an active, happy retirement out of reach. Without Hybrid Life + LTCI, assets that have taken decades to build may suddenly have to be liquidated. And with caregivers already in short supply, 73 million Baby Boomers are now retiring (10,000 will turn age 65 every day until 2030). At a 5% annual inflation rate, the cost of LTC will double every 15 years. The Boston area’s present and projected 4-year costs are:
2021 2035
Assisted Care Facilities: $300,000 $600,000
Nursing Homes: $700,000 $1,400,000
24/7 In-Home Care: $1,000,000 $2,000,000
In 2021, a private room in a Boston area nursing home averages $14,000+ per month. The cost for in-home professionals is $20,000+ per month for 24-7 care and about $5000 per month for 40 hours per week. However, Hybrid Life + LTCI is more affordable than you might think. It can be tailored to meet your care needs while finding a partial solution that fits within your budget and lifestyle. This strategy is better than solving for 100% of your long-term care problem when it isn’t affordable or Self-Funding
Life Insurance with an accelerated death benefit (Adb) rider Replaces The Stretch IRA
When life insurance leads – that is, when it is the more important priority than having Long-Term Care Insurance (LTCI), one alternative is to buy a permanent life insurance policy and add an LTCI Rider with an Accelerated Death Benefit (ADB). This strategy is especially effective when high-net-worth individuals wish to gift assets to their children, their children’s spouses, and grandchildren on a tax-advantaged basis.
What is an ADB? It is a rider that allows policyholders early access to the death benefit in their life insurance policy once qualifying triggers have started a long-term care claim.
Effective January 1, 2020, the SECURE Act eliminated most of the benefits of the Stretch IRA, which had allowed an IRA to be passed on to a non-spouse beneficiary from generation to generation while maintaining its tax advantages. But now, most non-spouse heirs will have to empty inherited retirement accounts within 10 years - upending a planning tool that estate planners have counted on for years.
Permanent cash-value life insurance is not only an innovative replacement solution for the Stretch IRA but is actually a superior long-term planning vehicle:
o Provides a larger inheritance, more control, and less of a tax burden
o The cash value that builds up can be accessed tax-free during the insured’s lifetime
o The death benefit is income-tax free
o Unlike IRAs and Roth IRAs, the payout can also be estate-tax-free. An IRA can be used to fund a trust, but from a practical, trust-administration perspective, life insurance is a lot more simplified than stretching an IRA
o Life insurance is the most flexible vehicle with which to fund a trust - some life insurers permit an LTCI rider within an ILIT
Let’s explore solutions that make sense for you and your family.
LTCI and the ULIT/ILIT
An estate plan should optimize exclusions, discount estate assets, transfer asset growth outside the estate and reduce estate taxes. A life insurance policy with an ADB owned by an ILIT, that pays Cash Indemnity benefits, may be used to fund LTC needs while maintaining the goal of providing funds for estate tax expenses. A Reimbursement plan pays the LTCI benefit directly to the care facility or agency providing care – or - reimburses the contract owner for expenses already incurred. Bills and receipts must be submitted each month to the insurance company. Then, the insurance company determines which expenses qualify for reimbursement. It is generally believed that a reimbursement plan may not work in an ILIT because bills for the LTC expenses of the insured are submitted to the insurance company by the trustee of the ILIT (which owns the policy), but the insurance company reimburses the trustee of the ILIT for the actual LTC expenses of the insured. This chain of events may be construed as a violation of Section 2042 by providing a direct link from the ILIT to the grantor/insured and destroy the integrity of the trust.
Cash Indemnity plans, however, pay the full LTCI benefit directly to the owner of the contract. No bills or receipts need to be submitted nor are considered. Thus, a Cash Indemnity plan can work within a ILIT because the LTCI benefit, without regard to expenses of the insured, is sent directly to the owner of the policy, which in the case of trust ownership would be the trust/trustee. The life insurance policy is essentially funding the ILIT with cash via payment of an ADB. (Keep in mind that as an ADB, the LTCI rider payout will reduce both the death benefit and cash surrender values.) It is important to note the insured (grantor) must never have the LTCI benefit directly in hand nor can he or she have claims against the trust for such monies. But from here, flexibility allows for the implementation of various strategies.
A ULIT (Ultimate Life Insurance Trust) may be used, which is a type of ILIT for the purposes of getting LTCI rider benefits from the trust. The ILIT is made “defective” for the purpose of being able to access funds from the trust using arms-length fully collateralized loan provisions. The loan must be legitimate - secured by property pledged by the Grantor/Insured, with interest charged, and an agreement to fully pay back the debt. Collateral can be anything that covers the debt; a house, artwork, coin collections, etc., as long as the asset has a legitimate fair market value. Collateral can be pledged all at once or can be pledged along the way as long as there is always adequate collateral pledged to cover the full amount of the current loan balance.
The interest rate charged should be at least equal to the guaranteed interest rate charged on the life insurance policy. Because a larger interest debt allows for more funds to be paid from the estate to the trust, using an appropriate interest rate on the high side may work best.
Ideally, the loan interest is allowed to accrue, but the loan interest should be paid back prior to the death of the Grantor/Insured if possible, as this will avoid income taxation on the interest paid to the trust. Some plans call for the repayment of interest on a periodic basis to hedge against the risk of all interest being taxable at death, though this will impact the overall accrual of debt. In either case, the taxable estate has been further reduced by the interest it has incurred and paid on the loan transaction created with the ILIT.
LTCI for your Business: Voluntary Worksite Plans and executive Carveouts
It’s been a tough year for our mental health. The pandemic and its fallout have created a buildup of pressures that have left many of us anxious and depressed. Employers recognize that this is their problem, too. If their workers can’t find the resilience it takes to get through times like these, employers must step up to put systems in place that will support them and maintain productivity during times of stress.
Four out of five Americans want the option of buying LTCI at work, 68% of survey respondents would prefer to purchase LTCI through an employer compared to a financial professional. Six in 10 caregivers report working while caregiving (61 percent) and the majority have experienced at least one work-related impact (61 percent). Most working caregivers report going in late, leaving early, or taking time off to accommodate care (53 percent). One in 10 working caregivers have had to give up work entirely or retire early (10 percent). A lot of Americans are providing unpaid care to loved ones and paying an incredibly high price in the quality of their own lives as a result. The stats on the number of caregivers who’ve given up promotions, taken unpaid leave, given up work entirely, moved home, and dismantled their lives to provide care for a relative or a friend is sobering. Today, more than 1 in 5 Americans (21.3 percent) are caregivers, having provided care to an adult or child with special needs at some time in the past 12 months. This totals an estimated 53.0 million adults in the United States. One in 4 find it difficult to take care of their own health (23 percent) and a similar proportion report caregiving has made their own health worse (23 percent).
Long-term care insurance helps protect employees retirement plans against the high cost of custodial care due to conditions such as Alzheimer's, strokes or other chronic illnesses – conditions that are not covered by employer-sponsored health plans or government programs. No carrier currently writes true group LTCI in the traditional sense defined as employer-owned, with employees covered by certificates of coverage and issued on a guaranteed-issue basis. Now, most long-term care insurance sold at the employer is individual contracts - so-called 'mult-life' LTCI.