Life/LTCi & Annuity/LTCi: The Hybrids Are Here!

You know those vehicles that do double duty, using both electricity and gas? The hybrids. They’ve been around for a long time, but have found new life and been revamped and are now among the most popular vehicles around. Well, the same holds true for hybrid insurance products.

Life and Annuity combos with Long Term Care insurance (LTCi) are the insurance industry’s version of an efficient hybrid. You may also hear these hybrid products referred to as Asset Based Care (ABC) or Linked Benefit Products.

Consider that:

• 49% of people turning 65 will need LTC at some point in their lives; and
• The average cost for a one-year stay in a nursing home is $71,000

It makes you wonder: How will your clients pay for this?

There are generally five ways to fund LTC:

1. Self-fund
2. Self-fund + buy basic short benefit period LTCi
3. Self-fund + buy LTCi with a long elimination period
4. Buy LTCi to cover most or all LTC costs
5. Buy a life insurance policy that allows pre-payment of the death benefit if you need long term care services

The new hybrid products answer your clients’ #1 objection to LTCi: Why should I pay for something I may never use?

The development of these hybrid products is a result of the Pension Protection Act (PPA) of 2006, which went into effect January 1, 2010. It clarified the tax treatment and allowed insurance companies to develop two LTCi hybrid options: one with annuities and one with life.

Annuity/LTCi Hybrids

Here’s how it was before January 1, 2010: benefit payments were taxable up to gains, and rider charges were taxable.

Now: riders are treated as a separate contract, LTC benefits paid from the rider are tax-free, and rider charges are no longer taxable.

Features of these Annuity/LTCi Hybrids:

• Currently available on fixed annuities only
• Makes covering spouses with one policy easy to do
• Does “double duty” if your clients have an existing deferred annuity
• Allows your clients to leverage less efficient assets for LTC -- assets like CDs, money market accounts or bonds
• If LTCi feature or option isn’t used, then the annuity values pass to beneficiaries or can be used to supplement retirement income
• LTCi benefits may actually grow at a higher rate than the annuity cash value

Life/LTCi Hybrids

Here’s how it was before January 1, 2010: rider charges were taxable if the life insurance policy was a Modified Endowment Contract (MEC) with a gain.

Now: rider charges are no longer taxable, whether the policy is an MEC or not, and you can eliminate all taxes on the gain in the policy.

Features of these Life/LTCi Hybrids:

• Your clients can choose to
  • Maximize death benefit, or
  • Maximize LTCi
• Funding Options:
  • Level pay premiums
  • Use 1035 exchange of cash values in existing life policies to fund one policy to do “double duty”
  • Pay premiums for 10 years or less
• Any LTC benefits paid reduce the death benefit dollar-for-dollar
• If LTCi is not used, then the death benefit passes to beneficiaries tax-free

Hybrids & Your Clients

Here are some underwriting “knock-out questions”*. Clients can't qualify if they:

• Use assistance devices (ie, wheel chair, oxygen)
• Currently need help with ADLs (activities of daily living)
• Have a cognitive impairment (Alzheimer’s)
• Have HIV/AIDS

*This list is not inclusive; insurance company underwriting guidelines vary.

What type of client is best-suited for these hybrids?

• The client who likes the idea of owning LTCi, but doesn’t want to write a check every year (don’t discount the psychological effect on your clients of having to write checks for something they perceive they may not need)
• The client who has other assets set aside to self-fund LTC costs
• The client who has a CD earning a whopping 0.9%
• The client who owns an old cash value life insurance policy they really don’t need

Hybrid PROs:

• Existing annuity and life policies can be transferred into a hybrid product
• Benefits paid are tax-free when used to pay qualified LTC expenses
• Immediately doubles or triples the pool of money available to pay LTC expenses
• Product does “double duty”

Hybrid CONs:

• They can be set up only as non-qualified plans
• May not have all the “bells & whistles” of stand-alone LTCi policies

Now, what do I mean when I refer to bells and whistles? If you have a client who’s looking for the Cadillac of LTCi, then hybrids aren’t for them. Just like the Prius – it’s a highly touted hybrid vehicle, but won’t carry eight passengers like an SUV; can't climb mountains like a Range Rover; and can't do 0 to 60 in 4.5 seconds like a Ferrari.

But for your clients who have assets sitting in their garage, or in a CD, a savings account, an old underperforming annuity, or a life insurance policy they don’t need, then these hybrid products may be just the vehicle they need to ensure they can have LTCi and still preserve their assets.

— Jerry Skapyak

If you have clients like these, please contact me at Jerry Skapyak or 877-254-4429. Please note: I will be presenting a webinar about these products on November 15, 2010. Sign up here.

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