Combining Life Insurance or Annuities with Long-Term Care Insurance

It would be easy to say “yes” to long-term care insurance if you didn’t have to come up with new money to pay for it, wouldn’t it? Well, there might just be a way to pull that off by repositioning money you already have.

An important tax change was effective January 1, 2010* that has made it easier to combine long-term care insurance with either life insurance or annuities.  Why would you want to do this anyway? Three reasons:

1) Some people are very concerned about paying premium for a number of years and dying without needing care. With a combination product, either the death benefit of the life insurance product or the annuity account value would go to your beneficiary if you didn’t need care or if you didn’t need enough to use up the entire account.

2) Some people may not have the resources to pay for long-term care insurance out of their cash flow, but they may have older life insurance or annuity products that they can exchange for one of the new combo products. This is particularly attractive with annuities as since 1/1/10, you can exchange an older non-qualified annuity with taxable gain for a combination annuity/long-term care insurance plan and take the gain out tax-free if you meet one of the two criteria that make you eligible to receive benefits on a traditional long-term care insurance policy. (You either have a severe cognitive impairment that makes you a threat to self or others or you are expected to need help with at least two of the six basic daily activities for at least 90 days; i.e. dressing, bathing, transferring from bed to chair, toileting, continence or eating.)

Benefits of the combination life policies have been tax-free since January 1, 1997** but the 1/1/10 legislation made the withdrawals from the cash value that are used to pay the annual premium for the long-term care insurance benefits tax-free.

3) Some people have older long-term care insurance plans but need more coverage. Perhaps they didn’t buy inflation coverage or they want more home care benefits. It’s rarely a good idea to replace an older long-term care insurance policy because it cost much less than a new one today because you were younger when you bought it. So they can buy a smaller combo product to supplement the traditional long-term care insurance plan they have.

Important: A great feature of these combo products are that you can get a much larger benefit for long-term care than the death benefit or annuity account value. This means that a true combo product will allow you to extend your coverage beyond what the amount based on the death benefit or annuity account value will pay. You can even get unlimited benefits with some combo products. But don’t make the mistake of just focusing on the larger benefit pool. Ask the insurance professional to show you what the monthly benefit will be in the future so that you won’t be disappointed when you have a claim. Many of the combo products have the ability to include an inflation benefit just like traditional long-term care insurance plans offer.

Well-known combo products today are OneAmerica’s Asset-Care® and Annuity Care®, Lincoln Financial’s Moneyguard®, Genworth’s Total Living Coverage℠ (TLC), Pacific Life’s PremierCare and Massachusetts Mutual’s LTCAccess℠ Rider.  There are also equity index annuities available today such as F&G’s Prosperity Elite Series that allow the payout for LTC and the death benefit to grow when the market is up without losing value when the market is down. This helps people who want to leave as much as possible to their children if they never need LTC. Ask your agent or financial advisor if leveraging current savings into these types of products would be a good way for you to plan for long-term care.

However You Plan for Long-Term Care, It’s All About Quality of Life and Taking Care of the Family

People should be able to enjoy the assets they have saved when they retire. Too often, the fear of a husband of wife getting sick causes older Americans to abandon their plans and not have the quality of life they anticipated in retirement. Long-term care insurance can give you the financial security to enjoy your retirement to the fullest. Younger people buy it to protect the growth of their savings and to insure themselves in the event of a long-term care need at a younger age.

The purchase of long-term care insurance is not something you do just for yourself. You really do it for your family – your spouse and your kids. The emotional trauma of long-term care is enough to deal with.

Giving your family the financial support to deal with long-term care needs is one of the most meaningful things you will ever do for them.

Long-term care insurance for many is the most important insurance you can buy if you can afford it. Suze Orman


* Pension Protection Act of 2006 [Public Law 109-280, Sec. 844(b) and 6050U (g) (1) and (2)] **Health Insurance Portability and Accountability Act of 1996 (Public Law 104-191, Title III, Sections 331, 332)


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