Let’s take a look at the new rules of long term-care solution and plan design.
Traditional LTC Insurance Plan Design
There are a few things that you must decide with your client:
- Daily or a monthly benefit
- Benefit duration
- Elimination period
- Inflation option
- Annual premiums
- Option for payment frequency – semi-annual, quarterly or monthly
Next, you have to explain the tax ramifications of Internal Revenue Code 7702 B.
For a qualified traditional LTC insurance policy, the premiums may be deductible depending on how you file your taxes, but the benefits would be income tax free.
The benefit duration tends to get a little confusing. A lot of people are under the misperception when you talk about three years or five years that this is a time frame.
In fact, it’s a pool of money based on the daily benefit amount times the benefit multiplier, which is the time in years.
If you take three years and convert it to days, it’s 1,095 days. So $200 per day times 1,095 days starts with an initial pool of $219,000.
The new rules are different, because we now have options for long-term care solutions and their plan design is a little bit different.
The first decision you’ve got to decide is what’s the base for the solution – whole life insurance, universal life insurance or an annuity product?
You’ve got to decide on the monthly benefits you want to begin with, because that will determine the death benefit or the annuity investment.
You should have a discussion of inflation options, and then decide how will they fund this purchase, because that will make a difference in what product they purchase.
- Are they taking money out of savings?
- Are they doing a 1035 Exchange?
- Are they using qualified funds?
- Are they using a 401-K, IRA or a certificate of deposit?
How would they like to pay for this product?
- In a single payment?
- Would they prefer to do a ten year or a twenty year pay?
- Would they like to do an annual pay like they can with traditional long term care insurance?
The other difference with these products is that most of them come under Internal Revenue Code 101 (g) meaning that the premium is not deductible but the benefits for long-term care are received income tax free.
There is one product out there that’s a little different, because the carrier splits out the base policy versus the supplemental benefit. The supplemental portion is straight long-term care insurance, so it may be potentially deductible.
In this example, the total premium for this product for this couple is $6,766.44 per year.
The base amount, which is the life insurance, is $2,730.00 of the $6,766.44, so if you subtract $2,730.00 from the $6,766.44, the portion which may be deductible depending on how they file their taxes is $4,036.44.
Like all the other products, the benefits used for long-term care are received income tax free.
So, there are many many choices and there are additional riders you can add to these policies – we’re just talking about the basics.
How do you choose what your client should have?
Well, first and foremost, you should pre-screen your clients health, because some companies will take some people and others won’t.
Next how important to your client is premium stability? With these hybrid products, the premiums cannot change. With traditional LTC Insurance, they could, as they’re guaranteed renewable.
Are they worried about using it or losing it? Because with the life insurance and the annuity products, they’ll never use it or lose it, where with traditional LTC Insurance, if they don’t use it, they do lose it.
What’s affordable? The other considerations are their asset protection, their tax strategies and what other insurance they may have.
I’ve worked with a lot of agents that combine two – using both a traditional product with a hybrid product to get their clients the biggest bang.
Next – “Stop Selling and Start Helping People Buy.”