You may have heard of the hybrid life insurance and annuity policies that have somewhat recently come on the scene. They are policies that, in addition to their primary purpose, have the potential to pay long term care costs. I have some thoughts.
If you’re young and need life insurance, buy life insurance and forget about the hybrids. But if you’re in the market for long term care insurance (LTCI), I think the hybrids deserve a look.
The major drawback with LTCI is that the premiums are not guaranteed to remain level. The company can increase them at their discretion. Speak with someone who bought a policy in the ‘90s and I’m sure they can tell you some horror stories.
Some people say that the fact that you may pay all those premiums and not need it is a drawback, but in that respect, it is no different from any other type of insurance policy, save life insurance.
Do you really want to go into a nursing home so that all the premiums you paid aren’t “wasted?” No more than you’d want to be in an auto accident so that your car insurance premiums aren’t “wasted.”
But a properly funded guaranteed universal life insurance policy (GUL) will ultimately pay a claim, so when the LTCI is coupled with that, it makes an attractive product. If you need long term care, the policy will pay. If you don’t, the policy will still pay, albeit to your beneficiary.
The other attractive feature to the GUL is that the premium is guaranteed; the company can’t raise it. While this provides cost and budget certainty, it’s not perfect, as theoretically, the company could choose to not increase the rate on your cash value when interest rates rise as a way to recoup their costs.
If you are unfamiliar with annuities, my brief explanation here will help. The hybrid annuities are deferred annuities, and offer the potential to turn taxable income into tax free income.
Money compounds inside an annuity on a tax deferred basis, but taxes are due when the money is withdrawn. However, if it is withdrawn from a hybrid and used to pay LTC expenses, it is then tax free.
This can be particularly productive if you have an existing annuity with a large deferred gain. It can be exchanged for a hybrid annuity via a §1035 exchange and all monies withdrawn to pay LTC expenses will be income tax free.
While this is a very simplistic overview, these two products have the potential to deliver very powerful benefits. As always, call or email if you would like additional information, and thanks for reading.