Combo Products

One of the things that can discourage people from buying traditional long-term-care is the idea of paying a lot of money for a policy that they may never have to use.

One of the things that can discourage people from buying traditional long-term-care is the idea of paying a lot of money for a policy that they may never have to use. All the premiums paid in would go to waste, and if you add a return of premium rider, it’s very expensive. Of course, almost all insurance is like that. But long-term-care insurance is particularly expensive and frequently, its purchase comes at a time when people are facing retirement and looking for ways to cut back.

An alternative to spending a lot of money directly on a long-term-care policy while still getting its benefits, is to buy an insurance policy with a long-term-care rider. These combo or also known as hybrid insurance policies, can vary, but the type that has gotten the most attention is a long-term-care annuity. From 2010, the IRS has allowed those who hold one of these deferred annuities to use the money to pay for long-term care free of federal taxes. Annuities allow money to grow tax-free, but the taxes still must be paid when the money is removed. These long-term-care annuities free holders from this obligation.

Several insurers offer these types of products, most operate this way:

A consumer funds money into an annuity; usually $50,000 or more. These also can be funded with another annuity, or life insurance policy that the owner no longer needs through a 1035 exchange.

Consumers then choose the amount of long-term care coverage they want, usually 200 or 300 percent of the face value of the annuity. They also decide if they want inflation coverage. They decide how long they want the coverage to last, usually anywhere from two to six years. Inflation coverage will affect the maximum duration of the plan.

Here’s a generic example for illustrative purposes:
A 60-year-old male purchases a $50,000 long-term care annuity with 5 percent inflation protection compounded annually with a 200 percent coverage maximum and a six-year benefit period. So, his initial long-term-care coverage maximum is $100,000 — double the premium he paid. (If he had refused inflation protection, then he could have chosen three times the premium, or $150,000.)

If he makes no withdrawals over 20 years at a 3.5 percent compound interest rate, minus administrative fees, he would have — under the 5 percent inflation-protected scenario –$265,330 available in long-term-care insurance. Or a monthly maximum of $3,685.

If he never needs long-term care, then the annuity can be redeemed for its accumulated value when it matures at 20 years — or it can be left to accumulate further interest and the long-term care policy will remain in force.

When this person dies, his heirs will inherit the greater of the accumulated annuity value, if there have been no withdrawals, or the single premium he paid initially less the amount of long-term care paid.

Here’s a brief recap as to why this might be a great fit for your clients:

  • The underwriting is usually less stringent than a conventional long-term care policy.
  • Most policies have few restrictions on how you use the money. Once you meet the qualifications, usually the inability to manage two of the six activities of daily living (eating, bathing, dressing, toileting, transferring and maintaining continence, or cognitive impairment), how you spend your money is up to you. You can pay a neighbor or a family member to help out or use the tax-free payments to augment other money that you have available.
  • If you are in a high tax bracket even post retirement, getting the money tax-free could make a big difference in the amount you have to spend.
  • The annuity and your long-term-care insurance are fully funded; you don’t have to continue paying premiums. Unlike traditional long-term-care insurance, your client won’t lose your coverage if they forget or cannot make payments.
  • If not needed for long-term care, they are an estate planning tool.

There are a few drawbacks to consider as well, such as:

  • These policies require a large upfront fee rather than regular payments.
  • Your money is locked up for a long time, and returns are meager.

Talk to us today to find out more about agent commissions, suitability, materials, available training and more!