Harry N. Stout
205- How Triple Leveraging Beats Self-Insuring for LTC
Written by: Cary Carney, Vice President of Sales at Kuvare, Guaranty Income Life Insurance Company, a Kuvare company.
Today I’ll tackle a subject that’s near and dear to me both personally and professionally, but one that many don’t want to think about—the need for long-term care (LTC). This isn’t a discussion about LTC insurance specifically, those policies are great but also extremely expensive. Are they worth it? If you can afford it and use it, then yes. If you cannot afford it, or are unsure if you would ever use it, then consider an alternative called hybrid LTC or asset-based LTC. These are just fancy names for a fixed annuity that can provide benefits to help pay LTC expenses—yet another example of what annuities offer!
If you are like many and don’t believe you’ll need LTC insurance, it’s likely for one of these reasons:
You are healthy and don’t see the need for future care.
Your children or spouse will take care of you.
You can afford to self-insure.
Let’s address the first reason—good health and not foreseeing a need. To put this in prospective, if you are 65 years old, you have a nearly 70% chance of eventually requiring some type of LTC services and support. Comparatively, there is a 27% chance of having house fire, and an average driver only files an auto claim once every 17.9 years, yet most of us carry home and auto insurance.
The second reason is very common and commendable—if a spouse or child has the ability and resources to care for you. Unfortunately, a spouse often doesn’t have the physical capabilities nor the resources to do an adequate job long term. Likewise, an adult child also has his or her own busy schedule while attempting to care for a parent, which is extremely demanding.
The final reason, self-insurance, is certainly a great alternative. However, if you have an option to achieve three times the leverage of your own money to help pay for LTC expenses with little to no net cost, would that appeal to you?
This is exactly what a fixed annuity asset-based LTC product can offer. Today’s products may increase your money by as much as three times to help cover LTC expenses. In other words, if you put in $200,000, the insurance company may allow up to $600,000 to be paid for LTC expenses tax free. These resources can be used for LTC, assisted living or in-home care.
As an example, let’s assume that you are a 65-year-old placing $200,000 into an asset-based LTC annuity. The fixed annuity credits an interest rate of approximately 2.45% that’s renewable each year at current interest rates. The company may charge a fee of 0.95% for the additional $400,000 benefit that it may provide for LTC expenses.
Your $200,000 would earn a net return of 1.50% and continue to accumulate, assuming rates stay above 0.95%, until you need your money for a LTC event. At that time, you could have three times your accumulation value to use for LTC expenses, again tax free. If you don’t use the LTC benefits, you can walk away with the accumulation value when the contract ends or pass to a beneficiary at death.
Minimizing taxable buildup in an existing non-qualified annuity is yet another financial planning opportunity with this type of a product. If you have an annuity with untaxed growth, this would be tax free when utilized for LTC expenses. For example, you placed $50,000 of new money into an annuity 12 years ago, and the accumulation value is now $100,000. If you cash out the annuity, you’d owe taxes on the $50,000 gain. However, if you complete a 1035 exchange and move that $100,000 into an annuity with the LTC benefit, you wouldn’t pay taxes on the $50,000 gain, if using it for LTC expenses.
Another option is to place qualified money into asset-based LTC products. If you have $100,000 of qualified money, rather than taking required minimum distributions from your policy, you could move the $100,000 into the asset-based LTC product and have $300,000 available for LTC tax free. Keep in mind this option is a little different because you’d pay taxes on the initial $100,000 of qualified funds. However, some companies allow you to spread taxation over five years. This transforms qualified monies into non-qualified monies, so if it is not used for LTC, the money would pass more tax efficiently to your beneficiary.
Whether you are self-insuring for LTC or planning to minimize annuity taxation for your beneficiaries, now is a good time to review your options, including a fixed annuity asset-based LTC product.