Monday, January 26, 2015

Life Insurance with Long-Term Care Explained

Protecting yourself against the potential threat of long-term care seems to be the topic clients dislike discussing the most. With health care costs on the rise and long-term-care insurance premiums climbing by double digits several insurers have exited the business in the past three years. Many families are turning to an alternative: using life insurance with long-term-care benefits.

One reason life insurance policies with long-term-care riders have taken off is that they overcome one of the biggest hurdles for buyers of long-term-care policies—writing a sizable check for a product you hope you will never use. By pairing long-term-care benefits with life insurance, you can lock in a payout for your spouse, children or other heirs, even if you don’t use the long-term-care benefit. As with traditional long-term-care insurance, hybrid policies kick in when the policyholder needs help with two activities of daily living, eating, bathing, dressing, toileting, transferring (walking) and continence.

The living benefits in these hybrid products are typically limited to the amount of the death benefit. Several options include receiving between 2-4% per month of the death benefit. The insurance carrier either pays you a set amount each month or reimburses the long-term-care expenses. The premiums are locked in, unlike a traditional long-term-care policy but, you also have to factor in a lack of inflation protection.


One Asset For Long-Term Care: Families don’t always make plans for long-term care and all of a sudden they’re in a situation where they’re liquidating IRAs and paying huge taxes. The markets may not be on their side at the time. Even for clients who already have enough savings to cover long-term care you can use the life insurance to create a tax-free bucket. This way the family is not out there trying to figure out which asset to liquidate first to pay for the costs.

Avoiding Premium Increases: We have heard stories of a client’s long-term-care insurance bill climbing more than 30% within the last year. With the hybrid products, the rates are guaranteed to stay the same. You don’t have to worry about the insurance company coming back and raising the premiums.

Older Policies: This could be ideal for clients that purchased permanent policies 20+ years ago with a healthy amount of cash value. Chances are their financial situation has changed. The kids are on their own, the house is paid for, and now the client is retired living on a fixed income. First off you can analyze their policies to make sure they are still appropriate and running properly. Secondly, it could make sense to consider merging their existing policy into one with long-term care and take advantage of their cash value. They may never need the long-term care but it is nice to know it is available in case the need arises. Policy Review

Estate planning: If the long-term-care rider is what is called an “indemnity” benefit, not an expense reimbursement, you generally are allowed to put the insurance policy in an irrevocable trust and still use the accelerated death benefit for long-term care. When you pass away your heirs get whatever benefit is left tax-free, and it isn’t counted as part of your estate. You have to have the indemnity rider to do this. With an indemnity plan, the benefit is paid to the owner of the policy, which is the trust. If the benefit is paid directly to the insured person, the trust could be disqualified.

Monday, January 19, 2015

A Trust Sounds Too Fancy For Me


I’m not wealthy, why would I consider a trust? This is meant to lay out what a trust can do and why it may be beneficial to consider. There are two broad types revocable and irrevocable. Revocable allows for changes throughout but, it also stays within someone’s estate, meaning it is not excluded from estate taxes. Setting up an irrevocable trust limits the ability to make changes but, any assets used to fund this trust will be excluded from someone’s estate.

 Benefits to Revocable Trust
  • Bypasses probate
  • Assets go straight to beneficiaries(similar to life insurance and retirement accounts)
  • Maintains privacy
  • Allows for more control of assets after your death
  • For property owners it can add an extra layer of liability protection

Benefits to Irrevocable Trust

  • Assets are not subject to estate taxes
  • Easier to gift to charities
  • Income producing assets are not subject income taxes

Within those two broad trust types there are quite a few variations. Below are some of the most common that I deal with working with clients.

Special Needs Trust – Helps map out financially what happens to a family member who is disabled(mentally or physically). Can protect assets such as a home and still allow the individual to receive any government sponsored income they are entitled to obtain. It allows the trust to determine who they want to manage the assets as well as who would care for this individual.

Spendthift Trust – Mostly used in the case of minor children or for heirs that have not shown the ability to manage their money. You can stipulate the recipient receives a certain amount when they turn 18 or graduate college, etc. You can determine a regular monthly or annual amount they would have access to as well.

Charitable Remainder Trust – Provides tax advantages during your lifetime of gifting money to a charity and provides you with income. For example if you gift 25,000(preferably something with low cost basis) to a charity. That charity will receive that $25,000 once you pass away so it is considered a gift now and deductible. You also receive the income from that donation every year while you are living.

The estate planning world has a vast array of platforms to help families implement what they want to happen to their assets. As estate tax laws change financial planners must stay abreast of different nuances and how they impact a client’s financial situation. The key is periodically discussing your intent with your family and your trusted advisors to see if your goals match up with what you have in place and if there are estate planning vehicles that can benefit you.

Monday, January 5, 2015

Life Insurance Policies Are Running Out of Steam

This low interest rate environment has been a mixed bag for individuals. For clients looking to borrow money it has been a great time to buy or refinance real estate. For those relying on cds for income it has been a different story. The one asset many clients take for granted are life insurance policies. The vast majority of clients we meet for the first time typically haven’t looked at their policy since the day they signed their delivery requirements.

With interest rates at all-time lows, many permanent policies sold in the 1980s and ’90s – are at risk of lapsing. Clients will have to make the choice between letting the policy go, taking a cut in death benefits or shelling out even more money to fund premiums and keep the policy in force. They didn’t think of the life insurance as an investment, but rather as something they could set and forget. Many of these policies are now set to fail with a tremendous price tag to keep them going.

The problem is that these policies were based on optimistic interest rate assumptions, back when those rates were as high as 15%. Universal Life features included not only a death benefit, but also a cash value account that receives interest and that can be funded by a portion of premium dollars. Upbeat interest rate projections at the time meant that clients being sold these policies did not expect to pay much to fund the policy’s costs. Those high credited interest rates supposedly would help foot the bill. Even the most conservative agents and brokers were projecting 7% to 10% interest rates. But in today’s interest rate environment, it’s become significantly harder for insurers to credit the rates clients were expecting 20 years ago.

I worked with a client a few years back who had purchased a universal life policy back in the early 1980’s. It was a 250,000 policy and he was paying $120 per month. Fast forward 20 years as I reviewed his policy I had his carrier run multiple illustrations to determine his best course of action.
Option 1: Keep everything the way it is and the policy defaults in 3 years
Option 2: Start paying $270 per month to keep it in force.
Option 3: Reduce the death benefit to 100,000 and continue paying $125 per month to keep it inforce.

After getting an earful for a solid 15 minutes the client came to the realization that as an individual in his mid 60’s on a fixed income none of the options seemed ideal. The good news for him is that he was still in good health. We were able to write a new policy on him for 200,000 for $140 per month. The new policy had a built in guarantee to last until his death that his previous universal life policy did not contain.

Estate Planning

Attorneys, accountants and financial advisers are struggling with universal life insurance policies that were written during periods of higher interest rates for use within an irrevocable life insurance trust to help soften the blow of estate taxes. Many of these were bought when the estate tax exemption was far below what we have today(5.25 million for individuals). Still, there may be cases where clients need the liquidity, say for state-level estate taxes or if it’s part of a buy-sell agreement or for succession planning

Trustees overseeing the affected trusts are many times relatives of the person who set up the vehicle in the first place. They accepted the position without any knowledge of their responsibilities. Many times they do not have the skills necessary to successfully keep the trust’s primary holding — its life insurance — from expiring prematurely. Evaluating Trust Owned Life Insurance


With life expectancy continuing to trend up the cost of insurance has trended lower. Along changes in life expectancy the number of insurance carriers and options available to clients has made for a more competitive marketplace. There’s a lesson here for advisers and fiduciaries: Just as you review other aspects of your client’s financial situation on a regular basis life insurance is no exception.