For those who cannot qualify for insurance, an annuity with an attached LTC or “confinement care” rider might make the most sense. The latter is similar to the chronic-care option. A fixed indexed annuity with an income rider that can also be used for confinement care will double the contractual income guarantee when the confinement care is triggered. That happens whenever the insured person can no longer do two of six activities done in daily living—bathing, dressing, toileting, continence, feeding and transferring out of or into bed.
“Only by spending some quality time with one’s professional advisor can a decision be made,” says W. Allen Johnson, executive vice president at iTrust Advisors in Syracuse, N.Y. “If an annuity is recommended as part of the financial plan, then the withdrawal features for a chronic illness should be explored.”
In general, these annuities function much like their life-insurance counterparts. They don’t require a physical exam but do require a large up-front investment. On the other hand, premiums never increase. “Generally, the LTC component is two or three times the face value of the annuity,” says Melchiorre. “If you don’t use that component, you can redeem the accumulated value of the annuity down the road or annuitize it to get income for other purposes.”
This option has swelled in popularity since a 2010 ruling that classified withdrawals for qualifying LTC expenses as tax free—unlike confinement-care benefits, which are taxable. Either way, the distributions reduce the annuity’s accumulated value.
Deciding among all these options depends on where your clients are coming from. “Let’s say they have held an annuity they bought at 55 for 10 years, which now has a death benefit of $100,000,” says Steve Williams, vice president of Financial Planning Strategy at BMO Private Bank in Chicago. “And now that they are age 65, they start to worry about [an] LTC event. By doing a 1035 [tax-free] exchange to an annuity with LTC rider, they can typically get anywhere from $300,000 to $400,000 LTC coverage. If it is new money, then the permanent policy [universal or whole] with [an] LTC rider is typically a better option.”
Leveraging Life Insurance Cash Value
Even if you reject these hybrid options, life insurance can still be used to help fund LTC expenses. First, accelerated death benefits—usually available at an additional cost—allow you to take “a tax-free advance on your death benefit while you’re still alive,” says Melchiorre, “but you must be terminally ill or severely cognitively impaired.” In most cases, eligibility must be recertified annually. (“Terminally ill” is typically defined as having less than two years to live.)
Generally capped at 50% of the total death benefit, the distributions usually go for an immediate need, though at times they can be used for monthly LTC services. There are “limitations on what is considered covered or qualified care,” says Celeste Moya, vice president of product analysis at NFP International Insurance Solutions in Austin, Texas. “Qualified care generally includes care within a facility—nursing home, hospice care, etc.—and expenses related to room and board at any one of these facilities. However, there is no standard across the industry.”
Another option for the chronically or terminally ill is a viatical settlement or, for those with a less urgent need, a life settlement. Both are ways of selling a life policy to a third party. They are solutions of last resort. Many desperate senior citizens have been swindled. “The amount of the sale must be greater than the cash surrender value of the insurance policy, but less than the death benefit,” Melchiorre says. With viatical settlements, you may receive between 60% and 90% of the policy’s face value. If you are terminally ill, the proceeds are not subject to tax. If you’re chronically ill but not deemed terminal, the proceeds are only tax-free if used to pay for LTC needs that aren’t covered by other insurance.
LTC Benefit Accounts
Life policies with a cash value can also be converted to an LTC benefit account—a “privately funded irrevocable account funded by the sale of a life insurance policy,” says Chris Orestis, CEO of Life Care Funding, a senior care advocacy group in Portland, Maine.
The account is held by a professional administrator, who makes monthly tax-free payments on your behalf directly to LTC providers you designate. All levels of care and health conditions are eligible. Even funeral expenses are included. There are no premiums, and most types of insurance qualify for conversion, including group and term plans. It’s an allowed method for spending down assets to qualify for Medicaid, too, unlike other uses of a life policy’s cash value.
But your need for care must be imminent, if not immediate.