Long-Term Care Insurance – Hybrid Products Recreated
Several long-term care insurance hybrid products have surfaced over the past few years. These include life insurance with an accelerated death benefit provision that allows both leveraging and long-term care insurance benefits. One product in particular is the Lincoln Life MoneyGuard® universal life policy with long-term care benefits rider. This policy allows either a single premium payment or a stream of ongoing premium payments to fund the life insurance policy. The long-term care insurance rider expenses are taken from the policy’s cash value along with the life insurance expenses.
On a high level, the product offers “free” or “highly leveraged” long-term care insurance to the policy’s owner. This is because the premium paid will be leveraged three to six times to pay for qualified longterm care services if the policy owner needs such care. The death benefit returns the premium paid to the policy owner’s beneficiaries if the policy owner never needs long-term care services.
The policy concept is designed to allow consumers who wish to self-insure the long-term care risk to greatly leverage the capital used for self-insurance. Further, the concept solves a common concern of paying premiums for a substantial period of time and never needing the long-term care benefit. In that event, the policy’s death benefit becomes the primary financial justification for the coverage. One disadvantage is that the policy cannot be owned by an irrevocable trust so it may be difficult to remove the death benefit from an estate.
A recent case review included a couple from California, both age 52. This couple could purchase a Lincoln MoneyGuard® universal life policy that provides $93,600 of death benefit each ($187,200 total) for a combined single premium of $141,365. The policy would pay up to $3,900 per month for a maximum of six-years of qualified long-term care expenses each. In simple terms, they can pay $141,365 for $280,000 of long-term care benefit each and a death benefit that exceeds the premium paid if they pass without using the long-term care coverage.
My evaluation then looked to separating the life and long-term care coverage. By separating the policies, the $141,365 paid as a single premium to the above option is retained as an asset in their portfolio. The income can be used to fund the split insurance strategy. Let’s assume the asset generates a 4.5% after-tax return or $6,361 per year of consumable income.
The recommended long-term care insurance plan would pay $3,900 per month for up to a total of 12-years for the couple (shared benefit) at a cost of $3,550 per year. This coverage is a standalone long-term care policy with stronger provisions than those offered in the MoneyGuard® product.
In addition to long-term care insurance, the couple would also purchase guaranteed universal life insurance with a death benefit of $150,000 each. At death, these life insurance policies return the income/capital used to pay long-term care insurance premiums, regardless if the long-term care is used or not. The combined premiums of this life insurance coverage for the couple is $2,557 per year.
The combination of the life and long-term care insurance create a premium expense of $6,107 per year, $253 less than the income generated by the asset that would otherwise go the MoneyGuard® policy. In addition to the leveraging this strategy creates, the clients would have a stronger long-term care insurance policy, $141,365 in retained assets and long-term care insurance that they are basically paid to own.