By Rick Stewart
With the market volatility we’ve seen in March and interest rates at their lowest point in history, advisors are looking for ways to help their clients diversify their portfolios as well as protect their retirement income during these difficult times.
Clients are not only looking for protection from market and interest rate risk, but also from the rising costs of health care. Interest rates are low, but the cost of home health care continues to rise, according to the Genworth 2019 Cost of Care Survey. The national average cost of homemaker services rose 7.14% last year while home health aide services rose 4.55%.
Asset-based long-term care or linked benefit policies allow clients to leverage qualified or non-qualified assets to fund a life-based or annuity-based solution that offers LTC benefits if they need care.
Individuals who thought they could “self-insure” the risk of long-term care during these uncertain times may be reconsidering their decision. What would happen if a client had an incident today and needed to liquidate assets to pay for care when their portfolio is down 20%-30%? The opportunity cost of those assets not being able to participate in the market rebound could cost tens of thousands of dollars, if not more, over time. This scenario creates additional losses over and above the actual cost of care.
The stock market is down, interest rates are low, the cost of long-term care services is rising. Beside the obvious LTC benefits when a claim is filed, how can asset-based LTCi or linked benefits help balance out your clients’ portfolios during a time of crisis?
- Guaranteed return of premium. Zero is the hero. Having a portion of their portfolio in a policy that has a guaranteed return of premium protects the client from downside market risk and can minimize losses. Also, with interest rates so low, the opportunity cost of having money invested in a certificate of deposit is minimal.
- Nobody has a crystal ball. Needs may change down the road or clients may need access to money in an emergency. Some linked benefit policies now allow the ability to take partial surrenders. Loans or withdrawals can be taken if needed or multiple policies can be purchased. Stacking policies gives the option of exercising the return of premium option on one policy if needed, while not touching the second policy.
- Inflation protection. Rates have been low for a long time and may stay low for years to come. Inflation protection with 3% or 5% compounding can help keep up with a rising cost of care that does not seem to be slowing down. That 3% or 5% growth is looking pretty good with the 10-year Treasury below 1%.
- Flexible premium options. Don’t have a lump sum to put in a policy today? That’s understandable in today’s market. Asset-based LTC solutions can be funded over time. There are options to purchase a 10-pay, a 20-pay or even a pay to age 100. This strategy can still give clients all the benefits already mentioned with the flexibility of paying over time. A client can also 1035 exchange an old policy to help fund the new contract.
- Modest appreciation. For those investors who still want to see some growth on their cash value, some policies may pay dividends. Although dividends are not guaranteed, any upside growth potential with the premium guaranteed by a financially strong carrier looks pretty good in today’s market.
- Death benefit. Asset-based LTCi solutions built on a life insurance policy provide a tax-free death benefit to the beneficiary, less claims paid. Most policies even offer some residual death benefit for those who use up all their LTC benefits.
- Tax efficiency. Many investors today may have already earmarked a non-qualified annuity they own to fund their future LTC expenses. Under the Pension Protection Act, an annuity with a gain can now be 1035 exchanged into an annuity with an LTC rider. Benefits are still received tax free when clients file LTC claims.
Asset-based LTCi or linked benefits can not only help your clients prepare for the future cost of long-term care expenses but they can also help diversify their investment portfolio during difficult times.
Rick Stewart is director, long-term care sales, with Crump Insurance Services. Rick may be contacted at [email protected].
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