Why Advisors Should Consider Single-Pay LTCi For Their Clients

By Tom Riekse

The recent stock market run (especially in technology stocks) has been amazing. Despite the high unemployment rate, many investors are enjoying that feeling of increased net worth in both their qualified and nonqualified money.

At the same time, many may feel concerns about the market valuations, not to mention the recent craziness around retail investor trading. Are we set for a repeat of the big market corrections of 1999 or 2008? Is it time to take some chips off the table and reallocate assets?

Americans have seen the impact the pandemic has had on long-term care facilities and want a flexible plan for care. One great option may be a single-premium long-term care insurance plan.

Single-premium LTCi plans are just that — an applicant pays a single premium, and they are done paying premiums on that policy. Single-premium LTCi policies are available for both traditional LTCi policies and LTC + life hybrid plans. Carriers for single-premium LTC + life products include New York Life, OneAmerica, Nationwide, Lincoln Financial, Securian, Pacific Life and Brighthouse Financial. The carrier that offers single-premium in the traditional market is National Guardian Life.

Let’s look at how a typical policy works. Consider a 55-year-old married woman who makes a one-time premium payment of $105,000. The policy she is buying pays a cash benefit for LTC at home in assisted living or in a nursing home, and the benefit increases 3% each year.

In this example, by the time the policyholder reaches the age of 80, she will have a policy that will pay a benefit of almost $10,000 per month with total benefit available of $752,000. And that benefit is certain, not dependent on market performance, unlike “self-insuring” for long-term care.

Consider the advantages of buying a single-premium LTCi policy:

» No possibility of future rate increases.

» No lapse of coverage because of not paying premium, whether due to a change in economic circumstances or forgetting to pay.

» The ability to include inflation protection so that benefits will automatically increase with certainty.

» The addition of a death benefit, either through a stated death benefit with hybrid policies or a return of premium upon death for traditional LTCi.

» The ability to get money back due to the product surrender value or premiums paid.

And some of the disadvantages of single-premium LTCi coverage:

» Your client needs to have the money available.

» Opportunity cost! That money can’t be placed in other investments like stocks (or bitcoin).

» Cash surrender value — many plans offer a 100% return of entire premium option, but electing this reduces the LTC benefit.

» No potential annual tax deductions as a business owner or health savings account holder.

How does a single-premium policy compare with an annual pay plan in terms of premium savings? Let’s look at our 55-year-old female client, who is in excellent health and interested in an initial monthly long-term care benefit of $4,500 per month, an initial benefit of $216,000 (which represents about four years of care) growing at 3% compounded based on an included inflation rider. At age 90, this would result in an approximate monthly benefit of $12,293 per month and a total benefit pool of $590,000. Again, that benefit is defined and specific — not subject to market fluctuations.

Once a single-premium plan has been purchased, it should give a client more confidence to invest their money, knowing that the LTC benefit will be there.

There are many methods to fund a single-premium LTCi policy. Here are some of them:

» Cash.

» Nonqualified investments. This may trigger short- or long-term tax implications, and this needs to be considered.

» Retiring certificates of deposit.

» A 1035 tax-free exchange of an existing life insurance policy that has cash value but not LTCi benefits.

» Qualified money, such as from a 401(k).

It’s important to note that withdrawing qualified money to pay the premium will result in ordinary income tax treatment. That’s why carriers have designed solutions that allow the qualified funds to purchase an annuity that will in turn fund a 10-pay LTCi policy — spreading the tax hit over several years.

Single-premium LTCi plans can help fund a plan for care and provide peace of mind for a family — something well worth considering.