It’s an interesting question. In our experience offering hybrid long term care coverage, the answer is: It depends. Some of our clients will benefit more from an annuity and others from a hybrid life insurance plan. We will discuss the pros and cons of each below.
Some of the answer can also be found in your own personal comfort level with insurance. For better or worse, some LTC shoppers are more familiar with annuities and therefore gravitate toward these policies. Sometimes life insurance plans have negative (and in our opinion undeserved) connotations. There are a lot of insurance “experts” who will tell you to buy term life insurance only, but that’s short-sighte
You should keep an open mind and not approach your research with a bias. Buying hybrid long term care insurance is all about maximizing leverage and creating tax efficiencies. In some, not all, cases life insurance plans will offer more leverage on your invested dollars. These policies also provide additional tax advantages.
There are several different carriers offering hybrid life insurance. It’s important from the start to know there are two very different distinctions when it comes to these policies. Some life plans sold today simply offer an accelerated death benefit. In other words, you get some access to the death benefit amount if you meet certain requirements. In our opinion, these plans are more life insurance than long term care.
The second types of policies are true hybrids and are more long term care than life policy. We will be focusing on these types of coverage. They offer investment leverage, inflation protection, spousal options, and are considered qualified LTC plans. A qualified LTC plan will offer tax advantages when the policy is established and also when it pays out benefits to the owner(s).
Hybrid life insurance plans can be desirable simply because they offer tax advantages at passing. Any growth in a hybrid annuity is taxable as income at passing, but that’s not the case with life insurance. Should you invest a $100K single premium in a life plan and create a $250K death benefit, that $250K would not be taxed as income at your death. That is a big advantage life insurance policies offer over annuities.
Life insurance policies can also provide more leverage in some instances. When purchasing long term care insurance, one of your primary goals should be maximizing your benefit pool. Life insurance can accomplish this more efficiently when compared to some, not all, annuity plans. If the life policy provides a $250K pool of long term care benefits and the annuity only $230K, and all other things are equal, the hybrid life plan might be the better choice.
But insurance companies have more on the line when it comes to life insurance. If you purchase and qualify for a plan today and pass away tomorrow, then the insurance company will come out on the losing end of the transaction. Because of this, medical underwriting is more stringent with hybrid life plans when compared to most annuities. The immediate increase in your leveraged dollars requires more due diligence on the part of the insurance carrier.
In a nutshell, hybrid life insurance plans are popular for their tax-free death benefits, increased leverage and larger long term care benefit pools, but they have more medical underwriting.
Hybrid annuities deserve a seat at the table when you’re considering asset based long term care. They also offer leveraged payouts and yearly growth opportunities through interest gains. While they don’t offer an income tax free death benefit like life insurance, they can still be purchased as tax-qualified plans.
And this is one of the significant factors that make hybrid annuity accounts more desirable than life insurance plans. Annuities will accept transfers from other annuities on a tax free basis. This is called a 1035 tax free exchange. While you can perform this same transaction with the cash value in life insurance plans, it is rare for someone to have $100K cash value in a life insurance plan that they want to transfer over to a hybrid policy.
It’s not as rare for someone to have $100K in an annuity of some kind. As an agent, oftentimes I will hear that this same $100K is earmarked for long term care expenses.
That’s great, you’re planning ahead. But why not leverage those dollars 2 or 3 times over and watch them grow each year? That way, if you spend your $100K, you can then spend another $100K-$200K of the insurance company’s money. And that’s what LTC planning is all about – protecting your assets, leveraging your dollars and spending the insurance company’s money – not all of yours.
You might ask, what happens to the taxable gains in an old annuity when it’s exchanged for a hybrid annuity account? The investment growth is not taxed upon transfer (when using a proper 1035 exchange) and the growth is not taxable when the payouts are used for long term care purposes. It’s a win win.
And as we stated before, some LTC shoppers are simply going to be more comfortable with annuities. They are more of a known quantity with less moving parts and may simply provide more peace of mind. There’s nothing wrong with that. Don’t let someone put your hard earned dollars into something you are not comfortable with over the long haul.
If you are planning for LTC with an asset based approach, then either a hybrid annuity or life insurance plan will offer meaningful estate protection. They will both serve the purpose of leveraging your invested dollars and providing a significantly larger pool of money.
And more importantly, these plans can be funded with a one-time single premium so you never have to worry about future premium increases like you would with traditional long term care policies. And most hybrid plans also offer a return of premium – or at the very least access to your investment should you need it.
Additionally some hybrid plans also offer joint coverage. In other words, both you and your spouse can be covered under one policy. With traditional long term care, that’s usually not the case. Those policies may offer a shared care rider, but you have to use your policy up first before tapping your spouse’s policy. Joint hybrid policies allow both spouses to draw from the same pool of money at the same time. Hybrid plans allow you to invest less in one policy than more in two.
Hybrid plans also accept 1035 tax free exchanges from existing insurance policies like annuities and life insurance. This can help you leverage an under-performing asset while also providing estate protection for you, your spouse and your heirs. No longer will you need to self-insure for such a potentially large out of pocket expense.
Hyers and Associates is an independent insurance agency offering LTC quotes and coverage direct from several carriers. We can help you compare plans side by side in order to find the hybrid policy that best fits your needs and goals. Contact us today for a free consultation.