4 Ways to Fund Long-Term Care: Hybrid Insurance

Financially savvy individuals know it’s always smart to include potential long-term care expenses in a retirement budget. How exactly can your clients finance long-term care? Hybrid long-term care insurance (LTCi) is a fantastic feasible solution, but how can they fund that?

According to our calculations, there are four major ways to fund hybrid LTCi. Let’s explore them.

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Learn more about hybrid LTCi in general, and why you should offer linked-benefits products, from Ritter’s LTC Manager, Mike Baker! Watch the video below!

1. Cash Equivalents

Cash is almost always accepted as a payment for everything, unless you’re going to the DMV. Like other types of insurance, you can fund hybrid LTCi policies with cash, or “cash equivalents.” We consider cash equivalents to be anything like CDs, bonds, etc.

Some of your clients may have enough in their savings accounts to pay for a lump-sum policy. If you meet a client who doesn’t, that’s OK; not all hybrid LTCi policies are single-pay. Multi-pay hybrid LTCi policies do exist, some extending payments out as far as 15 to 20 years and longer. For example, some policies now pay to age 65 or even pay to age 100! Carriers are extending premium options to help make their rates more affordable, which will help broaden the marketing for this type of solution.

2. Life Insurance

If your client has a life insurance policy, say one they purchased years ago with a large death benefit, they may not need that large death benefit anymore (e.g., if their kids have grown and moved out). In fact, they may be able to benefit from trading in that policy for a new one with a lower death benefit and cheaper premiums. Or, they could even want something that addresses the new risk they’re facing in their next stage of life: potential long-term care costs.

If your client has a life insurance policy, say one they purchased years ago with a large death benefit, they may not need that large death benefit anymore.

Using a 1035 exchange, you can help your clients exchange an old life insurance policy for a new annuity or life LTCi hybrid product — either an annuity/LTCi or life/LTCi combination product or a life product with a long-term care rider.

3. Non-Qualified Annuities

What if your client has a non-qualified annuity? Good news! They may also have the ability to use that to fund an LTCi policy.

To trade in a non-qualified annuity for hybrid LTCi, you use the same tool involved with trading in life insurance for hybrid LTCi — a 1035 exchange. With annuities, it’s important to note, you can only trade one in for a hybrid annuity/LTCi product or a qualified, traditional LTCi plan. You cannot use an annuity to purchase a hybrid life/LTCi combination product or a life product with a long-term care rider.

To trade in a non-qualified annuity for hybrid LTCi, you use the same tool involved with trading in life insurance for hybrid LTCi — a 1035 exchange.

4. Tax-Qualified Funds

Many people also have what’s known as tax-qualified funds, like IRAs, 401(k)s, 403(b)s, and tax-qualified annuities. If your client has one of these types of accounts, they may also finance their hybrid LTCi with money from it.

There are two primary ways clients can use tax-qualified money to fund long-term care solutions. One carrier allows a tax-free transfer of the funds to their tax-qualified annuity. Once the money is received by the carrier, they calculate a 20-year life premium, which is funded by the tax-qualified annuity. The carrier then treats the distributions from the annuity as a required minimum distribution (RMD), so the policyholder is still taxed on the money but over a 20-year period. Alternatively, the client can purchase a single-premium immediate annuity (SPIA) with their tax-qualified funds. The carrier then uses the annuity distributions, which are taxable, to fund the long-term care solutions.

BONUS IDEA: Traditional LTCi + Riders

Does your client have a current stand-alone, traditional LTCi policy? If they’re tired of paying their premiums, risking getting nothing in return, you can offer a solution!

When you write clients with traditional LTCi into a replacement stand-alone policy with a ROP rider and an optional surrender rider, you can provide them with a linked-benefit-like hybrid LTCi product!

When you write clients with traditional LTCi into a replacement stand-alone policy with return of premium (ROP) rider and optional surrender rider, you can provide them with a linked-benefit-like hybrid LTCi product! A return of premium rider can provide the policyholder’s beneficiaries the total amount in premiums the policyholder paid minus any LTC claims paid by the insurer. The optional surrender rider can also provide the policyholder the total they paid in premiums, or a percentage of it, if they decide they want to surrender (or “quit”) the policy. With both of these add-ons, even traditional LTCi policyholders can have live, die, or quit benefits!

Alternative LTCi solutions, like hybrid LTCi products, exist in today’s market and should be utilized by agents, advisors, and consumers, especially because they’re so versatile in their ways to fund LTCi. Remember these solutions and that your clients’ needs may change as they age. Many people already have existing assets, like cash, cash equivalents, life insurance, annuities, retirement plans, etc. Make sure they don’t need those assets repositioned to help them enjoy lower-stress, financially set, and fearless retirement.