New Insurance "Combo" ProductsA new trend that is taking place in the insurance marketplace is the availability of insurance policies and annuities that are "linked-benefits policies" or "combined policies." These innovative products allow tax breaks for consumers when they access funds from either a life insurance policy or annuity for long term care expenses.
On January 1, 2010, section 844 of the 2006 Pension Protections Act went into effect. This means that individuals are now allowed to withdraw annuity proceeds or access life insurance benefits, income tax free, to pay for long term care expenses.
Why the change? In short, the answer is to help mitigate the current catastrophic risk that the vast majority of people are facing. Here are the facts:
- 60% of people over age 65 will require long term care
- 93% of people age 65 or older do NOT have long term care insurance
In other words, the chance of needing long term care is over 1 in 2, yet only 7% of the general population has Long Term Care Insurance. So you can see that there is a real, measureable gap and the new policy shift could make a huge difference. Most people are currently self-insuring through default. Frankly there are smarter approaches available that leverage assets and offer real protection to help pay for the cost of Long Term Care which is generally not covered by major medical insurance.
Here are three categories of options available in today's marketplace:
- Long Term Care Insurance (still a good option for many consumers)
- Combined Whole Life or Universal Life Insurance
- Combined Single Premium Annuities
Currently there are five insurance carriers with fifteen different ground-breaking, combination products. They are being slowly rolled out by the insurance industry. That will of course increase as more financial advisors and individuals become knowledgeable about these options.
Which way to go – combined annuities or combined life insurance policies? Generally speaking, here are the guidelines - they are simply based on your current age:
- Under 60 years old – lean toward life insurance based solutions
- 60 to 75 years old – lean toward life insurance based solutions
- 75 to 85 years old – lean toward annuity based solutions
You can of course start younger than 60 and then again consider life insurance based solutions. The benefit of starting younger is two-fold. Individuals must be healthy in order to qualify for all of these products - easier for many people when they are younger. Secondly, the younger you are, the lower the rates. As with many things, foresight usually pays off. Even in the long haul starting in your 50's or even 40's will get you a better deal plus peace of mind all along the way. But at any age, it is now even easier to say, it is not too late to take action.
How do these products work? A stand alone long term care policy is straight forward. You pay an annual premium and when needed, funds are made available to pay for long term care, typically based on a daily or monthly allotment. Combined or linked products allow tax breaks for individuals when they access funds from first the accumulated value of their annuity or insurance policy and then their built-in extended benefits.
An advantage of paying for long term care expenses through a combined product as is that it offers a "use it or use it" solution instead of a "use it or lose it" policy. A combo product will always get used either as a life insurance policy with death benefits or an annuity with payouts.
However, there has to be enough accumulated value in the policy in order to withdraw the funds in the first place. That is to say, unless there are accumulated assets worth about $100,000 these policies will not work as intended and will therefore be inappropriate for some individuals. Stand alone long term care insurance will be a better option in those instances.
In addition, existing life insurance policies and annuities can be converted into a new combo product. This will give the consumer the same type of policy they now have with the additional benefit of long term care benefits. This is especially true of anyone with a long standing policy that has built up a significant amount of cash value since they may not need to make any additional premium payments to fund long term care expenses.
Something to think about… as always, consult with a professional insurance advisor since these decisions can get quite complicated and if handled properly should also complement your entire financial portfolio.
Contact us today for more information to determine if these new options are suitable to you.
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