The alternative to traditional LTCI: self insure while shifting your riskArticle added by Barry Goldwater on November 14, 2013

Barry Goldwater

newton , MA

Joined: January 10, 2007

The way we think about our health is extremely interesting due to the enormous amount of denial involved. There is a very large pod of people who practice some of the unhealthiest lifestyles and who believe nothing adverse will affect their health moving forward. This is why greater than half the population is overweight and many of them detrimentally so, even though there is evidence reported every week that asserts that practically every disease can be controlled by weight loss and healthy eating.

For some reason, our behavior is irrational; we have the facts available to support longer life if we change our behavior, but as we all know, change is extremely difficult.

Regardless of the facts-versus-denial argument, there is a very unique way to address our clients' concerns and complaints about the premium to cover the risk of a long-term care event that may never be needed. Denial about future health possibilities is very real, and one solution that specifically addresses this planning objection is found in a product called hybrid life long-term care insurance.

When designed properly, hybrid life/LTC seamlessly morphs into long-term care insurance liquidity, meaning the life insurance contract will pay for medical services not covered properly by health insurance contracts. If care is not needed in this lifetime, the premium refund of all contributions comes back in the form of a tax-free death benefit to the beneficiaries.

Lastly, because there are no surrender charges attached to the premium contribution and the insured can get 100 percent of their initial contribution back at any time in their lifetime (after a waiting period of a few years with some companies), we can say that this contribution is part of the self insuring pool of money that the insured has dedicated to cover a future long-term care event. To be clear, hybrid life/LTC insurance addresses four distinct areas of concern, complaint and objection. This is for the people who are currently self insuring long-term care risk because:
  • Nothing will happen to me later, because I feel so good now.

  • I am throwing my premiums down the toilet because I will never need this.

  • I am losing investment income on premiums paid.

  • I don't want to create surrender charges on money that is now liquid.
Here is an example of a recent planning case using the concept of self insuring and yet transferring the risk that addresses all of these concerns.
    Husband and wife: ages 65 and 64.

    Self insuring pool of money available (liquid net worth, IRAs, 401(k)s, etc.): $4 million

    One-time contribution for the husband to the hybrid: $250,000

    One-time contribution for the wife to the hybrid: $200,000 (He is older, so his contribution is a little larger).

    Asset protection liquidity for a long term care event: $ 1.9 million combined.

    Initial life insurance benefit: $1.1 million combined

    Level life insurance benefit: $635,000

    $450,000 is to be managed by the insurance company.

    $3.55 million remains in current investment position.

    Total assets available to insured: $4 million without surrender charge, just like before.
If a long-term care event occurs for the husband at age 75, the $250,000 he moved to the insurance company turns into $991,000 of potential benefit liquidity for his care. If this event occurred in the 10th year of this hybrid contract, his internal rate of return (IRR) on his original $250,000 insurance premium is 11.8 percent. If he triggers in year 15, his IRR is 8.3 percent. If he triggers in 20 years, his IRR is 6.3 percent.

Rate of return is calculated by figuring how long money has been used, total benefits available and initial contribution. These rates of return are all acceptable and solid in some years, exceptional in other years.

The rate of return of a hybrid life policy is the inverse of growth investing. It is not how much one can earn on the initial contribution; it is what one earns from the benefits derived.

If the husband dies in the 10th year of this contract, his family gets $410,000 tax free and the IRR on the death benefit is 5.1 percent. If he dies in year 15, it is 2.6 percent. His family always gets back their original contribution and more because of the life insurance benefit and, because of this, he has self insured his premium risk.

In summary, for those who believe in self insuring their long-term care risk for whatever reason, the investment value of the original premium to transfer this risk to an insurance company is realized when the contributor needs care not calculated on an annual return basis. Because there are short-term surrender charges associated with the premium, it can be argued that the premium is still included in a client's net worth and always available for use.

And because there is always a return of original premium in life or death, it can be argued that the insured has entered into a form of self insurance for future long-term care disability. If this couple become disabled, their benefit for care is significantly higher than their original premium and, in some cases, much higher than benefits derived from individual long-term care contracts. In this way, they have transferred their risk of asset depletion to an insurance company.

This solution may be a much smarter way to cover the future possibility of a long-term disability. No one can predict life’s uncertainties.
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