Get Tax Advantaged Long-Term Care with a Linked-Benefit Policy

By on April 4, 2018

Long-term care planning is more than a discussion with your spouse or children about who will be a caregiver when you can no longer care for yourself and which assets you will liquidate first to pay for professional care costs. Like your retirement plans, long-term care planning is about setting your desired care lifestyle and determining how you will fund the expense without going broke.

Medicare will only pay for select short-term care and Medicaid is only available to the truly impoverished. And while individual or group long-term care insurance is one way to pay for care expenses, policies can be expensive or unavailable to those with disqualifying health conditions. There are now new options for funding long-term care through hybrid or so called linked-benefit policies which combine long-term care benefits with life insurance or annuity products.

The Linked-Benefit Policy

Since fully enacted in 2010, the Pension Protection Act (PPA) offers new tax benefits for long-term care combinations plans tied to a qualified life insurance or fixed annuity contract. Under the PPA, a linked-benefit policy would allow tax-free distribution of life insurance or annuity cash value to pay for long-term car.

Two forms of valuable protection in one easy policy can keep you or your loved ones from shouldering the financial and emotional burden of care or loss, letting you build a legacy for their future. So if you have not updated or established a long-term care plan in the last two years, now is the time to explore these new ways to fund your care.

Protect the Money You Invested to Pay for Care

Many people avoid buying long-term care insurance since the money they pay in premiums could be lost if they never end up needing care services before their passing — use it or lose it — all those premiums, paid to the insurance company, gone. The primary advantage of these linked-benefit products is that the policyholder will get some benefit from their premiums even if he or she does not eventually need long-term care.

For their premium investment, linked-benefit policyholders will get tax free distributions to pay for LTC services (or paid directly) just as they would with a stand-alone long-term care insurance policy. However, if the hybrid life insurance policyholder does not use (some or all) of the long-term care benefit they will still have a tax free death benefit. And if the hybrid annuity holder does not need long-term care they still have a fixed annuity.

Life Insurance Linked-Benefit Policy for LTC

Life insurance provides a death benefit to your spouse, children or other beneficiaries to pay for final arrangements, debts, fund their future, etc.. A life insurance and LTC combination plan allows the policyholder to use as much of their death benefit as needed to pay for qualifying long-term care costs. Any portion of your death benefit not used for long-term care will go to your beneficiaries as a death benefit.

Just as with other insurance products, coverage will vary based on your lump sum premium payment, benefit choices, distribution rates, and other variables. You will want to shop around and compare policies under the guidance of your trusted financial advisor.

For example, say you buy a hybrid life insurance policy with LTC benefits and later need to use the policy to pay for in-home care. The insurer would distribute a fixed percentage of the policy’s face value each month, typically this is around 2 to 4 percent. A policy with a $100,000 death benefit could pay out as much as $2,000 to $4,000 a month.

In some case, these policies can leverage the policy up to three times the cash value for qualifying long-term care expenses; turning that $100,000 into $300,000. And if need be, these policies may also be sold to help pay for long-term care (life settlement option). Be sure to craft and review your life insurance linked-benefit plan thoroughly so you understand all surrender charges or tax implications if you lapse on the policy.

Annuities and Long-Term Care Benefits

Fixed annuities linked to long-term care plan provides the annuitant with a fixed income, long-term care coverage or both. Individuals can use the proceeds from qualified annuities tax-free to pay for long-term care insurance benefits.

Before the PPA was enacted in 2010, annuity holders had to spend down the taxable gains of the annuity before the principal could be tapped tax-free. Under the new provisions, annuitants can pay directly for long-term care insurance premiums without owing taxes. These transfers can also help reduce the owners taxable income when they decide to cash out the annuity.

Linked-benefit annuities are purchased with a lump sum payment and can be leveraged up to two or three times the amount of long-term care benefits. A $100,000 linked-benefit annuity might be able to purchase up to $300,000 in long-term care insurance over a 3 to 10 year term. If the annuitant uses the coverage, the monthly disbursement is subtracted from the value of the annuity and coverage, but it is not taxed.

Save Money and Protect Your Future with Expert Advice

If you are in the market for long-term care insurance and have maxed out your retirement contributions for the year, explore the tax benefits of a linked-benefit LTC plan with your trusted financial advisor. These hybrid life insurance or annuity products may help policyholders afford care for their elder years, ensure a return on their premium investments whether they need care or not, and possibly free up extra cash to save for a child’s college tuition or business venture today.

Before you retire, make long-term care a part of your strong financial safety net. Ask your trusted financial advisor about new linked-benefit products which can ease the financial and emotional cost of care on your loved ones as well as save you money.

Before purchasing either a life insurance or annuity and long-term care hybrid product it is crucial that you shop around as products and prices vary, even among policies from the same insurance company. Purchase the product which best suits your needs and financial situation.

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