The way we think about our health is extremely interesting in a denial sort of way. 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 in 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 behavior, but as we all know, change is extremely difficult.
Regardless of the facts vs. 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 Insurance”. When designed properly, hybrid life 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, the premium refund of all contributions comes back in the form of a tax free death benefit to beneficiaries. Lastly, because there are no surrender charges attached to the premium contribution and the insured can get 100% of their initial contribution back at any time in their lifetime, we can make the analogy that this contribution is part of the self insuring pool of money that the insured has dedicated to cover a long term care event. To be clear, hybrid life insurance addresses four distinct areas of concern, complaint and objection for many clients who are currently self insuring the long term care risk, namely;
- Nothing will happen to me because I feel so good now, it is not possible.
- I am throwing my premiums down the toilet because I will never need this.
- I am losing investment income on premiums paid.
- Why 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 which addresses all of these concerns.
- Husband and Wife ages 65 and 64 respectively
- Self insuring pool of money available (liquid net worth, IRAs, 401k’s etc.): $4 million
- One time contribution for the Husband to the Hybrid; $250K, for the wife $200K. He is older, his contribution is a little larger
- Asset protection liquidity for a long term care event: $1.9 million combined
- Initial Life Insurance Benefit: $1,100,000 Combined
- Level Life Insurance Benefit: $635,000 Ultimate
- $450,000 is to be managed by the insurance company
- $3.55 million remains in current management position
- Total assets available to insured, $4 million without surrender charge, just like before
If a long term event occurs for husband at age 75, the $250K 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 procuring this hybrid contract, his internal rate of return on his original $250K insurance premium is 11.8%, if he triggers in year 15, his IRR is 8.3%, if he triggers in 20 years, his IRR is 6.3%. 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 $410K tax free, the IRR on the death benefit is 5.1%, if he dies in year 15, it is 2.6%. 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 people 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 and not calculated on an annual return basis. Because there is never a surrender charge associated with the premium, it can be argued that the premium is still includable in a clients 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 becomes 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.
About the Author: Barry Goldwater is Principal at Goldwater Financial Group, an insurance consulting firm since 1985. He works with business owners, retirees and advisors designing tax efficient solutions that make sense and are easy to implement. He can be reached at firstname.lastname@example.org or 617-527-9736.
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