Powering Up Those Premium Dollars

The versatility of linked-benefit solutions

Image courtesy Kurtis Garbutt

by Douglas R. Burkle and Aaron Ball

Managing risk is an important part of a sound financial strategy, both in terms of helping clients preserve the assets they’ve accumulated and protecting the legacy they plan to leave to loved ones. In today’s world, two important tools for managing this risk are long term care insurance and life insurance, which historically had to be purchased via two separate insurance policies. Today, a single product can provide protection for both of these risks, providing more flexibility and tailor-made solutions. The response to linking these two products into a single product with dual purposes has been tremendous. In 2008, policies offering a combination of life and long term care coverage generated $632 million in gross premiums. By 2013, that number more than quadrupled to $2.64 billion .

Back to Basics

To fully understand the power of linked benefits solutions, it is essential to understand the purpose and function of stand-alone life and long term care insurance. Both of these products are part of a sound retirement plan, but each has features the other does not. Traditional life insurance provides a death benefit, but is not designed to address living benefits for a long term care event. Traditional long term care insurance addresses these care events, but it does not provide a meaningful death benefit, thereby not providing a monetary value for policyowners who stay healthy and do not file a long term care claim. Enter – the linked benefits solution.

Linked benefits products provide a convenient way for consumers to purchase both life and long term care insurance protection in a single policy. They are most frequently purchased with a lump sum premium that immediately creates a death benefit for beneficiaries and a pool of benefits to pay for covered long term care needs, while also having a policy value that accumulates at a specific interest rate. What we’ve developed, for example, is a universal life insurance policy that also offers long-term care benefits. So, if the long term care services are never needed, beneficiaries will receive a generally income tax-free death benefit that is on average two times their initial premium. Conversely, if long term care needs require the use of some or all of the long term care pool of benefits, a minimum death benefit is still guaranteed. Finally, this cocept can offer an optional Return of Premium Rider that guarantees a policy can be surrendered at any time after the second policy year — for any reason — and the policyowner will be refunded 100% of his or her initial premium.

More Bang for Your Buck

Beyond the flexibility that linked benefits solutions provide, the key advantage of these products lies in the long term care leverage provided with the Extension of Benefits Rider (EBR). With linked benefits, the Accelerated Benefit Rider (ABR) is used to pay for long term care expenses by paying down the policy’s specified amount first. After the specified amount and ABR benefits are depleted, the EBR kicks in to extend the long term care benefits beyond the policy’s specified amount. The ABR combined with the EBR can provide a significant amount of leverage for the premium paid. Therefore, policyowners on average can get a 6:1 long term care coverage ratio to the initial premium paid.

To illustrate the long term care leverage of this type of product, let’s look at Helen as a hypothetical example. Helen is in good health, has been married for 30 years and she and her husband have two children. After 25 years, she retired with over $300,000 of available assets. Helen purchased a linked-benefits policy at age 60 and was able to leverage her $100,000 initial premium over 6 times for a total of $711,606 in total long term care benefits and more than 2 times for a total of $237,202 as a death benefit. A standard universal life policy would provide a death benefit to a beneficiary, but would not offer a living benefit that helps protect an insured’s assets from a long term care event.

Additionally, policyowners with one or more life insurance policies may want to explore opportunities via 1035 exchanges. As retirement nears, the benefits of the existing policies may be better served to use with a policy that provides both death benefits and leverage if a long term care event occurs. Frequently, we will see that the new policy will provide almost as much death benefit as the old policy(s) and also provide all the long term care benefits that didn’t exist in the old policy(s). A 1035 exchange allows a policyowner to take what they’ve accumulated in cash surrender value from each policy and consolidate it into one linked benefits policy. This transfer is tax-free.

Summing it Up

As linked benefits solutions continue gaining favor, it’s increasingly important for both advisors and clients to fully understand these options and the various benefits they can provide. The flexibility of these solutions addresses the “what if I never use it” objection that often comes with certain insurance purchases, such as long term care insurance, because policyowners will have coverage regardless of what the future holds. Their life is covered with the policy’s death benefit; their care is covered with the long term care benefits; and their decision is covered with the return of premium rider. Keeping in mind that these products are built for the uncertainty the future may bring, advisors will be equipped to have meaningful discussions with clients about the expanding, increasingly complex, product universe.