Old versus New Insurance

Transcription

1 Old versus New Insurance A Discussion of Chronic/LTC Riders Available Now Mike Pinkans, CFA, CFP Executive Vice President & CMO

2 Life Insurance How many thought about the life insurance you own when you woke up this morning? What about buying additional coverage? Not top-of-mind Viewed strictly as an expense maybe a necessary evil. Procrastination Avoiding unpleasant thoughts What s in it for me?

3 Life Insurance Statistics 85% of consumers agree that most people need life insurance, yet just 62% say they have it. 1 44% of U.S. households had life insurance in year low. In 1960, 72% of Americans owned individual life insurance. 2 40% of Americans who have coverage don t think they have enough LIMRA s Life Insurance Barometer Study LIMRA s Trends in Life Insurance Ownership study 3. Genworth LifeJacket Study 2011

4 Why Aren t Individuals Buying More Coverage? Many Americans overestimate the cost of life insurance 83% say they don t purchase because it s too expensive, believing it costs 3 times the actual price. Perceived annual cost - $400 Male, Age 30, $250,000 level term Actual annual cost - $ % fail a basic 10-question life insurance IQ test LIMRA

5 Other Reasons What s in it for me?

6 Changing the Conversation Do you have the old or new type of life insurance? Either way, they are interested. What is the new insurance?

7 Old Insurance Most life insurance sold has been Focused on the years prior to retirement Paying off a mortgage Cost of college Income replacement Contracts sold Term Guaranteed Universal Life (GUL) Focus on premature death

8 Old Insurance As clients get closer to retirement though, these three big risks get smaller.

9 Shifting of Conversation Focus on client s longevity and their needs. What is in it for them.

10 Priority Shift Retirement risks: Reduced Social Security Income Health care costs Financial risks These three risks increase during the retirement years.

11 Risk Protection Spectrum 3 other big risks get larger over time. How can you protect against both sets of risks? $ $ Years Prior to Retirement Retirement Years

12 New Insurance Contracts that protect against both sets of risks: Death benefit protection plus, Acceleration for LTC/Chronic Illness and Critical Illness needs Access to tax-free cash value distributions Access to death benefits for advanced age

13 Healthcare in Retirement

14 Cost of Healthcare in Retirement

15 LTC/Chronic Illness Acceleration Coverage Options Traditional LTC Partnership Programs Hurdles have been: Unknown cost Use it or lose it mentality Life Insurance with LTC/Chronic Illness Riders Linked Benefit combining Life and LTC Single pay or short pay Hurdle has been: Lump sum or significant premium needed (even on a 10-pay)

16 LTC/Chronic Illness Acceleration The Basics/Issues Triggers 6 Activities of Daily Living (ADL s) Severe Cognitive Impairment Taxation of Benefits Generally Tax-Free Indemnity versus Reimbursement Underwriting Streamlined or Full Licensing Training/comfort level of producers who are not health experts

17 What Is It? A Long-Term Care Rider Is an accelerated death benefit available at issue with certain individual permanent life insurance products. Provides a benefit you can use for your lifetime, and is a versatile way to pay for some of expenses associated with long-term care. May advance all or a portion of a policy s death benefit through monthly benefit payments that can help pay for qualified long-term care services. Physician must certify that the insured is chronically ill and otherwise qualifies under the rider.

18 Long-Term Care Riders Life Insurance/LTC linked products One pool of money covers LTC benefits or death benefit Tax rules allow for these type of tax free exchanges From a policy without a rider to new policy with a rider Any unused benefit is paid to beneficiary as a death benefit nothing left on the table Residual death benefit may also be offered

19 If You Don't Use It, You Don t Lose It With a Long-Term Care/Chronic Illness Rider: There is NO requirement to use 100% of unused benefit passed to beneficiaries upon death If you decide to add the Long-Term Care/Chronic Illness Rider to your life insurance policy and don t receive payments under the rider, the policy s entire death benefit will pass to your beneficiaries when you die. In other words, if you do not use your long-term care protection, but you have paid the rider charge for the option to accelerate the death benefit, the death benefit will pass to your beneficiaries when you die.

20 Long-Term Care/ Chronic Illness Riders Insured LTC benefits are addressed in two basic methods Reimbursement Approach Status of the insured PLUS actual bills or receipts required Benefit amounts limited to actual receipted expenses Benefits amounts paid directly to service provider or insured party Indemnity Approach Status of the insured ALONE triggers benefit payment Benefit amount based on policy limits alone Benefit paid to the policy owner

21 Long-Term Care/ Chronic Illness Riders Indemnity vs. Reimbursement Benefits Reimbursement Reimburses the actual cost of care up to the benefit limit. Some require receipts to be submitted Some will allow facility to bill insurance company direct Not all charges on bill may qualify for reimbursement Benefit not limited to HIPAA 2014 HIPPA limit $330/day or $120,450/year

22 Long-Term Care Riders Indemnity vs. Reimbursement Benefits Indemnity Pays benefit directly to contract owner No bills or receipts to submit Plan of care and accreditation usually required Excess benefits can be used for other purposes Benefit may be limited by a tie in to HIPAA

23 Long-Term Care Riders Classification of Riders Qualified Riders covered by IRC 7702B and 101(g) vs. 101(g) only riders Riders classified as qualified under IRC 7702B and covered by IRC 101(g) Can be marketed as and considered a qualified long-term care product Cover temporary claim conditions as well as permanent 101(g) only riders, require chronic illness Generally needs to be a permanent claim

24 Sample LTC Rider Illustration Insured: Female age 60, Elite Preferred, Using 2% Acceleration Potential Monthly Benefit: $40,000 Premium: $33,000 Potential Annual Benefit: $480,000 Potential Cumulative Benefit: $2 million Year Gross Death Benefit Policy Account Value LTCSR Annual Pool Maximum Annual HIPAA Amount Max Annual Policy LTCSR Benefit 1 $2,000,000 $13,272 $480,000 $120,450 $240,900 5 $2,000,000 $65,944 $480,000 $120,450 $240, $2,000,000 $141,455 $480,000 $120,450 $240, $2,000,000 $270,374 $480,000 $120,450 $240, $2,000,000 $404,303 $480,000 $120,450 $240,900 This is a supplemental illustration and must be read in conjunction with the basic illustration. The basic illustration contains values using the same underwriting assumptions as this supplemental at both guaranteed charges and guaranteed interest rates and contains other important information. The values represented here are for $2 million policy on a 60 year old female elite preferred non-smoker. The values represented are non guaranteed and assume current charges and a current indexed interest rate of 5.54%. If the client was to receive a guaranteed rate of return and maximum charges are assessed in the policy, the policy would terminate in year 16. Please refer to the basic illustration for more information. Life expectancy for a female age 60, using the CSO 2001 Table is 26 years.

25 ILITS and Long-Term Care Riders How do they access the trust values? The trustee has the discretion to take loans and withdrawals from the life policy that then can be distributed to the trust beneficiaries. Either spouse can receive loans from the trust Family assets can be sold to the trust to pull cash out of the trust Appreciation out of the estate, still pass to family

26 ILITS and Long-Term Care Riders How do they access the trust values? LTC accumulations can be distributed to the trust beneficiaries who can gift or loan values to the insured and the insured s spouse. In practice, this approach can be very flexible. Could also be established under a SLAT as well. If set up under an ILIT other than a SLAT, can be used with divorced or widowed estate owners as well or where marital stability is a concern.

27 Tax Considerations Pension Protection Act 2006 Redefined tax treatment of LTC riders on life insurance (and annuities) LTC riders on life insurance changes LTC benefit can remain tax free LTC rider on MEC policies no longer includable as income LTC riders charges do still reduce cost basis (but not below zero) LTC rider charges on MEC policies can no longer be deducted as medical expense

28 Long-Term Care Riders Linked with life insurance policies Offer a viable and effective planning option Can provide a Tax effective option Values can be available to 3rd parties, trusts and businesses Can assure values are not lost if not used

29 Next Steps Perform an insurance policy review Has the contract perform as expected? Will the premiums change? Will the death benefit be there when expected? Does cash value build up in the contract? Can the death benefit be accessed early? What sort of acceleration is available for Terminal, Chronic, Critical Illness protection? Read over the white paper on Chronic/LTC Riders

30 Old versus New Insurance Questions? Mike Pinkans, CFA, CFP x 6134