Long Term Care University – Question of the Month – 10/15/17
By Aaron Skloff, AIF, CFA, MBA
Q: We read the Long Term Care University article that compares Traditional to Combination Life and Long Term Care (LTC) Insurance and prefer the Combination policy (or Hybrid). Can you please review the State Life Asset-Care III Combination Life and LTC policy?
Overview. State Life Insurance Company Group is part of OneAmerica, an A.M. Best A+ rated, 140-year-old company. The State Life Asset-Care I (1) policy is a Combination Life and Long Term Care Insurance (also called hybrid or asset based) policy funded with after-tax dollars. The State Life Asset Care III (3) is a Combination Life and Long Term Care Insurance policy funded with pre-tax and after-tax dollars.
With Traditional LTC policies, premiums can be increased and you may not receive any benefits if you do not need LTC. With Combination LTC policies the benefits and premiums are guaranteed. The insurance company either: 1) pays you if you need LTC, 2) pays your heirs if you do not need LTC, 3) pays you and your heirs if you need a modest amount of LTC or 4) pays you a refund if you cancel the policy.
State Life Asset-Care III is Unique Because It Can be Paid with Retirement Account Funds and Provides Lifetime Benefits. For many savers, their largest asset is their retirement account. State Life Asset Care III allows you to rollover a portion of your retirement account, such as an IRA or 401(k), to an IRA deferred annuity. Then, from that IRA annuity a withdrawal is taken annually to fund a 20-pay Combination Life and Long Term Care policy. These annual withdrawals defer taxes and still meet your Required Minimum Distributions (RMDs). Asset Care III can insure you and your partner using just one of your retirement accounts. You can also purchase a Lifetime benefit rider.
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One of the largest long term care insurance companies reported that 50% of all claims dollars it has paid are due to dementia, including Alzheimer’s disease. According to the Alzheimer’s Association, 1 in 9 people ages 65 and older and about 1 in 3 people ages 85 and older have Alzheimer’s disease. The duration of Alzheimer’s disease is generally 4-8 years after a diagnosis, but can last as long as 20 years. Most companies mitigate their risks and increase consumers’ risks by limiting coverage to a maximum of six or seven years of care. State Life Asset-Care III offers lifetime benefits with an unlimited number of years of care and an unlimited dollar amount of total LTC benefits.
State Life Asset-Care III Policy Options for Singles or Partners. The policy options include: Benefit periods of 25 months to lifetime (unlimited number of years); Inflation protection of none or compound: 2%, 3%, 4% and 5% compound; Elimination period of 30 days and 60 days; Return of premium; Use of qualified funds (pre-tax retirement accounts: IRA,401(k)) and after-tax funds; Second to die death benefit.
Numbers Speak Louder than Words. Let’s look at a husband and wife that are each 60 years of age. He waits until he is 60 years old to buy his policy that covers both he and his wife. If purchased before age 59 ½, he could be subject to tax penalties. He transfers $64,271 from his pre-tax Traditional IRA on a tax-free basis for the base portion of the policy (first 25 months of LTC) and pays $35,729 after-tax for the continuation portion of the policy (Lifetime of LTC after the first 25 months of care) – for a combined $100,000 premium. With this combined one-time premium payment, they immediately gain a combined tax free $10,014 per month LTC benefit ($5,007 per month, per person) available for an unlimited number of months for LTC costs; literally a lifetime worth of LTC. They also gain a combined tax free $125,199 death benefit when the second person dies, if the policy’s LTC benefits are unused. Please see the chart below.
In 20 years when they are likely to need LTC at the age of 80, they will have a tax free $8,876 per month LTC benefit ($4,438 per month, per person) available for the first 25 months of LTC costs. Then they will have a tax free $10,014 per month LTC benefit ($5,007 per month, per person) available for or an unlimited number of months for LTC costs; literally a lifetime worth of LTC. They also have a combined tax free $110,955 death benefit when the second person dies, if the policy’s LTC benefits are unused. Please see the chart below.
Action Steps and Conclusions. State Life Asset-Care III provides lifetime benefits LTC benefits by using funds from a pre-tax retirement account and after-tax dollars. Since premiums vary greatly based on age, health and marital status, request individualized quotes.
Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA) charter holder, Master of Business Administration (MBA), is the Chief Executive Officer of Skloff Financial Group, a Registered Investment Advisory firm. The firm specializes in financial planning and investment management services for high net worth individuals and benefits for small to middle sized companies. He can be contacted at www.skloff.com or 908-464-3060.