Combination Plans in Long-Term-Care Insurance
Are there any benefits?
October 19, 2009
Will the Pension Protection Act of 2006 (PPA) help insurance companies broaden the market for long-term-care (LTC) insurance? The PPA changed, for the better, the income tax treatment of combination plans (life insurance and annuity contracts that include an optional LTC insurance rider) beginning in 2010.
Insurance companies are betting that the tax law change will translate into renewed interest in LTC insurance and in particular, combination plans. Combination plans, unlike the older standalone plans, can be better tailored to meet the needs of different market segments. Older buyers may prefer annuity/LTC plans, while younger buyers who still have a need for life insurance may prefer life/LTC plans.
My last article divulged the basic structure of combination plans was introduced followed by a discussion of the changes to the tax treatment of these plans. This article reveals the nontax benefits and what issues to consider when determining if a combination plan makes sense for your client.
Combination plans are not new. They appeal to consumers for a number of nontax reasons, including potentially lower premium cost and less restrictive and simpler underwriting standards.
Combination plans are able to offer lower premiums and less restrictive underwriting for a number of reasons including:
For clients concerned about LTC costs but unwilling to consider a standalone policy, the combination plan may be preferred. Should they never file a claim, the contract may be annuitized or paid out in a lump sum. At death, the annuity value may be bequeathed. For clients who may already be self-funding for LTC costs, they can take advantage of tax-deferred growth by shifting the funds — which cannot come from an IRA or other tax favored retirement plans — to a combination plan.
Combination plans have been introduced on a variety of platforms — from simple term and whole life insurance plans to universal and variable life products, to deferred and immediate annuities. The riders themselves vary in the features offered.
When comparing products for a client, note differences among the following features:
This list is by no means exhaustive and will change as new products appear on the market. According to Carl Friedrich, a principal at the international actuarial firm, Milliman, Inc. and leading expert on the design of combination plans, the variety of new products continues to expand and many more are on the drawing boards.
Does a Combination Plan Make Sense for Your Client?
A combination plan may make sense if your client:
For clients, combination plans offer a viable alternative to standalone LTC plans. A combination plan, however, may only provide a partial solution to a client’s LTC insurance coverage needs. The client should clearly understand the extent of the coverage provided and decide whether it provides the level of protection desired.
Friedrich notes that the coming changes offer opportunities as well as threats to insurance companies. While the opportunity to expand their line of business with combination plans is clear, the new 1035 exchange rules make insurance companies vulnerable to losing business as customers move existing life and annuity policies to combination plans offered by competitors. LTC carriers will also see encroachment by life and annuity carriers into their line of business.
As insurance companies create new and more complex combination plans CPAs must be prepared to provide guidance to their clients.
James Sullivan, CPA, PFS, MAS, is an investment counselor at Core Capital Solutions LLC. He has almost 25 years of experience in individual tax, investing and personal financial planning. Before joining Core Capital Solutions, Sullivan spent 20 years at Arthur Andersen LLP. He is a member of the AICPA PrimePlus/ElderCare Task Force. Brian Gordon, CLTC, is president of MAGA, Ltd. Established in 1975, MAGA is a family owned and operated insurance agency that focuses exclusively on Long-Term-Care Insurance with offices in Illinois, California and Arizona.