Wednesday, June 19, 2024
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Kip Kip Walker, JD, CLU

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JD, CLU, is the regional vice president, Midwest with Mutual Trust Life Solutions. He has more than 20 years of financial services experience specializing in sales training and development in the mutual funds, annuities and life insurance sectors. Walker is a featured speaker at many industry events and has written numerous articles on sales, marketing and product application. He holds a Juris Doctor degree, is a Chartered Life Underwriter, and is a MoneyTrax Circle of Wealth Master Mentor. Walker can be reached by telephone at 800-323-7320, ext. 5594. Email: WalkerK@mutualtrust.com.

Whole Life: The Foundation Of A Successful Plan For Retirement And Legacy

Most families are concerned about retirement and what they will leave behind for their loved ones when they are gone. Will they have enough income to maintain their standard of living in retirement? Will they have to work into their 70s to afford retirement? Will they ever be able to retire? Will they be able to leave something to their family or favorite charities? If you are helping families to navigate retirement and legacy, how can you help them feel more confident and worry less about their financial plan? More guarantees! Adding whole life insurance to a retirement plan can reduce your clients’ risk of outliving their retirement income, while providing a higher standard of living in retirement and ensuring they will leave a legacy for their loved ones and/or favorite charity. Whole life insurance has some of the strongest guarantees in the life insurance industry. Guaranteed premiums, guaranteed cash value growth, and guaranteed death benefits can provide a foundation on which to build a solid retirement and legacy plan. In this article we will discuss how the attributes of whole life insurance can help to achieve retirement success, address the limits of Social Security and dangers of market volatility, along with the threat of becoming disabled.

Social Security provides a supplement to retirement income, but it was not meant to stand alone. According to the National Institute on Retirement Security, full Social Security benefits replace about 40 percent of the typical retiree’s income. Therefore, many financial planners recommend what is known as the three-legged stool for retirement success. The three-legged stool consists of Social Security, a pension plan, and private savings. Unless you work for a government entity, you are unlikely to have access to an employer funded pension plan. For those families, private savings becomes even more important for retirement. Whole life insurance may be a great place to allocate some of those funds. The guaranteed cash value growth and non-guaranteed dividends in a whole life policy grow income-tax deferred, and can be accessed income-tax free. Whole life insurance cash values may be accessed prior to retirement age for any reason and without a penalty. Cash values in a whole life policy could be used to reduce the gap left by disappearing pension plans. Additionally, the current age to receive full retirement benefits is 67. Those who wish to retire a little earlier than full retirement could use whole life cash values to bridge the gap. Indexed universal life can serve as another option for an income-tax free retirement supplement. Both whole life insurance and IUL have the same advantages regarding income tax treatment. IUL provides the opportunity to capture higher cash value growth in the long run by tying the interest earned each year to a stock index like the S&P 500. The potentially higher returns in the long term could be used to provide a larger pool of cash value to bridge the gap between early retirement and full Social Security benefits and supplement retirement income. While there is room for both, whole life guarantees, and the resulting predictability, are what could make it a great foundation for a financial plan. IUL insurance is still tied to movements in the stock market. The guarantees in whole life insurance means the cash values are more predictable and consistent. These can be important qualities to provide a true buffer against market volatility. This buffer against volatility becomes increasingly important as your client approaches and enters retirement.

Many clients approaching or in retirement will continue to invest in volatile assets like stocks. You might have heard the investing rule of thumb that states that the percentage of a client’s retirement investment portfolio that should be invested in stocks equates to 100 minus their age. For example, 100 minus 55 years old means 45 percent of their investment portfolio is recommended to be invested in stocks. Many close to and in retirement continue to invest in stocks because they tend to produce higher returns over the long term than less risky assets like bonds, savings accounts, CDs, etc. Assets that are able to produce returns that potentially outpace inflation are a necessary part of many portfolios well into retirement to reduce the risk that a retiree will outlive their personal savings. However, when a client is close to or in retirement, they are susceptible to “sequence of returns risk.” This means a substantial decrease in the value of a client’s stock portfolio can dramatically impact or derail their retirement plans. Remember the “dot com bubble burst” in 2000 and the financial crisis in 2008? The market recovered in both cases, but it took time and delayed or derailed retirement for many Americans. Wade Pfau, Ph.D.,CFA is a professor of retirement income at The American College of Financial Services. He authored a white paper titled Integrating Whole Life Insurance into a Retirement Income Plan. In his paper, Dr. Pfau demonstrates how adding whole life insurance and income annuities to a retirement income plan can help retirees have a higher standard of living in retirement, leave a bigger legacy, and increase the likelihood their retirement savings will last a lifetime. Since whole life guaranteed cash values grow, regardless of movements in any other markets including stocks, whole life can help protect clients from sequence of returns risk. By taking a retirement income distribution from, or loan against, a whole life policy’s ever growing cash values, the more volatile assets like stocks can recover more quickly and support a higher income distribution throughout retirement. While sequence of returns risk is of great concern near and into retirement, the threat of becoming disabled is a life-long risk.

Life insurance can serve to replace an insured’s income if they die prematurely. However, we are more likely to become disabled for a period of time than we are to die. This is true every year of our working lives. According to the Social Security Administration, a worker between the ages of 20 and 67 has a 25 percent probability of becoming disabled. During the same period, the probability of a worker dying is 13 percent. The probability of becoming disabled during working years is about the same for men and women. The possibility of becoming disabled is an obvious threat to a successful retirement. Products like disability insurance are designed to replace the income lost during a disability. However, there may be additional costs associated with being disabled. According to the National Disability Institute, a family household containing an adult with a disability that limits their ability to work requires, on average, 28 percent more income to maintain the same standard of living as a similar household without a member with a disability. The living benefits of whole life insurance can help with those additional expenses. Living benefit riders on life insurance products have become more common and popular in recent years. The guarantees of whole life make these riders a reliable added benefit for no additional premium in some cases. The chronic illness rider generally allows an insured to accelerate the death benefit on their whole life policy if they are unable to do two of the six activities of daily living (feeding, bathing, transferring, dressing, toileting, and continence), or suffer severe cognitive impairment requiring substantial supervision. The critical illness rider provides an accelerated death benefit payment if certain health issues occur. Qualifying health issues may include certain types of cancer, heart attack, stroke, etc. The funds from these living benefits riders can be used to cover additional healthcare costs that can come with a disability and help to keep a client’s plans on track. But what about the whole life insurance itself? If whole life is used as the foundation of a successful retirement plan, isn’t it important to protect it from the possibility of the insured becoming disabled? Waiver of premium riders ensure that premiums for a whole life policy will continue to be paid if the insured is unable to work due to a disability. If the insured qualifies, the carrier will continue premium payments on the insured’s policy as if they were paying out of their own pocket. That means guaranteed cash values continue to grow and death benefits are maintained.

Adding whole life insurance to your clients’ retirement and legacy plans can help them feel more confident about having a successful retirement while leaving a bigger legacy. The guaranteed cash value growth provides a predictable source of income-tax-free distributions to potentially bridge the gap from an early retirement to full Social Security benefits. Whole life insurance can help to supplement income in retirement with income-tax-free distributions. These distributions can be taken when other volatile assets in a retiree’s portfolio, like stocks, have suffered a substantial downturn. This strategy can help those important, but volatile, assets recover more quickly and support a higher distribution rate of those assets throughout retirement. Whole life living benefits riders can provide an added source of funds in case of a disability. These funds can help to cover the higher costs of becoming disabled and keep a plan on track. Waiver of premium riders can protect the whole life policy itself by ensuring the premiums are paid if the insured loses their job due to a disability. The powerful guarantees and attributes of whole life insurance make every component of a retirement and legacy plan work better.

What Is The Infinite Banking Concept And Why Should You Consider Incorporating It Into Your Practice?

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If you have never considered implementing the Infinite Banking Concept (IBC) into your practice, now may be a good time to do it. Here’s an overview of the IBC, how it benefits your clients, and the impact it could have on your business.

The Infinite Banking Concept is a strategy that was popularized by R. Nelson Nash in his book, Becoming Your Own Banker®, published in 2000. Since the first edition of Nelson’s book, the Infinite Banking Concept has become a popular strategy with many financial advisors. IBC uses life insurance to take advantage of U.S. tax laws and life insurance contractual obligations to help clients reduce the effect of income taxes, pay less interest on debt, and redirect that interest to build wealth. The Infinite Banking Concept is a simple strategy, but it can be difficult for many advisors and clients to comprehend.

Using Participating Whole Life
The IBC is a strategy, but it is based on only one product. Nelson realized the unique qualities of participating whole life insurance that make it the best vehicle for the IBC. Participating whole life is a combination of guaranteed premium, guaranteed death benefit, and guaranteed cash value growth. No other financial product provides these guarantees. In addition, participating whole life companies are mutual companies, which means they are owned by their policyholders. Policyholders are the owners of a participating whole life carrier and share in the profits of the company. The guaranteed cash value growth plus dividends in a whole life policy accumulate and can be accessed on an income-tax-free basis.

Cash value is the primary focus in most IBC policies, so most IBC policies use a Paid-Up Additions (PUA) rider to help grow cash quickly inside the policy. PUAs can be thought of as single pay whole life policies because they are very cash rich and provide a relatively small amount of additional death benefit. A PUA by itself would be considered a Modified Endowment Contract (MEC), which is an IRS status that treats the cash value in a whole life policy as an investment and changes the tax treatment from FIFO to LIFO. This means that any withdrawals or loans of the cash value in a MEC policy will be treated as a taxable event to the extent there are gains in the policy above the cost basis. Because of the potential of becoming a MEC, it’s important to design an IBC policy with sufficient cash value to meet the client’s goals, but not with so much of it that the policy becomes a MEC. Typical IBC policies will have about 60 percent of the total premium directed to PUAs. The amount of premium to PUAs can be higher, though, with the addition of a term rider, which will increase the death benefit and maintain the non-MEC status. Once an IBC policy is established and accumulates sufficient cash value, the client can begin to take loans against the policy whenever needed to purchase anything they can’t afford to pay for in full with their monthly cash flow. This puts the client in a position to negotiate the best interest rates on loans.

Reducing Headwinds for Your Clients
The Infinite Banking Concept can help your clients reduce two big headwinds in their financial plan: Taxes and interest. Many Americans use alternative financial vehicles to accumulate some of their retirement nest egg. They could be safe, but they may also be taxable. Clients often need to report the interest they earn and pay taxes on it to the IRS every year. While the client’s wealth is growing in these alternative accounts, it could be eroding by a growing tax bill. Not only is the client losing money to taxes, but he or she is losing the opportunity to earn interest on those tax dollars. As previously discussed, cash value grows income-tax-free within a properly structured whole life policy. As a result, IBC clients can reduce their tax burden and earn more interest on the additional savings.

Another financial headwind is debt. As Nelson explains in his book, Americans pay 34.5 cents of every dollar to interest on debt. Meanwhile, we have been trained to focus on getting a higher rate of return on our investments. However, there is much more to be gained by reducing interest payments on debt than by chasing higher rates of return. The sheer volume of interest being paid makes it difficult for many to save money to invest. According to the Bureau of Economic Analysis, the personal savings rate of the average American is five percent. We can help our clients increase their savings rate by showing them how to “become their own bank” using whole life insurance. Obviously, the client cannot use whole life to duplicate all of the aspects of owning a bank. For example, banks have the advantage of taking in other people’s money, paying them some interest, and lending those funds out to other people at a higher interest rate. IBC clients must fund their IBC policies with their own money. Further, banks take advantage of “fractional reserve banking.” According to http://Quickonomics.com, “Fractional reserve banking is a banking system in which banks only hold a fraction of the money their customers deposit as reserves. This allows them to use the rest of it to make loans and thereby essentially create new money.”

So while IBC clients cannot create new money, they do put themselves in a position to negotiate the best rates in the market. This is true because they have the cash value in their life insurance policy to use as collateral. Nelson equates this to owning a grocery store. The cash value in the policy is the inventory. If the IBC practitioner takes a loan at wholesale rates, i.e. the rate the insurance carrier charges, they are essentially stealing from their own store. So the “honest banker” should repay the loan against his or her policy at the “retail rate,” meaning the best alternative rate in the market had they not established their IBC policy. For example, if the best interest rate on a traditional personal loan from a bank is eight percent and the client can take a loan against his IBC policy at five percent, the client should take the loan against the policy and make payments equivalent to the eight percent interest rate the bank would have charged. In this case, the client is recouping the three percentage points that would have gone to the bank and redirecting it into his own personal economy to grow wealth.

There also are additional benefits in taking a loan against a whole life policy versus taking one from a bank. IBC policyowners are able to take loans against their policies simply by requesting the loan. No credit check is required. In addition, the loan doesn’t show up on a credit report and no scheduled repayment plan is required. It’s important to review the lending policies of the carrier to make sure the policyowner can take loans against a policy within an acceptable timeframe and as often as needed to meet the client’s objectives. It’s always best to pay off loans as quickly as possible, too, but the IBC client has the flexibility to determine how and when policy loan repayments are made. The Infinite Banking Concept can help your clients build wealth by reducing the burden of interest on debt and income taxes, but what can it do for your business?

Growing Your Business with the IBC
Infinite Banking using whole life insurance is a great opportunity to diversify your sources of revenue and organically grow your business. According to LIMRA, whole life insurance has increased premium market share over the last 11 consecutive years, growing from 22 percent in 2002 to 37 percent of all life premiums written in 2017. Whole life now represents the highest market share of premiums written in the U.S. During the same 11-year period, the combined market share of UL and IUL fell from 46 percent in 2011 to 36 percent in 2017. The market share of term insurance fell slightly from 22 percent in 2007 to 20 percent in 2017, and variable universal life dropped from 14 percent in 2007 to seven percent in 2017.

While all of these products serve a purpose for the right client and objective, according to Nelson Nash participating whole life insurance is the best product to use for the Infinite Banking Concept. This makes the IBC a great way to introduce whole life into your practice, start participating in the entire life market, and organically grow your business. In addition, according to the NAIC, whole life premiums per case tend to be higher than the average life sale. Due to the focus on building cash value, the typical IBC policy premium tends to be greater than the average whole life premium. I work with many top producing IBC practitioners and have found that the typical IBC case is about $6,000 in annual premium, although some cases are much larger. This means it doesn’t take a lot of IBC cases to move the needle on revenue for you.

The Infinite Banking Concept, while still a relatively unknown strategy, can help you bring added value to your new and existing clients by showing them how to reduce their interest and tax burden as well as diversify your business and provide a new source of organic growth for your practice.

Whole Life Is Always In Style Its Guarantees Keep It Evergreen

Some things never go out of style, and whole life insurance is one of them. At the end of the first quarter of this year, sales of whole life were up six percent. It now represents 37 percent of all life insurance sales in the U.S., surpassed only by UL–at 39 percent of market share–and the difference between the two continues to narrow. This is the eleventh consecutive year of growth for whole life, and it’s predicted that it’s heading for a twelfth.1

Why all the renewed interest in whole life insurance? Because it provides guarantees in an unpredictable world: Guaranteed premiums that will not increase for the life of the policy, a guaranteed death benefit, and guaranteed cash value that accumulates on a tax-deferred basis. What can this mean to your clients? Peace of mind. As long as they pay their premiums before the grace period ends, their coverage will never cost more nor be worth less than the day they purchased their policy, no matter what happens in the economy or in their lives. In fact, with whole life, the cash value of their policy continues to grow at a guaranteed rate for the life of the policy. What other products or services are guaranteed to never increase in price and not only hold their value, but increase in value over time?

In addition to the advantage of level premiums, whole life provides both guaranteed living and death benefits. This means your clients can borrow against the cash value in their policy throughout their lives, for any purpose, and in many cases without incurring income tax. Having liquidity, access and control of their money whenever they need it, provides clients financial flexibility. They can use the cash value in their policies for emergencies, unexpected opportunities, college planning, and even to create a stream of income to supplement their retirement.

With whole life, what your clients want to happen will happen—no matter what curves life throws their way. Whole life’s guaranteed death benefit can even enable them to spend down more of their assets during retirement and still provide a legacy to their loved ones. So even if they get sick and experience unexpected medical expenses, or inflation or taxes are higher than they anticipated and eat up some of their assets, their policy will still provide an income tax free death benefit to their loved ones–whether they die one day after the policy is issued or decades later. What other product can fulfill those promises?

With all these advantages, why aren’t more people rushing out and buying more and bigger policies? It’s probably safe to say that, in general, life insurance has an image problem. It appears complicated to many people and the cost is often overestimated. Say the words “life insurance” and many people conjure up images of death–a subject most people would prefer to avoid. According to LIMRA, life insurance falls into the nice to have category, while more often auto, homeowners, and health insurance are must haves.2 Life Happens seconds this dilemma: “More people protect their ‘things’ with insurance than protect their loved ones with life insurance.3

Additional reasons life insurance may sometimes be a challenging sale? For many people, there is no real urgency to buy. But statistics show the industry may be partly to blame. According to a recent survey, only five percent of consumers spoke with an agent or broker about life insurance during the past year. This suggests we may have to find new ways to engage and reach potential customers. And then there continues to be an issue of trust. Studies indicate that consumers consider the banking industry easier and more convenient to use and more likely to treat consumers fairly than either life companies or investment companies.2

Finally, there are the financial gurus that proliferate in the popular media who maintain that whole life’s guaranteed cash value provide a poor rate of return, and that if you need life insurance, buying term and investing the difference is the way to go. But the truth is, if your clients buy term insurance, they are paying for a death benefit their loved ones may never receive if they don’t die during the term of the policy. Once your clients reach the end of the term, the death benefit is gone and now, if they want to leave a legacy, it’s up to them to split the nest egg they’ve acquired into two parts—what they want to live on and what they want to leave their loved ones. This isn’t easy, especially if their investments have suffered losses or their living expenses are higher in retirement than they anticipated. 

Guarantees: A Buffer against Risk
Whole life offers more value than just a rate of return, because its guarantees provide a buffer against risk. Even if your client’s plans change over time, unlike other types of life insurance, the guaranteed cash value in a whole life policy provides an exit strategy that doesn’t require anyone to die to reap the benefits of the product. With whole life your clients can enjoy a variety of non-forfeiture options including cash surrender and reduced paid-up options.   

Although planning is certainly important in order to try to make dreams come true, none of us knows nor has control over the future. That’s how guarantees can help. Take for example taxes. Many believe that because income will be lower in retirement, income taxes will be lower too—but this isn’t always true. In fact taxes can actually be higher, especially once a person reaches age 70-1/2 and has to start taking required minimum distributions (RMDs) from their retirement accounts. In some cases RMDs can drag as much as 85 percent of a couple’s Social Security benefits into their tax return. In addition, while income taxes have recently been historically low, an improving economy and changes in the tax code could push them much higher in the future. And since many retired people have fewer items they can deduct on their taxes–because their mortgage is in many cases paid off and their children are grown–taxes could be a larger expense than your clients anticipate.

How can you combat risk? With guarantees.  And what better product to use than whole life insurance? After all, banks have been using it for this purpose for decades. They have a portion of their assets that they have to put in the safest investments available, Tier 1 Capital, so they often put the maximum amount allowable by law in life insurance. In fact, in the banking industry, high cash-value permanent life insurance is known as the bank’s bank.4 And if this wasn’t proof enough of the advantages of guarantees and whole life insurance, just look to some of the largest corporations, like Walmart, General Electric, Disney, Time Warner, Inc., and Johnson & Johnson. These companies fund their executive compensations and pensions with whole life insurance because they want guaranteed money to be available when they need it.4    

Why is whole life so safe? Because unlike banks, life insurance companies don’t use excessive leverage. If a bank has $1 million on deposit, it may lend out up to $10 million to the public. On the other hand, if a life insurance company has $1 million on deposit, that company may loan no more than $920,000, and usually only a fraction of that. As such, life insurers are 100 percent reserve based lenders, which makes them stable institutions in down economies.5

A Guarantee Is a Guarantee—Anything Else Is a Variable   
In “Optimizing Retirement Income by Combining Actuarial Science and Investments,” Wade D. Pfau, Ph.D., CFA, a professor of retirement income at The American College for Financial Services and principal and director for McLean Asset Management and Solutions, reports on a study he conducted on two couples, one in their 30s and the other in their 50s. He found that even with a conservative spending assumption, because investment portfolios don’t have guarantees they remain vulnerable to depletion. However, when an integrated approach with investments, whole life insurance and income annuities is taken, a more efficient retirement outcome is produced rather than relying on investments alone. His take away? That younger individuals planning for retirement and needing life insurance may see whole life as a tool for retirement income planning and that “buy term and invest the difference” is less effective when viewed in terms of the risk management needs of a retirement income plan.6

So why is whole life insurance always in style and gaining in market share? Because of its guarantees, which make it evergreen–independent of the economic climate or the uncertainties of life.

Footnotes:

  1. LIMRA 2nd Quarter 2017 Industry Briefing.
  2. “Life Insurance in a Tough Economy,” LIMRA, 2010.
  3. Your Love Study 2017, Life Happens.
  4. “The Banks Biggest Financial Secret Revealed,” Valhalla Wealth, 7/12/15.
  5. “The Case for Investing in Life Insurance,” Barry James Dyke.
  6. “Optimizing Retirement Income by Combining Actuarial Science and Investments,” Wade D. Pfau, Ph.D., CFA, 2014.

Whole Life For Living And Legacy

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When financial advisors discuss life insurance with their clients, the focus is usually on the death benefit as it should be. However, many times clients have little or no understanding of the features and benefits that certain types of life insurance contracts provide in helping to grow their estate and preserve their legacy. During their life, clients might need quick access to capital for an opportunity or emergency. What if the client becomes sick and needs nursing home or home based healthcare? Some types of permanent life insurance, like whole life, provide powerful benefits for the insured while he or she is living. The strong guarantees offered by whole life contracts can be very appealing to clients who are quite risk averse. Guaranteed cash value growth and a guaranteed death benefit are evidence of the great degree to which risk is shifted from the whole life policy owner to the whole life carrier. As such, this article focuses on the living benefits of using whole life insurance as a legacy and estate planning tool. In evaluating the living benefits of whole life insurance, we will discuss the estate building potential of cash value in a whole life contract, provisions related to skilled nursing care, and how the guaranteed benefits could enhance distributions from the insured’s retirement assets as well as his or her overall legacy. 

Access to Capital throughout Life
Access to capital can be an important part of building an estate. If an individual does not have access to capital when an investment or business opportunity arises, those opportunities could be lost. Also, there are different strategies for utilizing capital. Many clients do not realize that, all things being equal, paying interest on a loan costs the same as not earning interest on cash withdrawn from a savings account. For example, suppose client A and client B each need $10,000 to purchase new equipment for their small business. Client A withdraws the $10,000 from a savings account earning five percent interest. Client B takes a loan from a financial institution at five percent. Both client A and client B pay back the loan over five years. The cost for client A and client B is the same after five years. This is true because client A has lost five percent compounding interest over five years, and client B has paid five percent amortizing interest over five years. A third option is for client A to use the $10,000 in the savings account as collateral. This would allow the client’s savings to continue to compound at five percent uninterrupted during the loan repayment period, taking advantage of the power of compounding. 

Accumulating and collateralizing cash inside a life insurance contract has many advantages. Whole life insurance guarantees not only that a certain interest rate will be earned on the cash value in the policy, but that the cash value will continue to grow.  Other types of policies might offer a return of premium after a certain number of years, but these ROP provisions cannot be used as collateral and typically require a complete surrender of the policy jeopardizing the insured’s legacy. One of the biggest advantages to cash value relates to tax treatment. Cash value grows income tax deferred inside of a properly structured life insurance contract. Also, the cash value can be accessed income tax free when distributions or loans are done properly. Utilizing the cash value inside a whole life insurance contract as a source of capital can be a powerful strategy in helping to build an estate, but whole life insurance can also help to protect an estate from unexpected health issues. 

Healthcare Riders
One of the biggest risks to a client’s estate is the need for nursing home or in-home care for an extended period of time. Studies show 72 percent of Americans become impoverished after just one year of nursing home care.1 The average cost of a six-hour visit by a home health aide is $114 per day or $29,640 per year.2 The cost to stay in a nursing home averages about $80,000 per year for a semi-private room.3 Long term care, chronic and terminal illness riders are a relatively new feature of whole life contracts and can be an option to help protect an insured who is unwilling to pay for, or does not qualify for, long term care insurance. For example, client A knows that an individual is more likely to become disabled than die prior to age 65, but she is concerned that she will pay premiums for 10 years or more and receive no benefits from the LTCI policy.4

Some whole life contracts have long term care or chronic illness benefits linked to the base policy. Some of these riders require additional premium and provide a guaranteed amount of long term care benefit. Other healthcare riders, such as those called chronic illness riders, require no additional premium and provide an acceleration of the death benefit to help cover the cost of in-home or nursing home care. Typically, chronic illness riders require little or no underwriting, and are easier to qualify for than long term care riders. Details of these benefits are beyond the scope of this article and might not provide a complete solution for nursing home care. However, linked benefits can provide a measure of protection for those clients who do not qualify or are unwilling to pay LTCI premiums. Another source of funds for skilled nursing care might come from the client’s other retirement assets. Whole life insurance can provide clients with the freedom to maximize the distribution from other retirement accounts while still maintaining their legacy.

Term policies do a great job of protecting family members from the financial impact of losing an income-producing spouse. However, only about one percent of term policies ever pay out a death benefit.5 The guaranteed death benefit of a whole life contract ensures that clients will be able to leave a legacy to their children, grandchildren and other heirs. However, a whole life policy might also benefit the quality of the insured’s retirement. If the death benefit is large enough, the whole life policy allows the insured to spend down the retirement assets he has accumulated over his working years without fear of depriving loved ones of a legacy. Alternatively, whole life could be used strategically to increase the annual income of retirees while helping to preserve or even increase the legacy to their heirs. 

Advantage of Combining Products
According to the research of Dr. Wade Pfau, PhD, CPA, a higher income level and greater legacy are potentially achieved when investments, single life annuities and whole life insurance are combined than when applying investment-only solutions. Whole life insurance and annuity products, “which invest primarily in a fixed income portfolio, can better hedge a retiree’s personal income needs. By combining them, the overall planning horizon can essentially be fixed at something close to life expectancy, as whole life insurance provides a higher implied return when the realized lifetime is short, and income annuities provide a higher return when the realized lifetime is long.” Dr. Pfau’s research indicates the use of whole life insurance and single life annuities are a more effective way to use fixed income assets as a tool to reduce volatility in a portfolio.6

The primary purpose of whole life insurance is to provide a guaranteed death benefit to the insured’s chosen heirs. However, the power of whole life has the potential to enhance the size of the insured’s estate by providing efficient access to capital when opportunities arise. Whole life insurance could also protect the insured from the financial impact of the need for nursing care with healthcare related riders. Finally, whole life contracts, when used as an asset class, could improve the retirement income and legacy of the insured over the use of an investments-only retirement strategy. For these reasons and more, whole life can be a powerful solution for living and legacy.

Footnotes:

1. Harvard University Study in Compensation & Benefits Review

2. John Hancock Life & Health Insurance Company. “John Hancock 2013 Cost of Care Survey,” conducted by LifePlans, Inc., April 2013.

3. Genworth Insurance Company. “2015 Cost of Care Survey, Home Care Providers, Adult Day Health Care Facilities, Assisted Living Facilities and Nursing Homes,” 2015.  

4. American Society of Actuaries. 

5. Money-zine.com, “Term Life Insurance Policies.”

6. Dr. Wade Pfau, PhD, CPA. 2015 “Optimizing Retirement Income by Combining Actuarial Science and Investments.” 


Evaluating An Accelerated Benefit Chronic Illness Rider As An Alternative To Traditional LTCI

According to the LIMRA Secure Retirement Institute, (Secureretirementinstitute.com), people could live 30 years or more in retirement. While baby boomers approaching or in retirement can expect to enjoy their retirement longer, they also face greater incidents of chronic illness and the need for long term care. Approximately 70 percent of individuals turning 65 can expect to use some form of long term care.1  Long term care costs can substantially deplete or even wipe out a retiree’s assets. On rare occasions, a patient’s children have been held liable for a parent’s unpaid long term care bills.2

There are many insurance products and riders that can help protect a client’s nest egg from long term care expenses. They include traditional long term care insurance (LTCI), hybrid long term care, fixed and variable annuities with long term care, etc. In this article, I’ll compare the basic provisions of traditional LTCI and life insurance with accelerated death benefit for chronic illness riders. I’ll also discuss what types of clients may want to consider a chronic illness rider as a supplement or an alternative to traditional long term care solutions. 

LTCI has evolved since it was introduced about 30 years ago. It typically provides coverage for personal or custodial care, intermediate care, and skilled care in various settings including nursing homes and at-home care, adult day centers and assisted-living facilities. Benefits may be in the form of reimbursement of expenses, usually up to a limit, or payment of a defined amount. Insureds qualify for LTCI benefits through two criteria known as benefit triggers, but they are required to meet only one of the two triggers. The first trigger is the inability to do two of the six activities of daily living (ADLs) for a period of at least 90 days due to loss of functional capacity. The six ADLs are bathing, continence, dressing, eating, toileting, and transferring (moving in or out of a bed or chair). The second trigger is that substantial supervision is required due to cognitive impairment. Cognitive impairment refers to deficiencies in comprehension, judgment, memory and reasoning.3         

An accelerated benefit for chronic illness rider (chronic illness rider) cannot be called long term care insurance. Additionally, agents can sell the chronic illness rider without an LTCI license. Benefit triggers associated with the chronic illness rider are similar to those of traditional LTCI. The insured is certified by a licensed health care practitioner as unable to perform two ADLs or is suffering from severe cognitive impairment. A physician does have to certify the chronic illness is non-recoverable and will likely last for the rest of the individual’s life. Once the insured is eligible to make a claim, the benefit is paid with no restrictions on how the funds are used, and documentation of expenses is not required.4

Chronic illness riders are available either for an additional charge that is added to the total policy premiums or via a “discounted acceleration” of the death benefit. The additional premium version of the chronic illness rider may have a higher premium, but it offers the advantage of knowing what the benefit will be when the policy is issued.5  The discounted acceleration option is added to the base life insurance policy at no additional cost. If the benefit is needed, the total death benefit is reduced or discounted. The benefit discounting is based on several factors, including the client’s age, gender, risk class, interest rates, and policy cash values at the time of claim. While clients do not pay additional premium for the discounted acceleration version, a claim could significantly reduce the total available death benefit. 

The rest of this article focuses on three important factors to consider when designing a plan to address the expense of long term care. They are the person’s financial means, age, and health.  

A client with modest means may perceive little benefit to purchasing an LTCI policy. According to the Center for Retirement Research, 44 percent of men and 58 percent of women over 65 will spend some time in an assisted care facility. Of these people, 50 percent of the men and 40 percent of the women will stay 100 days or less. While Medicare covers nursing home care for 20 days, and then a portion up to 100 days, Medicaid coverage is much more expansive for those with relatively little assets.6  Chronic illness riders could be appropriate for people who have approximately $200,000 or so in liquid assets, because they have too much wealth to qualify for Medicaid to pay for nursing home care, and they would likely spend down their assets within a couple years if they required long-term care for an extended period of time.7

Clients with $2 million of assets will be able to cover the cost of nursing home or home care. However, these clients may consider a chronic illness rider as a way to minimize—with little or no additional cost—the impact of nursing home or home care expenses, provided life insurance is already a part of their financial plan.

Age is another important consideration. It’s generally advised to purchase LTCI around age 50 to 55. A client who is 65 will pay about $250 per month, while a client who is 45 will pay approximately $100 per month. Although the premium is lower for the 45-year-old, it is likely that the younger client will pay premiums for 30 years or more before he or she needs to use the long term care benefit. So while a 55-year-old will pay higher premiums, he will likely pay premiums for 10 years less than a 45-year-old, and run less risk of being rejected for insurance due to poor health than if he waits until age 65.8  As a result, younger clients also might consider a chronic illness rider to be a better value and will delay the purchase of a traditional LTCI policy.  

Finally, it is said that clients pay for LTCI with their good health. The medical underwriting requirements are usually less stringent for chronic illness riders than for LTCI. Chronic illness riders tend to have less stringent underwriting because they pose less risk to the insurance company.9  Life insurance is also purchased with a client’s good health however. So for unhealthy but insurable individuals, an accelerated chronic illness rider on a life insurance policy might be a good alternative. If the client is uninsurable, he might want to consider other strategies such as annuities. 

Long-term care expense could pose a serious threat to your client’s retirement plans. Whether or when to purchase LTCI requires a comprehensive review of a client’s situation. In cases where LTCI isn’t the right fit, a life insurance chronic illness rider could be an option for those clients who don’t fall within the suggested age, financial means, or health guidelines for traditional LTCI.

 

Footnotes:

1. www.longtermcare.gov.
2. www.Nolo.com, “Your Obligation to Pay a Parent’s Nursing Home Bill”.
3. Individual Health Insurance Planning, 15.4.
4. Investopedia, “How Long Term Care Insurance on Life Insurance Work”.
5. Ibid.
6. Center for Retirement Research, “Long-Term Care: How Big a Risk,” November 2014, Number 14-18.
7. www.longtermcare.gov.
8. Forbes, “Ten Questions to Ask Before Buying Long Term Care Insurance”.
9. Milliman Research Report, April 2012.