Linked-benefits products can make clients' money work harder

In the current economic climate, a conversation about retirement and long-term-care planning is a "must have" for any family that wants to protect its existing assets.

Just about everyone understands the need for life insurance, but long-term-care insurance can be a much harder topic to discuss with current and prospective clients. It is a subject that is consistently avoided, as many people believe they will be able to pay for these costs out of pocket. An objection that advisors hear repeatedly is that clients do not want to pay out premiums for long-term-care services they may never need.

The fact is that approximately 70 percent of people 65 or older will need some form of long-term care during their lifetime, and this type of care does not come cheap. According to the Genworth 2009 Cost of Care Survey conducted by CareScout, the average median annual cost for a private nursing home room is approximately $74,000, and the average length of stay is about three years. You can multiply the cost by two for a married couple. That may be enough to substantially deplete most people's savings.

What many clients may not know is that another LTC protection option exists in the form of linked-benefits products. These products, which combine life insurance or an annuity with long-term-care coverage, offer protection that does double duty. The riders on these products can help pay for LTC protection and/or provide a death benefit. Additionally, with some life-linked benefit products if a client decides in the first 15 years that they no longer want the policy, they can recover at a minimum the initial premium paid, minus any amount used for LTC benefits.


In the current economic environment, many Americans are looking to save money and are hesitant to take money out of perceived "safe" places, such as savings accounts, to put it into any financial vehicle that seems risky. However, the rationale is clear for linked-benefits products - live, die or quit (that is, decide you no longer want the policy) and it still keeps your money working for you and your family for years to come.

By taking advantage of a linked-benefits product that includes life insurance or an annuity with LTC insurance, you are offering your clients the best of both worlds.

If they end up needing long-term care, the funds will be there to hedge against this risk. These products generally provide up to six times the premium paid into the policy in an LTC benefit. Additionally, if the benefit is never needed, the premiums paid into the product may result in a tax-free death benefit twice the initial premium amount. The tax-deferred policy values grow at current interest rates and there also may be a residual death benefit to cover final expenses, even if the entire benefit amount has been used to cover LTC costs.

For example, a linked-benefit life insurance policy of $100,000 may provide a death benefit of $200,000, or a long-term-care benefit of approximately $600,000. It may also free up some of the money that a client was saving to cover their potential long-term-care costs. An annuity-linked benefit product that combines an annuity and LTC insurance rider may offer the ability to double or triple their initial premium when used to pay LTC insurance claims. A variation of the product may also open up the long-term-care benefit to people who would traditionally be declined. Additionally, the owner of an annuity with long-term-care rider would typically have the ability to access contract values other than to pay LTC claims through either partial withdrawals or annuitization. These withdrawals may be taxable and also reduce the amount available as a long-term-care benefit.

Clearly, these products are not the right fit for everyone; therefore it is important to ensure that your client fits the criteria. Advisors should assess this on a case-by-case basis, but general guidelines include clients who:

* Are planning to self-insure their LTC needs;

* Have liquid assets of at least $300,000 for the life-linked benefit product and $200,000 for the annuity-linked benefit product;

* Are in good physical and mental health; and,

* Want to have funds to pass on to their surviving spouse, beneficiaries or a charity.

It is also important to encourage clients to have candid conversations with their family members in order to ensure that loved ones are all on the same page regarding where they want to spend their golden years and how they plan to pay for potential long-term care. Tips for how best to initiate these vital conversations can be found at


In addition to being a smart way for protecting assets and hedging against risks, annuity-linked benefit products will offer additional tax benefits next year. For annuity-linked benefit policies sold after 1996, the Pension Protection Act of 2006 will allow for tax-qualified LTC rider benefit payments beginning in January 2010 to be income-tax-free. In addition, the charges for the rider will not be considered taxable income, though they will reduce the owner's cost basis (but not below zero). Other tax issues remain unclear, such as how the LTC benefit payments will affect cost basis in the underlying annuity contract. Clients should always consult their CPA or accountant for specific tax advice.

Carriers are working at top speed to ensure that they have annuity-linked benefit products in place to coincide with the new changes to the law that will allow consumers to maximize the potential tax advantages, as well as the broader coverage these products offer.

Clients will appreciate that these products do double duty by both shielding them from the costs of a possible health event that could negatively impact their overall portfolio, and also providing financial security in the form of life insurance or an annuity. Linked-benefits products offer a unique way to safeguard clients' wealth and also provide a sense of security for the entire family by leveraging assets and self-insuring the smarter way.

Kyle Rothery is vice president of sales and marketing for the Long-Term-Care Insurance Division of Genworth Financial. Reach her at (804) 484-3848 or kyle.rothery

(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.

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