Have you ever bought anything that totally made sense at the time, but now you don’t really want (or need) it? The treadmill that now doubles as a clothes rack. The timeshare you bought after a high-pressure sales pitch. The Franklin Mint plate collection.
For some people life insurance falls into this category. It made perfect sense at the time. With a growing family and people relying on your income, you needed a plan just in case the unexpected happened.
But then, thankfully, the unexpected didn’t happen. The kids grew up and moved out. The value of the nest egg went up and debt was paid down. Now, with retirement on the horizon, the “income replacement” argument for life insurance is no longer quite as compelling. At this stage in life you’re more concerned with how to pay for your healthcare and long-term care. Wouldn’t it be nice if there were a way to swap your existing life insurance for some long-term care insurance? Now you can.
How it works
If you have a permanent (e.g. whole life) insurance policy that you no longer want, one option is to cash it in and quit paying the premium. A better option might be to use the cash value in that insurance policy to buy a new, paid-up life insurance policy with a long-term care rider.
How does life insurance with a long-term care rider work? Just like with your old policy, the new policy will act as life insurance if you die. Where it differs is that it will also give you some multiple of the face value of the policy in long-term care benefits. For example, if you bought a $50,000 policy, the rider might provide $150,000 in long-term care benefits. These policies also typically have an option that allows you to terminate the policy for a full refund if you decide you don’t want it.
In other words, these can be win-win-win policies. In the above example, if you need care, you have $150,000. If you die without needing care, your heirs get the $50,000. If you decide you don’t want the policy, you can get a full refund.
I have had a number of clients use this strategy to repurpose an old life insurance policy into something more useful for their retirement years. If it sounds like something that might work for your situation, give me a call and I will connect you with my long-term care partner. She is licensed in all 50 States and would be happy to answer questions.
Have a great 4th!
Joe
What type of underwriting is involved in a policy like this? I assume it’s different than a normal policy. Also, can you 1035 the cash value from a whole life policy to this new multipurpose policy to avoid taxes or surrenders?
Hi Jason. There is underwriting and since it’s a life insurance policy with a long-term care rider, the underwriter is looking at both mortality and morbidity. And yes, you can use a 1035 to avoid the tax issues. Hope that helps.
As someone who sells LTC insurance as part of my financial advisory practice, there are plenty of pros and cons. The only thing I can work with are statistics and here is what I recommend. First off the product whether you buy long term care or a hybrid is not cheap. Then again, the cost of long term care services is not cheap.