Every once in a while, we publish content from one of our trusted financial professionals out in the field. This week, Barry Goldwater, Principal at Goldwater Financial Group, impressed us with his excellent article on an exciting alternative to traditional long term care. Please enjoy Barry’s article below.
The way we think about our health is extremely interesting in a denial sort of way. There
is a very large pod of people who practice some of the unhealthiest lifestyles and who
believe nothing adverse will affect their health moving forward. This is why greater than
half the population in overweight and many of them detrimentally so even though there is
evidence reported every week that asserts that practically every disease can be controlled
by weight loss and healthy eating. For some reason, our behavior is irrational; we have
the facts available to support longer life if we change behavior, but as we all know,
change is extremely difficult.
Regardless of the facts vs. denial argument, there is a very unique way to address our
clients concerns and complaints about the premium to cover the risk of a long term care
event that may never be needed. Denial about future health possibilities are very real and
one solution that specifically addresses this planning objection is found in a product
called “Hybrid Life Insurance”. When designed properly, hybrid life seamlessly morphs
into long term care insurance liquidity, meaning, the life insurance contract will pay for
medical services not covered properly by health insurance contracts. If care is not needed,
the premium refund of all contributions comes back in the form of a tax free death benefit
to beneficiaries. Lastly, because there are no surrender charges attached to the premium
contribution and the insured can get 100% of their initial contribution back at any time in
their lifetime, we can make the analogy that this contribution is part of the self insuring
pool of money that the insured has dedicated to cover a long term care event. To be clear,
hybrid life insurance addresses four distinct areas of concern, complaint and objection for
many clients who are currently self insuring the long term care risk, namely;
- Nothing will happen to me because I feel so good now, it is not possible.
- I am throwing my premiums down the toilet because I will never need this.
- I am losing investment income on premiums paid.
- Why create surrender charges on money that is now liquid?
Here is an example of a recent planning case using the concept of self insuring and yet transferring the risk which addresses all of these concerns.
Husband and Wife ages 65,64.
Self insuring pool of money available (liquid net worth, IRAs, 401k’s etc.) $4 million
One time contribution for the Husband to the Hybrid; $250K, for the wife $200K. He is
older, his contribution is a little larger.
Asset protection liquidity for a long term care event; $ 1.9 million combined.
Initial Life Insurance Benefit $1,100,000 Combined
Level Life Insurance Benefit $635,000 Ultimate
$450,000 is to be managed by the insurance company.
$3.55 million remains in current management position.
Total assets available to insured, $4 million without surrender charge, just like before.
If a long term event occurs for husband at age 75, the $250K he moved to the insurance
company turns into $991,000 of potential benefit liquidity for his care. If this event
occurred in the 10th year of procuring this hybrid contract, his internal rate of return on
his original $250K insurance premium is 11.8%, if he triggers in year 15, his IRR is
8.3%, if he triggers in 20 years, his IRR is 6.3%. Rate of return is calculated by figuring
how long money has been used, total benefits available and initial contribution. These
rates of return are all acceptable and solid in some years, exceptional in other years.
The rate of return of a hybrid life policy is the inverse of growth investing; it is not how much
one can earn on the initial contribution, it is what one earns from the benefits derived.
If the husband dies in the 10th year of this contract, his family gets $410K tax free, the
on the death benefit is 5.1%, if he dies in year 15, it is 2.6%. His family always gets
back their original contribution and more because of the life insurance benefit and
because of this, he has self insured his premium risk.
In summary, For people who believe in self insuring their long term care risk for
whatever reason, the investment value of the original premium to transfer this risk to an
insurance company is realized when the contributor needs care and not calculated on an
annual return basis. Because there is never a surrender charge associated with the
premium, it can be argued that the premium is still includable in a clients net worth and
always available for use. And because there is always a return of original premium in life
or death, it can be argued that the insured has entered into a form of self insurance for
future long term care disability. If they become disabled, their benefit for care is
significantly higher than their original premium. In this way, they have transferred their
risk of asset depletion to an insurance company. This solution may be a much smarter
way to cover the future possibility of a long term disability. No one can predict life’s
uncertainties.
Barry Goldwater is Principal at Goldwater Financial Group, an insurance consulting firm
since 1985. He works with business owners, retirees and advisors designing tax efficient
solutions that make sense and are easy to implement. He can be reached at barry@frg-creative.com
or 617-527-9736 or visit his site at www.safemoneyboston.com
Please make sure to read more of Barry Goldwater’s content at Safe Money Boston
* This blog is purely educational. Nothing in this blog should be construed as investment advice
Today we hit a 10 year Treasury interest rate of 1.7% for the first time since Eisenhower was in office. With these all time low rates comes much stress on the insurance carriers who are regulated to invest heavily in safe bonds like the 10 year Treasury. We have already seen quite a few carriers lowering rates, caps, and even pulling some products.
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