Self-Funding isn’t Self-Insurance

Last week, I shared my opinion about self-insurance.

In reality, self-insurance is pure risk retention.  Said another way, it is self-funding without any “stop-loss” provisions.

At a minimum, reviewing the extended healthcare self-funding / risk retention strategy in conjunction with the client’s income plan is imperative to making it as solid as possible.  Most importantly, the identification of the assets to be utilized to fund the expenses as well as a written plan needs to be in place.  Without both, it is boils down to luck.  Simply, having a written plan is the key to any extended healthcare strategy.

With a self-funding / risk retention plan, those elements are vital.  Otherwise, it becomes the plan of hope.  Hope nothing happens and if it does, hope that the resources and people are available to address the need.

Let’s dig a little into the strategy to see if we can improve upon it and make it a true self-funding strategy where there is “stop-loss” protection from financial obliteration.

So, here is an idea how to transform the risk retention / self-insurance strategy into a safer and more tax efficient self-funded strategy.  This strategy involves the use of non-qualified deferred annuities as the “funding mechanism” for the extended healthcare need.

In a 2013 Gallup Report discussing deferred annuities and ownership, “73% of annuity owners identified their annuity as an emergency fund in case of catastrophic illness or for nursing home care.”  In that same report, it was noted that 84% of annuity owners responded that they have their individual annuity for income while only 45% have actually withdrawn income on an ad-hoc basis and 33% have begun taken regular periodic payments.

In an ideal situation, non-qualified are already in place and are not identified as one of the primary income producing elements of the client’s income strategy.

Thanks to the Pension Protection Act, we can transform tax-deferred accumulation into tax-free distributions for long term care services.  Simply, your client’s risk retention / self-insurance strategy can be improved by simply repositioning the nonqualified deferred annuity into a long term care and tax friendly solution called Annuity Care.

Annuity Care can do more than transform the tax-deferred accumulation into tax-free money for LTC.  By adding a Continuation of Benefit Rider (COB) to the annuity, tax-free LTC benefits can continue beyond the basis of the annuity – it can double, triple, quadruple, or even create a lifetime stream of benefits.

Think about this for a moment, the COB serves as the “stop-loss” protection that I have mentioned earlier.

Using Annuity Care II, repositioning $200,000 can produce a pool of $1.1million of tax-free LTC benefits available for 132 months.  That is $8,317 of monthly long term care benefits.  Granted, it is a finite period of time, but we put in place $900,000 of stop-loss protection by simply repositioning the annuity into a more efficient vehicle.

The next time that someone elects to “self-insure” correct their perception by telling them that “self-funding” is a better strategy.  And, remember, no self-funding strategy is complete without  stop-loss protection.

Learn more about Annuity Care by contacting Justin Fox at justinfox.isp@oneamerica.com