Last week, I shared an example of how Annuity Care can help enhance the “self-insurance” situation.
If you recall, the primary advantage of including an Annuity Care strategy in the “self-insurance” plan is the leverage that it provides when money is needed to pay for long term care expenses. Today, I want to expand on that discussion.
Last week, we simply used the Pension Protection Act to wash away taxable distributions from a nonqualified annuity to fund long term care needs. What if that couple had the extended care bucket of money in cash or cash equivalents?
Cash and good health create an almost perfect scenario for planning.
One idea is to take a part of the money and deploy it into a defensive position to provide funding for long term care if needed while retaining liquidity for other emergencies. In this case, we will carve off $300,000 and leave the remaining balance of $200,000 in their money market account that is crediting 5.00%. (Note: I selected 5.00% based upon a quick survey or top rates and did a quick average of the top 10 rates that I found.)
So, we will deploy the $300,000 into an Asset Care policy where upon approval, we get close to $1 million in tax free long term care.
Immediately, you start to call for a time out. You say, “my clients want the liquidity that their present strategy offers, and they have enough money to self-insure.”
I reply, “before you shut me completely down, let me explain how this works.”
This Asset Care policy is limited in duration and provides a pool of almost $1 million to be used for long term care. It also includes a full return or premium starting day 1 of the policy which makes it completely liquid. It is called Asset Care Return of Premium.
The three guarantees are this. The first is this: one way or another, your clients or their family will receive $461,893 of tax-free benefits from the policy as living benefits, as a death benefit, or a combination of the two.
Next, while your clients are alive and they need resources for their long term care expenses, each one of them can access the pool of money up to $9,238 each month until their pool is exhausted.
Finally, from the outset, they have complete access to the full $300,000 that was used to fund the Asset Care ROP. And, by the 12th year, they could walk away with $305,685; in 15 years with $352,568, and after 20 years, the walk-away would be $371,746.
During this whole time, $200,000 remained growing in the money market account at 5.00%. Here is how that would look after 5 years – $255,256; after 10 years – $325,779; after 15 years – $415,789; and at end of year 20 – $530,660.
Let’s just say that the husband, at age 78, requires long term care services after a recoverable medical event like a stroke. Upon stabilizing and returning home, he qualifies for benefits from the Asset Care ROP policy. Every month, they draw from the extended care bucket using the Asset Care policy.
After 5 years (60 months of payments) and $461,893 of expenses paid from his healthcare fund, he passes.
Although he consumed the full death benefit portion of the Asset Care policy, his wife retains $461,893 of paid-up long term care benefits from the continuation of benefits rider portion of the policy.
On top of that, assuming they did not pull money and that it grew regularly at a 5.0% compound rate during that whole time, the balance in the liquid money would have grown to $395,986 at the end of year 14 (when the claim ends with his passing).
For comparison, had they left the money in the extended care buckets as a cash account, after paying the same amount for care, the ending balance at end of year 14 would be $377,416.
Here is a quick comparison at end of year 14:
Cash account only – $377,416 available for her LTC expenses
Asset Care ROP + cash account – $857,879 available for her LTC expenses
Remember this, this is what I call average care not long term care. Why average? Because the industry average for plan design is 5-6 years. And, this solution is “average” due to the plan design requiring liquidity from day 1.
Other policy designs can offer a bigger pool of resource on either a monthly basis or we can make an unlimited pool of money. It all comes down to the wants and needs of the clients.
Next discussion that involves long term care policy design, call my internal Justin Fox or me. We will be happy to help you craft a strategy that is unique to your clients’ situation.
Fridays with Fisher 
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