Cash value life insurance vs. term and invest the difference: is that the only choice?

Last week Seeking Alpha posted an article where a 38 year old man, presumably an investment broker, passed on his life insurance agent’s advice for a permanent life insurance product with a $5,000 annual premium, and instead choose term coverage for $600 a year. He took cash value life insurance to task with the self-serving advice to buying term and investing the difference.

OK.  No real argument there. At age 38, or for that matter for any working age person, term offers more bang for the buck, and that’s the most affordable way to replace lost income and thus protect a spouse or dependents.  But did this gentleman get enough coverage?

Term: How much and how long
He’s to spend $600 a year in premium.  Let’s review the most competitive rates and see what $600 a year buys.  A male preferred non-tobacco with SBLI (Savings Bank Life Insurance of Massachusetts), $800,000 of 20 year term is $596 a year. 25 year term $525,000 face amount is $600.75 a year with SBLI.  The rule of thumb is had 7 to 10 time one’s annual salary in life insurance. If he has children, there’s a college fund to consider.  Whether this individual got sufficient coverage depends on how much he makes, but keep in mind the goal is to get an adequate amount, and if affordable extend coverage to retirement age or to a point the children would be expected to have finished their secondary or post secondary education: age 22 or age 26.

Term and Permanent:  Two Plans – Two Purposes
Term verses permanent life insurance is a fallacious argument, as if it’s either one or the other. You can set up two policies: one term to replace lost income during your working years and a permanent for estate planning and to build cash value.  For this 38 year old, instead of a $800k 20 year term, how about a $100,000 of permanent life insurance and $700,000 in term?  A $100,000 Indexed Universal Life “Lincoln LifeReserve Indexed UL Accumulator” with Lincoln National, increasing face amount, targeted to endow at age 100, is $1,511 annual for male, age 38, preferred. That quote assumes 5% interest on S & P 500 index, annual point-to-point. At 5% that projects $33,803 cash surrender value and a $133,803 death benefit after 20 years.  Add a $700,000 20 year term with SBLI for $529 annual, that comes to $2,040 annual total cost for the two plans, and the Indexed UL is a very flexible premium, up or down depending on index returns or personal finances. This way after 20 years this person, now in his late 50’s, doesn’t have to encounter much more expensive choices in establishing permanent coverage for estate planning and with the right plan a chronic care or LTC rider in case LTC is needed.

There is also return of premium (ROP) term.  $800,000 20 year ROP term is $3,072 annual with American General for a 38 year old male at preferred.  In 20 years that guarantees $61,440 cash back or $170,218 in paid up life insurance.  After 20 years that paid up life insurance might be an appealing choice.  You could do a mix of ROP term and regular level term to lower that cost.

Please contact me for a free and confidential quote.  Many more options available.

sean's profile picLicensed Agent:  Sean Drummey
phone:  (910) 328-0447
email:    spdrummey@gmail.com

Hybrid life insurance plans covering home health care

The Dayton Daily News has posted an article on the growth of home health care companies in Ohio.

“I think there’s been a real renewed interest in home care,” Thompson said. “I think people are looking for alternatives for care and again to remain in their homes I think [because of] the cost of moving into a facility, and they have to give up a lot to do that. I think independence is important to that population.”

Many life insurance plans at no extra upfront cost come with an accelerated benefit rider for chronic care.  Being unable to perform 2 out of 6 activities of daily living, like dressing or bathing, or cognitive impairment allows the policyholder to accelerate portions of their life insurance benefit for long term care.  The better plans allow an accelerated cash benefit.

These hybrid life and chronic care plans offer fixed premium, guaranteed for life.   They can be structured to build cash value and have an increasing benefit.  Once certified by a doctor as needing chronic care and a plan was devised that home health care was a suitable option, the accelerated benefit could pay for home health care services.  Any benefits not needed would pass on as a life insurance death benefit.

This kind of coverage is affordable and a very good solution for the associated costs of home health care.

Long term care insurance options: Partnership or hybrid

Life insurance agents who reside in North Carolina are required to get 24 hours of continuing education credits every two years.  Nationally, my licenses for other states have cross reciprocation with my NC requirements. To help get my credits for this cycle, I’m taking a couple of courses that are required for the long term care (LTC) partnership program.  I have been licensed to sell LTC/Medicare Supplement since 2003, but now to sell a traditional LTC plans in NC requires educational credits for the Partnership Program which NC has adopted.

Partnership Programs have standardized LTC coverage features that protect the consumer.   Regardless, the fundamental flaw is that traditional LTC insurance plans are subject to rate increases.  Those increases must be approved by state insurance commissions, if sufficiently justifiable, but over the years they have occurred and likely will occur in the future.   Also if you don’t use traditional LTC insurnace coverage, it’s money out the window.

The hybrid solution: Life insurance with LTC
A solution to can be a life insurance policy with a decent LTC accelerated benefit rider.   With it you can lock in a guaranteed level premium for life, and the benefit is not wasted.  If you never need LTC, your beneficiaries get the LTC benefit. According to the course I’m taking, the amount paid for an accelerated LTC benefit is usually in the range of 50 to 90 percent of the policy’s death benefit.

The question becomes:  can you afford a policy with a death benefit big enough for potential LTC cost of care?

Annuities
Annuities are another good option.  It is an investment that can grow and then used if needed to fund LTC.

Hybrid Annuities
Two products:  Lincoln LTC fixed Annuity and United of Omaha Living Care Annuity come with LTC riders that augment the total amount of LTC coverage.

The question becomes: can you establish an annuity big enough for potential LTC costs?

Long term care type benefit with Protective Life

Protective Life has a long term care services rider available on their universal life insurance product “Centennial G II”. This allows the life insurance benefit to accelerate out when the insured is certified by a licensed health care practioner as chronically ill, meaning unable to perform two out six activities of daily living or severe cognitive impairment.  This LTC type benefit is a very valuable added plus to include in a life policy.  It’s there just in case, and if not needed or if only some benefits are needed, the remaining death benefit goes to the beneficiaries.

Payouts with Protective’s plan are an indemnity payment method, full direct benefit payments, which is much preferable over the reimbursement method, repayment of bills or receipts.   Maximum is $8,500 per month, and the benefit can be 100% of the policy value.  Lump sum payment is also available.

Protective’s $8,500 per month maximum accelerated benefit is better than most carriers, but a few competing plans are based on percentage of the policy benefit which allows a higher acceleration.  For example, Penn Mutual allows 24% of the policy benefit, maximum $240,000 accelerated per year.

Life insurance helping to meet the cost of long term care

Genworth Financial each year publishes a long term care cost of care survey that is very informative as to what services cost by location.   LTC costs are eye popping and daunting, and make college seem like a bargain.

Long term care is expensive but often not all that long.   According to National Health Care Statistics provided by the Montana Department of Insurance:

How long do people stay in long-term care facilities?

36% stay less than 1 year
32.5% stay from 1 to 3 years
14% stay from 3 to 5 years
17% stay 5 years or longer

Most people, whether by choice or necessity, opt for in home care.   Life insurance with an accelerated living benefit for long term care can help cover LTC costs.  This hybrid coverage will grow more and more popular because the premiums are fixed, not like traditional LTC insurance where the company reserves the right to increase premiums.

Hybrid life long-term care looking even better after Prudential’s exits LTC market and increases premiums

Prudential announced it will stop selling individual long term care (LTC) insurance policies at the end of March. Prudential ranked fifth in the LTC market.  They will still sell group products.

In 2011 Prudential announced rate increases on its first and second generation individual LTC policies. The premium rate increase percentage requests were substantial: 18% or 32% on the first generation product, and 15% or 30% on the second generation. That higher tier of increases was on plans with a cash benefit rider.  The actual increase for those policy holder depends on what each state’s Department of Insurance approves.  From what I reviewed, states were approving most of what was requested and premium increase letters were going out this year to Prudential LTC policy holders.

All individual long term care insurance policy holders have to worry about rate increases.  In contrast with a hybrid life insurance LTC policy, the policy owner is able to lock in a fixed premium for life with a guaranteed UL plan.  For those with other retirement or estate planning goals, Indexed UL plans provide an opportunity for cash accumulation and increasing death or long-term care benefits.