Safe Money - 3-22-25

Episode Transcript

Speaker 1 (00:00):
Good morning to all. Craig Shillig here and this is
Safe Money. I'm here every Saturday to talk with our
listeners about financial strategies we use to manage and protect
assets safely. I've been an insurance agent for over twenty
four years. During that time, I've learned a few insurance strategies,

(00:20):
like using annuities as safe money harbors, or using cash
value life insurance to supplement retirement income. Just a reminder,
you can call our office at five six three three
three two two two zero zero if you'd like to
enroll into one of my virtual Medicare community meetings. I

(00:42):
do those via zoom and I give two every month,
or you can email me at Craig at Craigshillig dot
com and that's cr Aig at Craig sc Illig dot com. Today,

(01:05):
I'd like to discuss annuities and life insurance that can
help you pay for long term care otherwise known as LTC.
Let's talk about some life insurance writers that can help
pay for long term care. Life insurance has many uses,

(01:25):
including income replacement, business continuation, and the state preservation. Long
term care insurance helps provide financial protection against the potentially
high cost of long term care. If you find yourself
in need of both types of insurance, a life insurance

(01:47):
policy that combines a death benefit with a long term
care benefit may appeal to you. Permanent life insurance offers
lifetime protection and a guaranteed death benefit as long as
you keep the policy enforce by paying the premiums. A
portion of the permanent life insurance premium goes into a

(02:10):
cash value account, which accumulates on a tax deferred basis
throughout the life of the policy. Withdrawals of the accumulated
cash value up to the amount of the premiums paid
are not subject to income tax. Loans are also free
of income tax as long as they are repaid. Loans

(02:33):
and withdrawals from a permanent life insurance policy will reduce
the policy's cash value and death benefit. It could increase
the chance that the policy will elapse, and might result
in a tax liability if the policy terminates before the
death of the insured. Here's a tip. If you need

(02:54):
a long term care insurance, you may be able to
get it by exchanging an existing life insurance policy with
accumulated cash value for a new policy with a built
in long term care writer. You can do this through
a tax free exchange, but you must also qualify for
the new insurance policy as well. You might not get

(03:17):
as much death benefit as you've had under the original policy,
but you'll pick up the option of being able to
use it for long term care expenses. An individual should
have a need for life insurance and should evaluate the
policy on its merits as life insurance. Here's how this works.

(03:39):
Some life insurance issuers offer life insurance with a long
term care writer available for an additional charge, and is
subject to contractual terms, conditions, and limitations as outlined in
the policy and may not benefit all people. If you
buy this type of power, you can pay the premium

(04:01):
in a single lump sum or by making periodic payments.
In any case, the policy provides you with a death
benefit that you can also use to pay for long
term care expenses should you incur them. The amount of
death benefit and long term care allowance is based on
your age, gender, and health at the time you buy

(04:22):
the policy. The appeal of this combination policy lies in
the fact that either you'll use the policy for long
term care expenses or beneficiaries will receive the insurance proceeds
at your death. In either case, someone will benefit from
the premiums that you've paid in let's talk about long

(04:44):
term care writers. Long term care benefit is added to
a life insurance policy by either an accelerated benefits writer
or an extension of the benefits writer. An accelerated benefits
writer makes it possible for you to access your death
benefit to pay for expenses related to long term care.

(05:05):
The death benefit is reduced by the amount you use
for long term care expenses plus the service charge. If
you need long term care for a lengthy period of time,
the death benefit will eventually be depleted. This same writer
also can be used if you have a terminal illness

(05:25):
that may require payment of large medical bills. Because accelerating
the death benefit can have unfavorable tax consequences, you may
want to consult with your tax professional before exercising this option.
I've had a few clients use this type of option
due to a medical diagnosis, and I can tell you

(05:46):
from experience that clients that have been able to use
that rider have been very happy with that outcome. Here's
an example. You pay a single premium of fifty thousand
dollars for a universal life policy with a long term
care Accelerated Benefits Rider. The policy immediately provides approximately eighty

(06:06):
seven thousand dollars and long term care benefits or eighty
seven thousand as a death benefit. If you incur long
term care expenses, the accelerated death benefit the accelerated Benefits
rider allows you to access a portion such as three
percent of the death benefit amount each month, so three

(06:30):
percent of that would be twenty six and ten monthly
to reimburse you for all of your long term care expenses.
Long term care payments are available until the total death
benefit amount of that eighty seven thousand dollars is exhausted,
which would take about thirty three thirty three and it

(06:51):
be thirty three months and a third. Whatever you don't
use for long term care will be left to your
errors as the death benefit. Let's talk about extension of
benefits writer. An extension of benefits writer increases your long
term care coverage beyond your death benefit. This writer difference
from company to company and as it is to specific application,

(07:16):
depending on the issuer, and this is a very important point.
Not all companies do the same thing. So some companies
do this very well and some don't. If you have
questions about that call me and we'll talk about it.
The extension of Benefits writer either increases a total amount
available for long term care, the death benefit would remain

(07:38):
the same, or it extends the number of months over
which long term care benefits can be paid out. In
either case, long term care payments will reduce the available
death benefit of the policy. However, some companies still pay
a minimum death benefit even if the total of all
the long term care payments the policy's death benefit amount.

(08:02):
And those types of contracts are the ones that I'm
very familiar with, where even if you use all the
money in the contract, there's still a death benefit at
the end of the rainbow. Those are the types of
contracts you want to get your hands on. Continuing from
the previous example of the policy, extension of Benefits writer

(08:25):
increases the long term care benefit the death benefit being
eighty seven thousand remains the same to three times the
death benefit or two hundred and sixty one thousand dollars
of benefit. The monthly amount available for long term care
increases to seven eight hundred and thirty. That's a lot

(08:48):
more than twenty six hundred and ten. On the other hand,
of the extension of benefits Writer extends the length of
time the monthly long term care benefit is available. Then
the monthly payments would only be the TWI and ten,
but they're extended for an additional twenty four to thirty
six months beyond the initial number of thirty three months available. Typically,

(09:14):
qualifying for payments under long term Care Writer is similar
to the requirements for most standalone long term care policies.
You must be unable to perform some of the activities
of daily living. Most contracts say two of the six
The six activities a daily living are bathing, dressing, eating,
getting in and out of bed or a chair, toilet use,

(09:38):
and or maintaining continence. Or you suffer from a severe
cognitive impairment such as Parkinson's or Alzheimer's. Again, you only
need if you lose one of those, Normally another one
will follow. An elimination period may also apply. You may

(09:58):
pay for the initial cost long term care out of
pocket for a specific number of days. You can call
this your deductible. Most deductibles are going to be thirty
days to ninety days, so you're on the hook for that,
and then that's when the policy would kick in. And
then once you hit that whatever that said day is

(10:20):
thirty or ninety. You then can apply for payments under
your policy. As with all life and long term care insurance,
the insurance company will require you to answer some health
related questions and submit to a physical exam before issuing
a combination policy to you. Again, you have to qualify

(10:43):
for this. You must be accepted. It's a good idea
to buy this stuff when you're younger, but please don't misunderstand.
I write life insurance for people that are sixty five,
even seventy five years old. If you're relatively healthy, it's
still achievable. Just understand. The longer you wait, the more

(11:06):
the price is going to be. Is a combination policy
right for you? Deciding whether a combo policy is right
for you depends on a number of factors. Do you
need life insurance and long term care insurance? I'm going
to answer that right now. The answer is yes, almost everybody.
Does you need at least one of those two. And

(11:27):
remember your chances of long term care need as you
age is one in two, so one out of every
two people will have some sort of need for long
term care usage. And oh that's right, we're all going
to die someday, so everybody needs life insurance. How much

(11:51):
life insurance and long term care insurance will you need?
How long will you need it? Will long term care
part of a combo policy the sufficient coverage that you need.
A long term care writer may not provide as many
features as a standalone long term care policy. For example,
a combo policy may not cover assisted living or home

(12:15):
health aids, and that depends on again the carrier. Most
of the companies that I represent, that writer is going
to cover as long as you meet the definition of
a loss of two or more activities of daily living.
Sometimes it also may not provide an inflation adjustment, an

(12:37):
important feature considering the rising costs of long term care.
The tax benefits offered by a qualified long term care
policy may not apply to long term care portion of
combination policies, which could result in taxation of long term
care benefits received from the policy. Generally, policy writers paid

(12:58):
to you is not going to be to exible, but
again it does depend on the contract. What if your
life insurance needs change as you get older and you
find that you no longer want life insurance protection. It's
not uncommon for people to drop their life insurance in
their later years if there's no compelling need for it.
But if you surrender the combo policy, you're also forfeiting

(13:21):
the long term care benefit it provides, usually at a
time when you're most likely to need it. So hence,
don't cancel those policies. And keep in mind that as
you use your long term care benefit, you're depleting the
death benefit. I really don't see a problem with that
because you're still getting use out of it on a

(13:42):
tax free basis. You also need to compare the costs
of combination policies to other forms of life insurance, such
as whether it be a term insurance contract or a
standalone LTC policy. But I will I'll tell you standalone
long term care policies today are very expensive. They're kind

(14:06):
of priced out of the market. By buying a combo policy,
you're going to use it one way or the other
because you're either going to die or you're going to
go on long term care benefit need and then you die.
But in either case, with these you kind of win
both ways. Depending on your age and health. The cost

(14:27):
for the combo life policy may actually be higher than
the total premiums paid for separate life insurance and a
standalone long term care policy, especially if your life insurance
need is temporary, such as income replacement during your working years,
rather than permanent. I will answer that right now, permanent

(14:49):
always wins because it's based on your life. Term insurance
is good for short term things, but if you go
outside of that term period, you've actually spent more money,
so keep that in mind. Another way to fund long

(15:09):
term care is you could use an annuity. The cost
of long term care can quickly deplete your savings and
affect the quality of life for you and your family.
Long term care insurance also allows you to share that
cost with an insurance company. Premiums for long term care
insurance can be expensive, and cash er income to cover

(15:32):
those premiums may not be readily available. One option is
to exchange your annuity contract for a long term care contract.
Another option would be to use an annuity to pay
for a combo life an LTC contract. Under these provisions,
there's an IRS section called ten thirty five. It's called

(15:55):
Section ten thirty five exchange. Generally, withdrawals from a non
quality deferred annuity are considered to come first from earnings,
then from your investment premiums paid in the contract. The
earnings portion of the withdrawals treated as income to the
annuity owner subject to ordinary income taxes. IRC Section ten

(16:18):
thirty five allows you to exchange one annuity for another
without any immediate tax consequences, as long as certain requirements
are met. However, prior to twenty ten, an annuity contract
could be exchanged for long term care insurance policy on
a tax free basis, but the Pension Protection Act changed that,

(16:40):
and as of January one, twenty ten, both life and
annuities may be exchanged tax free for qualified long term
care insurance. The conditions for the tax free exchange are this,
The annuity must be non qualified, media cannot be part
of an employer sponsored retirement plan. A tax sheltered annuity

(17:04):
or an annuity used to fund an IRA would not
qualify for a tax free exchange treatment. The long term
care insurance policy must meet the requirements of HIPPA and
IRS criteria. Generally, long term care insurance policies must provide
coverage only for qualified long term care services. It must

(17:26):
be guaranteed renewable. It cannot have a cast surrender value.
Refunds or differences can only be used to reduce future
premiums and policy benefits. Cannot pay for expenses covered by Medicare,
except where Medicare is a secondary paye. The exchange must
be made directly from the annuity issuer to the long

(17:49):
term care insurance company. You will not receive tax retreatment
if you would draw the funds from the annuity directly
then use them to pay the long term care insurance premium,
presuming these criteria met. Exchange an annuity for long term
care policy can be done in one of two ways,
a full transfer the entire cast surrender value of the

(18:11):
annuity exchange for long term care insurance policy, or partial
exchanges of the annuities cash value for the long term
care policy. Not all insurance companies allow long term care
policies to be funded with a single lump sum payment,
so the more common approach may be to pay for
long term care insurance premiums through partial exchanges from certain

(18:37):
annuity contracts. There's some potential tax advantages under ten thirty
five you can use. I'll give you an example here.
You take a non qualified annuity that's worth one hundred grand,
which includes your premiums of fifty plus the earnings in it,

(19:03):
which would be fifty, and you haven't taken any previous withdrawals.
You direct the annuity issuer to send twenty five hundred
to the long term care insurance company. Is a partial
exchange to pay for insurance premiums. Your annuity cash value
is reduced by twenty five hundred, but half the amount
twelve to fifty comes from the earnings. As a result,

(19:25):
not only have you withdrawn annuity earnings at twelve to
fifty without paying taxes on them, but you've further reduced
the taxable portion of your annuity by twelve hundred and
fifty bucks. By withdrawing earnings from your annuity to pay
for your long term care insurance, you can reduce the
taxable portion of your annuity, which can be important if

(19:46):
you were to surrender this annuity later. Let me see
what else is in here so other possible benefits. Aside
from favorable tax treatment, there may be other benefits as well.
You can use an annuity to pay for long term
care insurance may lessen the need to tap other savings

(20:07):
or income to pay for the premiums. You may still
use any remaining cast surrender value of the annuity for
other income needs or expenses. Exchanging the annuity for long
term care insurance may may better meet your current needs,
financial situation, and or preferences. Let me see what else

(20:30):
do I have here? So there's a few some disadvantages.
If you have a surrender charge within your annuity, those
may be incurred. Reducing the annuities value to pay for
long term care insurance premiums may reduce the ability to
use the annuity to provide for income in the future.

(20:55):
If you exchange the annuity for long term care insurance policy,
your survivors won't have the cuities cash value for income
or savings that otherwise would have been available at your death. However,
remember by paying for it from the annuity, then that's
not coming out of your other assets that could transfer
to your errors. Generally, premiums from qualified long term care

(21:19):
insurance are deductible as qualified medical expenses, subject to certain restrictions.
The tax savings are using a tax free Section ten
thirty five exchange need to be compared to federal and
state income tax deductions for long term care insurance premiums.
Depending on your situation, it might be more beneficial to

(21:40):
deduct premiums and include annuity earnings as taxable income. Let's see,
so some questions that sometimes come up. Can I exchange
an annuity for a lot long term care insurance policy

(22:01):
jointly owned by my spouse and me? And I'll address
that right now. Generally, know, because both your names are
on that contract, that's not gonna work because it's got
to be a one for one. But you might be
able to change the ownership of the annuity to include
your spouse. So it just depends. If I'm receiving payments

(22:26):
from a non qualified a media annuity, can I exchange
these payments for a long term care insurance I'm gonna
say answer that right now. Generally no, if you're taking payments,
because that may not work. There may not be enough
money to cover both the premiums and your payment at

(22:48):
the same time. Can I use more than one annuity
you pay for long term care insurance? And the answer,
of course is yes. Funds from one or more non
qualified annuities can beg for a long term care insurance policy. Generally,
Section ten thirty five allows tax free exchanges in the
following circumstances. An annuity for annuity contract A life insurance

(23:13):
for an annuity contract, a life insurance for a life
insurance contract, life insurance for an endowment contract, endowment policy
for an endowment contract, a life insurance policy, a dowment annuity,
or qualified long term care policy for a long term
care contract is also allowable. Don't forget. I give monthly

(23:38):
virtual meetings regarding Medicare. I give two of these every
single month for different companies. In one meeting, I will
cover Medicare supplements and I'll talk about a standalone drug
plan with that. That meeting is usually sponsored by well Mark.
My other meeting is normally sponsored by United Healthcare. For

(24:01):
that virtual meeting, and I focus solely on Medicare Vantage
Plans also known as Medicare Parts C, and I cover
the benefits of that platform. My next upcoming dates for
some of these meetings are going to be April fifteenth
and April seventeenth, May tenth and May twenty second, and

(24:23):
June seventeenth and June nineteenth. That's the next three months.
You can call our office at five six three three
three two two two zero zero for the zoom meeting
codes and additional dates and times. You're also welcome to
email me at my it's my name, is my email address,

(24:45):
Craig at Craigshilig dot com. And that's cr Aig at
cr ai g scchi llig dot com. Shoot me a
note or give me a call and I can send
you the virtual zoom link meeting codes. This is Craig

(25:06):
Schillick with safe money.