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Navigate a Course for Long-Term Care

But now that their daughter is in college, their insurance needs have changed. After the economic downturn in 2008, they worried that their retirement savings were no longer large enough to cover potential long-term-care expenses. "The stock market crash contributed to us taking the insurance more seriously," says Erik.

To meet potential long-term-care expenses, they bought a long-term-care policy. They have stopped reinvesting dividends in Helen's life insurance policy and now automatically shift the dividends to pay their long-term-care premiums. Because of the new tax law, they don't have to pay taxes on the transferred money.

You always were able to withdraw the amount of your past life insurance premiums without owing taxes, but you owed tax on any earnings you withdrew. The new law allows you to transfer as much as you want tax-free to a long-term-care policy. The law also applies to transfers from tax-deferred annuities to a long-term-care policy.

To get the tax break, you must transfer the money directly from one insurance product to the other -- a process known as a 1035 exchange. If two different companies are involved, ask the recipient of the money -- in this case, the long-term-care insurance company -- for help with the transfer. The insurer that is losing your assets may erect some hurdles, but the long-term-care insurer will help ease the way.


The move was simple for the Jensens. They have both policies at Northwestern Mutual. They simply filled out a form. Being able to transfer the money tax-free was a "terrific benefit," Erik says.

Hybrid policies. As companies flee the standalone long-term-care insurance business, many are developing new kinds of policies to protect against long-term-care costs. These products combine long-term-care insurance with either life insurance or annuities.

The most prevalent are life insurance hybrids. You invest a lump sum or pay premiums for ten years, and you get either long-term-care payouts or your heirs get a death benefit.

For example, a 60-year-old man who invests $50,000 in Lincoln Financial's MoneyGuard policy could get payouts of up to $216,000 (up to $3,000 a month for six years or more) for long-term care in a nursing home, assisted living or at home. If he dies before he needs long-term care, his heirs will receive a $72,000 death benefit. Any money you use for long-term care reduces the death benefit.

With these hybrid policies, it can be easier to pass the medical underwriting test than with an individual long-term-care policy. But a passing grade depends on your medical condition. For instance, it may be tougher to qualify for a life insurance hybrid if you have a heart condition, which can shorten your life.

Adam, the Boca Raton planner, bought this type of policy in her late forties with money from an inheritance. Adam is a single parent whose mother had Alzheimer's. "I clearly understand the need for the coverage," she says. "What a great way to take the money, put it aside and cover my long-term-care needs. And if I don't need it, then it goes tax-free to my kids as life insurance."

Melissa Spickler, a senior financial adviser with Merrill Lynch in Bloomfield Hills, Mich., began recommending combination policies to her clients after her mother developed dementia 18 months ago. "I went to all of my clients and I started to tell the story of what happened to my mother, with the expense of $8,000 to $11,000 a month coming out of my pocket," she says. Spickler's mother recently died.

Spickler recommends Lincoln Financial's MoneyGuard because it offers beneficiaries a long-term-care benefit of three to six times the amount of the original investment. It also offers a guaranteed return of principal if the policyholder ever needs the money back. If the policyholder dies before she needs long-term care, her beneficiaries will receive a life insurance benefit.

To calculate how much her clients should spend on a policy, Spickler looks at the cost of long-term care in the area and at their retirement-income cash flow. "When we know what the shortfall will be, we figure out how much we need to cover that gap," she says.

Insurance for the long term. Another financing option is longevity insurance. You invest a relatively small amount of money with an insurance company at about 65 and get a relatively large payout at 85. You can use the money for any purpose, including for long-term-care expenses.

Longevity insurance may be a better choice than a standalone long-term-care policy if you are healthy and expect to live well into old age, says Barry Gillman, principal of Longevity Financial Consulting, which advises asset managers. Assume you're a 65-year-old man who invests $100,000 in a longevity product. At age 85, you'll start getting $5,600 in monthly benefits. If you live to 87, you'll get $134,000 in total payouts. If you live to age 95, you'll get more than $670,000. You'd get no payouts if you die before 85.

The payouts provide extra cash flow at a perfect time to help cover any monthly long-term-care bills for the rest of your life. With most standalone long-term-care policies, payments end after three to five years. "Longevity insurance gets to be a better deal very quickly for those in better than average health," says Gillman.

Keep in mind, however, that the $5,600 monthly benefit will not be adjusted for rising costs, unlike a long-term-care policy with an inflation adjustment. And part of these longevity-insurance payouts will be taxable.

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