Transcript Slide 1

Understanding Life
Insurance with LTC
Riders and Advanced
Marketing Opportunities
Brought to you by the
Nationwide® Advanced Consulting Group
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NFM-9907AO.1 (09/12)
Some Things You Should Know
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This presentation was not intended by the author to be used, by
anybody for the purpose of avoiding any penalties that may be imposed
on you pursuant to the Internal Revenue Code. The information
contained herein was prepared to support the promotion, marketing
and/or sale of life insurance contracts, annuity contracts and/or other
products and services provided by Nationwide Life Insurance
Company.
Federal tax laws are complex and subject to change. Neither the
company nor its representatives give legal or tax advice. Please talk
with your attorney or tax advisor for answers to your specific questions.
Investing involves risk, including possible loss of principal
Keep in mind that as an acceleration of the death benefit, the LTC rider
payout will reduce both the death benefit and cash surrender values.
Care should be taken to make sure that your clients' life insurance
needs continue to be met even if the rider pays out in full. There is no
guarantee that the rider will cover the entire cost for all of the insured's
long-term care as these vary with the needs of each insured.
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Some Things You Should Know
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When evaluating the purchase of a variable annuity, your clients should
be aware that variable annuities are long-term investment vehicles
designed for retirement purposes and will fluctuate in value; annuities
have limitations; and investing involves market risk, including possible
loss of principal.
This information assumes that the life insurance is not a modified
endowment contract, or MEC. As long as the contract meets the nonMEC definitions of IRC Section 7702A, most distributions are taxed on
a first-in/first-out basis. Surrender charges may apply to partial
surrenders. Loans and partial surrenders from a MEC will generally be
taxable, and if taken prior to age 59 ½, may be subject to a 10% tax
penalty. Loans and partial surrenders will reduce the cash value and
the death benefits payable to your beneficiaries, and withdrawals above
the available free amount will incur surrender charges. If your contract
were to lapse with a loan outstanding, the loan amount in excess of
basis will be treated as a distribution and all or a portion will be subject
to income tax.
The underlying investment options to a variable annuity or life
insurance product are not publicly traded mutual funds and are not
available directly for purchase by the general public. They are only
available through variable annuity/variable life insurance policies issued
by life insurance companies.
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Some Things You Should Know
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As your clients’ personal situations change (i.e., marriage, birth of a child or job promotion),
so will their life insurance needs. Care should be taken to ensure these strategies and
products are suitable for long-term life insurance needs. You should weigh your clients’
objectives, time horizon and risk tolerance as well as any associated costs before investing.
Also, be aware that market volatility can lead to the possibility of the need for additional
premium in the policy. Variable life insurance has fees and charges associated with it that
include costs of insurance that vary with such characteristics of the insured as gender,
health and age, underlying fund charges and expenses, and additional charges for riders
that customize a policy to fit your clients’ individual needs.
Not all Nationwide products and services are suitable for all clients or situations. There may
be products, issued by other companies, which better suit your clients’ goals. Be sure to
consider your clients’ objectives, their need for cash flow and liquidity, and overall risk
tolerance when using any strategy.
This information was developed to promote and support products and services offered by
Nationwide. It should not be taken as tax advice. It was not written or meant to be used by
any taxpayer to avoid tax penalties, and it cannot be used by any taxpayer for that purpose.
Life insurance and annuities are issued by Nationwide Life Insurance Company or
Nationwide Life and Annuity Insurance Company, Columbus, Ohio, member of Nationwide
Financial®. The general distributor for variable insurance products is Nationwide
Investment Services Corporation, member FINRA. In Michigan only: Nationwide Investment
Svcs. Corporation.
Not a deposit Not FDIC or NCUSIF insured Not guaranteed by the institution
Not insured by any federal government agency May lose value
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Agenda
• The current LTC marketplace
• A Brief Look at the Variety of LTC Solutions
• The Explosion of Life Insurance Linked Solutions
– Product Differentiators
• Nationwide’s Indemnity-style LTC Rider
• Advanced Market applications
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The Current
LTC Market Place
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Traditional LTC – Current Status
Growth in traditional LTC sales disappointing1
– Sales down 2006-2009
– Sales down 23% in 2009
– Compound annual growth rate -5% between
2005-2010
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LIMRA – U.S. Individual LTC Insurance Annual Review 2010
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Traditional LTC – Current Status
Concerns in traditional LTC market place1
– Significant premium increases on in-force polices
– Companies leaving the marketplace
– What is contributing to this dilemma?
• Unexpectedly low lapse rates on LTCI polices
• Claim payouts doubled between 2006 & 20092
• People living longer – boomers joining parents
• Declining interest rates
– 40% to 60% claims revenue depends on
investment returns
1
“Long Term Care Insurance May go the Way of the Dinosaur”, Investment News, March 18, 2012
Term Care Headache” – Financial Advisor Magazine, January 2011
2 “Long
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Consumer perceptions/objections
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LTCI is expensive
It’s not necessary
Use it or lose it
Mistrust of industry
Affluent believe they can just self-insure
Unaware of alternative solutions
“Why People Don’t Buy Long-Term Care Insurance”, Howard Gleckman, Forbes, Sept. 12, 2011
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A Variety of LTC Solutions
•Traditional LTC
–Most economical way to insure LTC
–Most customizable
•Single premium LTC/life asset based products
–Return of premium and cost recovery
–LTC focused solutions
•Annuity/LTC linked product
–Limited resources to work with
–Insurability issues
•Life Insurance/LTC linked products
–Long term care concerns
–A need for life insurance for financial protection
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Life Insurance Linked Solutions to
Long-term Care and Chronic Illness
Product Differentiators
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Life Insurance/LTC Combo
• Classification of rider determines:
– How product can be marketed
– Requirements needed to sell a product
– How rider is charged for
– How claims are paid
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Product Differentiators
• LTC Riders classified as 7702B
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Can be marketed and referred to as Long-term Care
Tax free per IRS Sec. 7702B LTC rules
2 impaired ADLs or Cognitive Impairment certified
Covers temporary and permanent claim conditions
Rider is available for an additional charge
Underwritten for LTC risk
LTC amount set at policy issue
Does not require separate LTC license
• Many states require state specific LTC CE or other licenses
– Must have licenses to sell the base life insurance product
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What Differentiates 7702B LTC Riders?
Indemnity vs. Reimbursement Benefits
• Reimbursement
– Reimburses only cost of care up to the benefit limit.
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Require receipts to be submitted
Some will allow facility to bill insurance company direct
Not all charges on bill may qualify for reimbursement
Benefit not limited to HIPAA
• Indemnity
• Pays benefit directly to contract owner
• No bills or receipts to submit for claims reimbursement
– Some companies require monthly re-verification of billable services
• Physician’s plan of care
• Excess benefits can be used for other purposes
• Benefit usually limited by some tie in to HIPAA
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Product Differentiators
• Chronic Illness riders 101(g) classified
– Some companies build riders under regulations that
have the following provisions:
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Cannot be marketed as a long-term care product
“Accelerated Death Benefit for Chronic Illness”
2 impaired ADLs or Cognitive Impairment
Requires claim to be diagnosed as “likely to be for lifetime
of insured”. (no temporary claims)
Benefits tax free when individually owned per Sec. 101(g)
May underwrite and charge for the rider, or include with the
policy and discount
All pay by indemnity since claims reimbursement not
possible
Does not require separate LTC license and currently does
not have state CE requirements
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What Differentiates 101(g)
Chronic Illness Riders?
• Charge for rider
– Underwritten for chronic illness risk
– Monthly deductions charged
– Chronic Illness amount and benefit determined at policy issue
• Included with the policy – death benefit
discounted at time of claim
– No underwriting, available to all
– Not “free” – Charged for at time of claim
– Death benefit discounted at claim by actuary factors
• No charge if never used
• Can’t determine benefit amount until time of claim
• Younger the insured is, the less that is received
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Long-term Care Rider/product,
cont.
Accelerated Death Benefit for
Chronic Illness Rider, cont.
Differentiators of 7702B Products
Differentiators of 101(g) products
Indemnity
Reimbursement
Additional
charge for rider
Included with policy
but discounts the
acceleration of
death benefit
Full benefit is paid
regardless of the
actual LTC expenses.
Excess benefits can
be used for any other
purpose.
Only the actual
costs of qualifying
long-term care
services are
reimbursed, with a
maximum of the
plan benefit.
Has additional
cost of insurance
charge for rider
and rider is
underwritten.
Rider included for all with
policy. At claim, factors
such as age, gender,
premium class, plus cash
value and interest rates
at time of claim are used
to discount the death
benefit to be accelerated
Some
carriers do
not require
submission
of bills or
receipts
while on
claim.
Reimbursement
plans require bills
and receipts to be
submitted. Some
carriers will do
direct billing to
The Chronic
Illness benefit
pool and monthly
benefits are
determined
upfront and are
specified at
policy issue**
Total Chronic Illness
benefit pool and
benefit amount cannot
be determined until
time of claim. Benefits
accelerate on
monthly, annual or
semi-annual basis.
Other
carriers
require
monthly
proof of
billable
expenses
.
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Nationwide Life Insurance
with the
Long-term Care Rider
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Nationwide LTC Rider
An alternative solution is Nationwide’s Long-term
Care rider:
– LTC benefit paid tax free as an accelerated death
benefit
– Death benefit provides pool of money
• Someone receives money as LTC or death benefit
– Cash value
– Some contracts offer death benefit and premium
guarantees for life of insured including LTC rider
– LTC benefit reduces death benefit dollar for dollar
• LTC rider amount may be dialed down to preserve some
needed death benefit (not available in NY, KY or Virgin Islands)
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Nationwide LTC Rider
• Cognitive impairment
– Doctor certifies an impairment (includes Alzheimer’s and
dementia) OR
• Two ADLs impaired
– Unable to perform 2 or more of activities of daily living:
• Bathing, dressing, continence, eating, toileting, transferring
• One-time 90-day elimination period before
benefits are paid
– May be met over a 730 day time period
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Nationwide LTC Rider
• LTC benefit is lesser of:
– 2% per month of death benefit/rider amount OR
– Daily per diem rate established by HIPAA times
days in the month
• 2012 per diem rate = $310/day
• Example:
– 500K LTC rider x 2% = $10,000 per month OR
– The HIPAA per diem of $310/day x 30 days in a
month = $9,300 per month
– In this case, client would receive $9,300/month
– Benefit lasts at least 4 years & 2 months*
Note: the 2012 per diem amount allowed by Health Insurance Portability and Accountability Act is
$310 per day. Maximum annual amount for 2012 is $113,590
*Assuming no loans or withdrawals have been taken prior to collecting LTC benefit.
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Nationwide LTC Rider
• Covered benefits include services such as:
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Nursing home
Home health care
Assisted living
Adult day care
Hospice
• Indemnity-style plan
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Benefit paid to owner of contract
Direct payment – no receipts!
No monthly re-verification of billable services
Supplemental Family Care
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Nationwide LTC Rider
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Issue ages 21-80 (SPUL is 35-80)
Lapse protection provision
Tax-free benefits (even on a MEC)
Guaranteed minimum death benefit (not
available in NY, KY or Virgin Islands)
• Benefits may be payable outside US
• Available on most Nationwide permanent
individual life insurance policies (not available in
all states)
• LTC Rider can be rated up to 5 tables
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Using an Indemnity-style Long-term Care
Rider to Enhance a Life Insurance Need in
Advanced Markets
• Estate Planning Tool
• Business Succession
• Special Needs Trust
• Charitable Giving
• Executive Benefits
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Estate Planning Tool
• LTC riders can be used in ILIT if product pays an
indemnity benefit.
– Rider is paid to contract owner (the trustee) with no
obligations to pay funds to grantor
• Use of collateralized arms length loans removes
money from trust without incidents of ownership
– Collateral
– Interest Rate
– Loan is repaid in full
• Interest taxable if repaid after death
•
Reimbursement plans will not work
– Reimbursement is tied directly to grantor and creates
incidents of ownership
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What does self insuring LTC mean to
an affluent client?
Client sets aside $1,000,000 to
cover any LTC Costs. Asset is
liquid and in the estate.
50% chance of using some or
all of asset for LTC costs1
Little or no amount from this asset would be
estate taxed since it was liquidated to pay
LTC costs
$1,000,000
1The
50% chance of not needing
this asset for LTC costs
The untouched $1 million would be
estate taxed. At 2012 rates, this could
mean a tax rate of as much as 35%
($350,000)
Washington Post, Jan 23, 2012, Amy Pahl, Milliman, Inc.
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Example
• Our client, Jane, has a $5 million tax liability
– Assume product can dial down LTC rider
– Add a $1 million LTC rider
•When no dial down possible, use two policies
– $4 million policy with no LTC rider
– $1 million policy with a LTC rider
• Assuming the following loan provisions
– Collateral is the vacation home
– Interest rate is 7%
– Loan paid back just days before death
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The Results
Jane Needs Long-term Care
At Client’s Death
Nationwide pays LTC benefit to Trust
($10,000 per month)
Death claim filed – remaining death benefit of
$4,000,000 is paid to trust
Jane borrows funds from trust to pay
LTC expenses
Estate repays Principal $1,000,000
Estate repays Accrued Loan - $ 352,000
Total Amount Repaid $1,352,000
Jane dies just as LTC benefits are
exhausted
Estate Principal Debt is - $1,000,000
Accrued Interest Debt is- $ 352,000
Total Debt to Trust $1,352,000
Estate has been drained of $1,352,000
This amount not subject to estate tax now
Result: $4,000,000 + $1,352,000
Trust now has $5,352,000
Loan interest assumed to be 7%, HIPAA rare assumed to be at $10,000 per month, benefit paid 100 months
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Business Succession
• Buy-sell agreements
– LTC rider provides funds for installment sale
– Buy-sell agreement should reflect this possible
type of sale
– Purpose of LTC rider is to protect the business
– LTC rider used in traditional manner when
partners buy each other’s policies
•Key person insurance
– LTC rider provides installment compensation for
lost services
– Purpose of LTC rider is to protect the business
– Business may offer key person their own plan (via
Sec. 162 Plan, etc.)
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Business Succession
Business Value - $900,000
50/50 Ownership
Sam
Dave
$450,000
$450,000
Sam has 2 ADLs
Claim is filed
Benefit check ($9,000) is sent monthly to Dave
Dave sends $9,000 a month to Sam as part of buyout
Dave buys out Sam in 4 yrs and 2 months
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Buy Sell/Business Succession
•Tax Treatment
– 7702B LTC riders
• Benefit paid tax free to business/policy owner or
corporation
• 7702B references Sec.104
• Insured as first rights to tax free amounts
• Remaining tax free amount and tax on excess of formula
paid by business
– 101(g) chronic illness riders
• If death occurs, tax free death benefit
• If Chronic Illness benefit is paid to business owner,
benefit is taxable in excess of cost basis.
• No aggregate LTC tax rules on insured apply
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Special Needs Trust
• Purpose of a Special Needs Trust
– Enhance quality of life for special needs person
– Maintain federal, state and local benefits for special needs person
• How much death benefit will be needed?
– What goals need to be met?
– Can vary greatly
•Contradiction of adding LTC Rider
– Most companies require LTC rider and DB to be equal
– LTC benefit depletes Death Benefit
• May leave little or nothing for the trust
– Nationwide allows LTC to be dialed down to preserve DB
• Even if LTC can be dialed down, it may be wise to separately address
life/LTC need with special needs
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Charitable Giving
• Why does client usually want to add LTC rider to a
policy intended for charitable giving?
– Tax deduction
– Leave money to charity – AND
– Have access to LTC benefits!
• Can’t have it all
– Gift should be given with full intent of charity receiving
• Why would an LTC rider make sense?
– LTC benefit paid earlier than mortality
– Provides cash with more spending power
– Indemnifying the key contributor
• Example - Life expectancy 83, LTC needed at 75
• DB flows to charity 8 years early- enhances spend-ability
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Executive Benefits- Employee Owned
•LTC rider works in executive-owned plans
– Insurance-based retirement plans
– Executive bonus (Sec. 162 plans)
– Collateral split dollar
•Cost of LTC may be less expensive when over funded
•May allow more potential income from plan
– LTC is reduction of death benefit, not withdrawal or loan
– If policy does not reduce current cash value
• Cash value may continue to grow when LTC is collected
– If policy takes a pro-rata deduction from cash value (NY, KY, V.I.)
• Still makes valuable addition- low cost on max funded
– LTC benefit could be eliminated after period of withdrawals and
loans
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Executive Benefits- Employer Owned
• Deferred Compensation
– Ruled by 409A
– Has specific triggering events
– LTC is not one of them
• Advantage is to Corporation
• If insured’s disability includes LTC triggers:
– LTC benefit paid to Corporation
– Corporation only obligated to separation amount
– Remaining accelerated DB stays with Corp.
• Taxation?
– Does reference to Sec. 104 apply? Let CPA decide!
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In Summary
• LTC alternative products seem to be wave of the
future
• It is important to understand differentiators between
products
• Indemnity LTC riders can be used in “outside the
box” scenarios and advanced case design
• Nationwide is “on your side” with true 7702B LTC
Rider that pays an indemnity-style benefit and can be
added to a variety of individual life products with a
variety of premium payment options
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Questions?
Independent Dealer:
Financial Institutions:
Wirehouse/Regionals:
Nationwide Agents:
Nationwide Financial Network:
Brokerage General Agency:
1-800-321-6064
1-800-893-5399
1-800-720-1511
1-888-333-4202
1-877-223-0795
1-888-767-7373
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