Long-Term Care Insurance Case Study
Late 60’s couple with lots of life insurance but very little long-term care insurance (LTC). His parents both used their LTC policies to a great extent, so he knows the value of the protection. One of his life policies has about $200,000 in cash value.
Task
Find a way to use the cash value to provide the premium for the LTC contract. A straight 1035 exchange (transfer the cash value into a like policy without experiencing a tax on the gain). The problem is that a straight exchange only covers him because the wife is not on the life policy.
Solutions
(1) Cancel the life policy and buy the LTC contract that will cover them both and pay the tax on the gain. IRS rules allow for the tax to be spread over about 14 years.
(2) Do a maximum loan on the life policy to pay for the LTC contract. Hybrid LTC policies are life insurance with a LTC rider. This means that he leverages the $200,000 to buy the LTC policy and still has most of the life insurance. He may have a schedule to repay the loan, but he is really just repaying himself.
We continue to review other solutions, but my bet is that option # 2 will be the best solution to their problem.
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