Funding Long-Term Care Plans
There are a variety of ways to fund a long-term care plan including (1) pay-as-you-go monthly or annually, (2) lump sum single payment or (3) a combination of lump sum payment with lower guaranteed annual or monthly payments. Below is a list of different sources of funds you can use and how they can be applied to the various types of long-term care plans.
Income can be used to fund Traditional or Hybrid plans and is usually set up as a pay-as-you-go plan with either a monthly or annual payment. Many plans do offer semi-annual or quarterly payment options as well as auto deduction options in most cases.
Savings can be used as a pay-as-you-go option for Traditional or Hybrid plans. It can also be used to fund a single payment Asset-Based plan which will give you the most leverage and long-term care insurance and will eliminate ongoing payments.
If you are over age 59.5, you may withdraw funds from your retirement account to pay for any expenses, including long-term care plans, without a penalty. However, if you pull a lump sum out for an Asset-Based plan, you get additional advantages. You get the immediate leverage of long-term care protection, but you get to spread the tax bill out for up to 20 years. This means you get the protection today, but you don’t have to pay all the taxes due immediately. This amount also counts towards your required minimum distributions that you have to start taking at age 70.5. Although this is confusing to many people, using your retirement accounts is a great way to fund a long-term care plan. We can show you how to take advantages of the recent rule changes, thus maximizing your protection and minimizing your taxes.
Changes to the Pension Protection Act have made using existing deferred annuities one of the best ways to fund an Asset-Based plan. You can now transfer the annuity into a qualified long-term care plan and pull out all the prior growth on the annuity tax-free. Let’s look at an example:
Mr. and Mrs. Client have an existing annuity that they originally purchased for $20,000. Today the value is $100,000. They are not planning on withdrawing the money since they would have to pay tax on the growth of the annuity ($80,000). They transfer the annuity into a qualified long-term care plan that provides them with an immediate value of $300,000 for care. The clients can now pull out all $300,000 tax-free.
Not only did the clients get a step up in value from their annuity, they get to pull all the gain out of the annuity tax-free.
Cash Value Life Insurance
Similar to annuities, cash value in a life insurance policy can be transferred into an Asset-Based long-term care plan without tax consequences. The client can now have long-term care coverage that will come out tax-free should they need care. And many Asset-Based plans also use a life component - if the client does not end up in a care situation, they will still have a permanent life insurance policy. If you have a cash value life insurance policy, let us show you how to put it to work in a long-term care plan.
Health Savings Accounts (HSA)
Many long-term care plans can be funded using an HSA account which allows you to pay premiums with pre-tax dollars.
Many people are unaware that they can use home equity to fund a long-term care plan. Many clients have the ability to borrow a lump sum through a home equity loan or line of credit which allows them to fund an asset-based plan today and pay it off over several years. In most cases, any interest paid is tax deductible, and the client will usually get more long-term care coverage for less money compared to paying directly into a pay-as-you-go plan.
With a reverse mortgage, they can set up a line of credit to fund a pay-as-you-go plan, or they can take out a lump sum to fund an Asset-Based plan. The advantages are numerous as there is no payment due on the reverse mortgage and you get a multiple of long-term care coverage for every dollar you put into your plan. For example, without a long-term care plan, the client will be limited to the equity available in their home. But by putting that same amount of equity into an Asset-Based long-term care plan, they can get $3-$10 dollars back in coverage should they end up in a care situation. And if they don’t need care, they can always get their money back. Using a reverse mortgage is a more complex way to fund a plan but has great advantages and can be an ideal way to protect you and your nest egg. We understand the process of using a reverse mortgage and can show you how it could make sense in your situation.