Nnew rules governing hybrid long-term-care products go into effect on Jan. 1 and may spawn a new generation of hybrids. Avisors need to think about when and why to consider them for clients.
Sales of long-term-care insurance (LTCI) have struggled, often because clients perceive them as risky. You pay a lot in premiums, which reward you handsomely if you later need extensive care, but which disappear if you die before needing them or never qualify for them.
To address these concerns, product providers developed annuities and life insurance policies with long-term-care riders as less-expensive alternatives. For example, insurers tested the waters with single-premium life policies that had provisions for LTC, usually a multiple of the death benefit paid out over several years. Once the death benefit was exhausted, any remaining claims would be applied against "excess benefits" up to a maximum. If the client didn't have LTC costs, the death benefit would ultimately pay out when the client passed away.
However hybrid LTC policies turned out to have serious tax problems.
The government addressed the tax issues in the pension protection act of 2006 to encourage the development of more hybrid products. Congress provided that the new rules take effect in January 2010 to allow companies to comply.